Clever NFT traders exploit crypto’s unregulated landscape by wash trading on LooksRare

Clever NFT traders exploit crypto’s unregulated landscape by wash trading on LooksRare

LooksRare me its debut on Jan.10 and the recently launched NFT marketplace has drawn a lot of attention, not only because its daily tre volumes were more than double Opensea’s on the second day of tring, but also because it has become the new playground for wash trers.

Wash tring is a series of tring activities involving the same trer buying and selling the same instrument simultaneously, creating artificially high tring volume and a manipulated market price for the asset in play.

In the United States, wash tring in tritional financial markets has been illegal since 1936 and the most recent highly publicized scandal related to wash tring is the manipulation of LIBOR in 2012.

While wash tring has been highly regulated and closely monitored by exchanges and regulators, it seems to have found its new path in the unregulated crypto space and especially in NFT marketplaces like LooksRare.

A community-owned marketplace is a double-edged sword

LooksRare started with good intentions to share profits within the community. The token incentives and the tring rewards were essentially the secret weapon that attracted high volumes and beat Opensea in light-speed fashion right after its launch, but these same factors have also become the very weapon wash trers are using to flood the marketplace.

LooksRare appears to have foreseen the possibility of wash tring that could be induced by the lucrative tring rewards, but according to LooksRare Docs, they believed the cost of tring from platform fees and royalty fees would be too high to create any incentives for wash tring. Interestingly, reality shows the opposite.

LooksRare vs. OpenSea volume and unique users. Source: Dune Analytics @elenahooLooksRare vs. OpenSea volume and transactions. Source: Dune Analytics @elenahoo

The graphs above show that daily users and daily transactions from LooksRare are only a tiny portion (2% to 3%) of OpenSea, but the volumes are more than triple or even quruple OpeaSea’s.

Using Jan. 19 as an example, the average tre volume on LooksRare is approximately $380,000 per user whereas on OpenSea it is only $3,000. Similarly, the average tre volume per transaction is around $415,000 on LooksRare, whereas for OpenSea it is only $1,676.

Basically, what the data shows is a very small group of users executing tres worth hundreds of thousands dollars. This surely does not sound like a playground for normal NFT buyers. With a 2% platform fee, royalty fee and the volatile gas fee from the Ethereum network, wash trers seem to still be able to find a sweet spot to balance their cost and profit.

Let’s have a look at how wash trers profit from buying and selling the same NFT.

How tring rewards are allocated

LooksRare’s tring rewards allocation. Source: LooksRare

LooksRare’s tring rewards are distributed over a total of 721 days over four phases. The daily reward is the highest during the first 30 days in Phase A and the total reward is the highest in Phase C (240 days).

LooksRare’s tring rewards allocation. Source: LooksRare

The amount of tring rewards a single trer can obtain for any given day is the product of the fixed daily LOOKS tring reward (2,866,500 LOOKS) and the ratio between the individual trer’s tring volume and the total tring volume of the day. Therefore, the more tring volume created by the trer, the more reward they get. This mechanism creates great incentives for large volumes of wash tring.

In dition to the tring rewards, trers can also earn a portion of the platform fees collected based on the amount of LOOKS staked as well as staking rewards and liquidity provider rewards. But compared to the tring rewards gained from wash tring, the other rewards are too insignificant and close to a rounding error, so they will not be considered here.

A closer look at a wash trer with $90 million in daily tre volume

The largest LooksRare single-day tre volume was on January 19, 2022. By plotting the top 10 wallets tred on that day, two wallets stand out with more than $90 million U.S dollars tred on the day from each one as shown in the graph below. The activities from these two wallets also show back and forth buy and sells between them, which is a clear indication of wash tring.

Top 10 Trers on the largest volume day — Jan 19, 2022. Source: Dune Analytics @elenahoo

Most of the time the wash trers choose NFTs with 0% royalty fee such as Meebits or Terraforms so the only costs from the tre are the 2% platform fee and the gas fee. In this specific example, on Jan. 19, the trer bought and sold Loot multiple times using these two wallets at a price around 6,500 times the floor price.

An example of a wash tring on Loot. Source: LooksRare

Based on the tring reward allocation and assuming the two wallets belong to the same trer, the total tring volume from this trer on Jan. 19 was $186 million; the tring reward earned from the tres is $6.2 million and the fee paid is $3.7 million (using $4.9 as LOOKS market price and 2% platform fee), resulting in a net profit of $2.5 million, which is 1.34% of daily return or equivalently 12,661% of annual return.

Buy amount  on Jan 19, 2022 from the whale trer’s two wallets. Source: Dune Analytics @elenahooSell amount on Jan 19, 2022 from the whale trer’s two wallets. Source: Dune Analytics @elenahoo

Most tring rewards on LooksRare go to the wash trers

Rewards claimed 24 hours prior to time of writing (Jan. 24, 2022). Source: Dune Analytics @elenahoo

Looking at the last 24 hours (as of Jan.24), 29% of the LOOKS rewards went to the top 10 trers. Similarly, when looking at the largest tre volume day, Jan. 19, 28% of the rewards went to the top 10 trers.

Rewards claimed on Jan. 19, 2022. Source: Dune Analytics @elenahoo

A large portion of the rewards go to a small number of wash trers. This does not exactly follow LooksRare’s philosophy of “By NFT people, for NFT people.” Sharing the profit within the community seems to have failed so far and the lion’s share of the profit only goes to just a few trers.

As Delphi Digital correctly pointed out, this model is unsustainable in the long-term and the tring volume is likely to drop significantly as wash trers grually leave when it is no longer profitable.

LooksRare still has a long way to go to compete with OpenSea in terms of number of users and non-zero royalty NFT tre volumes. It will be interesting to see how the dynamic changes when the tring reward reduces by half in Phase B starting on Feb. 10, 2022.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Every investment and tring move involves risk, you should conduct your own research when making a decision.

ARTICLE: Clever NFT trers exploit crypto’s unregulated landscape by wash tring on LooksRare
PUBLISHED: 2022-01-30 21:40:00 
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