Wash trading or marketing genius – you decide
New Ethereum-based NFT marketplace LooksRare is causing a stir this week as its airdrop requirements have stimulated wash trading on the platform. LooksRare has generated over $385 million in trading volume since launching, sending it flying up the ranks to second place on the DappRadar NFT Marketplace ranking.
Wash trading in the digital collectibles space happens when the owner of an NFT sells it to themselves to stimulate a price hike, or in this case, collect LOOKS tokens. Some spectators are crying foul play while others are calling it genius.
This wash trading is stimulating impressive trading volume figures and driving the marketplace up the ranks. As a result, more eyeballs are on the market, and airdrop opportunities and a vicious circle can form. Seven-day trading volume is almost 50% that of Opensea, yet the number of traders is much smaller, just 5,000 compared to Opensea’s 260,000. Signaling that a small group of traders dominate the platform, buying and selling to themselves to reap the rewards.
For example, looking at the NFT page of Meebit #16728 we can see that this particular NFT switched owners 6 times in the past 24 hours. Every sale happened between two wallets, clearly indicating that the NFT owner is selling the NFT to themselves.
The breakdown
LooksRare has four phases of trading rewards that will continue for 721 days. The initial phase gives 2,866,500 LOOKS tokens per day to traders. That’s $10.9 million per day based on the LOOKS price right now. This means that if you complete a trade on an eligible NFT on LooksRare, the volume will count towards trading rewards that day and a portion of the 2,866,500 LOOKS at the end of the day.
The issue arose when many traders tried to create as much volume as possible to earn a share of the $10.9 million reward pot. Furthermore, since marketplace fees are a flat 2%, as long as the combined volume is below $500 million, wash trades remain profitable. This is also why wash traders take advantage of collections eligible for trading rewards that have 0% royalty, such as Meebits and Loot. Hence, their wash trade cost is lower, leading to 40,500 ETH trading volume in Meebits on the platform.
Who’s in charge here?
Many expected the platform to have stepped in and halted this type of activity, but when you take a more comprehensive view, it’s clear that there’s a cost to wash trading. Every wash trade generates 2% of WETH in fees to LOOKS stakers. For example, If a user were to trade 1,000 ETH, they would be down 20 ETH in costs. However, by wash trading 1,000 ETH, the user creates 2,000 ETH of trading volume since they represent both the buyer and seller. The wash traders are picking up double rewards and sending volume through the dapps smart contracts.
Using the below quick math provided by a spectator on Twitter, we can look at how many tokens someone with 2,000 ETH volume would have earned on day one of the LooksRare platform going live.
Clearly, despite any fees, day one was very profitable for wash traders. Nonetheless, many variables come into play, meaning profits could reduce significantly. Mainly, traders don’t know how many other wash traders are out there. Secondly, It’s hard to predict the token price of LOOKS each day.
On the flip side, everyday traders can still earn healthy amounts of LOOKS and are incentivized to stake their tokens within the platform, which stops them from selling and deflating the token value.
In summary
What’s happening here is that LooksRare is doing a pretty good job of drawing traders away from the leading NFT marketplace Opensea. Arguably, that was the entire intention of the airdrop and then allowing this wash trading to happen. In some ways, it’s similar to what SushiSwap did to Uniswap some time ago.
Since trading on LooksRare is beneficial right now, the organic volume will continue to transfer over from Opensea. As this happens, the amount of wash trading will hopefully organically decrease, as those looking to employ it would be sharing rewards with people that aren’t there to only farm tokens.
In order to compete with the leading NFT marketplace Opensea, a behemoth of a platform that generates billions in trading volume per month. LooksRare took powerful steps to compete and looks set to capture some market share. With an arguably slicker UX and an apparent business ethic to provide traders with a much more transparent, decentralized, and user-friendly platform, it’s going to be very interesting to see how this plays out.
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The above does not constitute investment advice. The information given here is purely for informational purposes only. Please exercise due diligence and do your research. The writer holds ETH, BTC, AGIX, HEX, LINK, GRT, CRO, OMI, IMMUTABLE X, ENS, GALA, AVASTR, GMEE, CUBE, RADAR, FLOW, FTM, BNB, SPS, WRLD, ATOM, and ADA.
