OpenSea product chief accused of flipping NFTs using insider information

Illustration by Alex Castro / The Verge

OpenSea, the biggest NFT trading marketplace, said today that one of its employees used internal information to buy NFTs that were about to be featured on its homepage — and likely spike in value. Accusations were made against OpenSea’s head of product, Nate Chastain, last night after a community member publicized suspicious transactions from his wallet. “Yesterday we learned that one of our employees purchased items that they knew were set to display on our front page before they appeared there publicly,” the announcement tweeted by OpenSea CEO Devin Finzer read. “​​This is incredibly disappointing.” The site explicitly prohibits “deceptive or manipulative trading activities” in its Terms of Service.

The statement was prompted by a community-led investigation of Chastain’s trades. On Twitter yesterday, a user named ZuwuTV posted a thread claiming Chastain operated “secret wallets” that purchased the site’s front page NFTs before they were “featured,” later selling them for a profit once the price increased due to their exposure. In the thread, ZuwuTV identified a September 14th transaction where Chastain allegedly sent 5 Ethereum (around $17,000 USD) from his known wallet to an anonymous wallet that then sent the money to a third account. According to another user, ricefarmer.eth, the account purchased four NFTs by artist Dailydust, one titled “Spectrum Of A Ramenfication Theory,” which OpenSea directly featured soon afterward. The account is then alleged to have “flipped” the NFTs for a profit of roughly 2 Ethereum and funneled the money back to Chastain’s original wallet. OpenSea has not confirmed which NFTs were traded on using internal information.

As the NFT community picked up on ZuwuTV’s investigation last night, he posted more transactions suggesting that the front running behavior could have begun as early as last month. Using tools such as Wayback Machine and Twitter’s advanced search function, ZuwuTV and other users showed that Chastain likely purchased would-be-featured NFTs before or immediately after the OpenSea website updated. Like other NFT platforms such as Nifty Gateway, OpenSea’s front page is curated by hand rather than algorithmically determined.

Because the Ethereum blockchain is transparent, meaning all transactions are permanently recorded on a public ledger, users were able to follow the money trail leading back to Chastain’s publicly known account. Every transaction is timestamped, and the NFT or Ethereum traded is known. This transparency has historically allowed users to protect the community by uncovering elaborate scams, such as when “cybersleuth” Fedor Linnik discovered that the team behind a million-dollar “female-led” project was actually Russian men.

In a late-night Twitter Spaces titled “Investigating allegations” (with the monocle face emoji at the end), over 1,700 NFT collectors and traders joined to discuss the situation. Many celebrated the capabilities of the blockchain, arguing that the technology enabled a thorough investigation despite the unsettling findings. “Because there’s a blockchain … at least we know a hell of a lot more and can talk about it,” fungiblΞs, an NFT trader, said.

LURKLOVESYOU, one of OpenSea’s featured artists, whose work was allegedly flipped by Chastain, said he wasn’t paid or knowingly involved in the trading. He also surmised that he had been selected mainly because he had helped OpenSea with an art show but never got a heads-up from the site. “From an artist’s point of view, I’m just a guy who’s doing artwork and enjoying the NFT space and community. This has kind of shaken me a little bit,” he said during the conversation.

In the wake of the investigation, OpenSea has implemented new policies regarding team members. They “may not buy or sell from collections or creators while we are featuring or promoting them” and are “prohibited from using confidential information to purchase or sell any NFTs, whether available on the OpenSea platform or not.”

Chastain did not respond to a request for comment. As of writing, Chastain has yet to make a public statement, and OpenSea has not directly named him as the employee involved. Yet, despite the concerns the allegations raise — trusting OpenSea’s centralized curation practices, the merits of Securities and Exchange Commission regulation versus community-led regulation, and insider trading in general — many NFT community members remain optimistic.

“It’s nice words from OpenSea, but we have heard those words before. If they follow through, this could turn into a good thing,” OK Hotshot, a friend of ZuwuTV who also does blockchain analysis, told The Verge this morning.

“We just invented anti-insider trading by putting this on blast. If this were a humongous trading firm, they would have done so much to bury the story,” yuppie.eth, a community member and co-host of the Spaces, added last night. “We’re working for the best interests of the customers of OpenSea right now.”

Source: The Verge