Wash traders are making huge profits from the NFT LooksRare market
NFT marketplace LooksRare purports to be an alternative to OpenSea, but the amount of wash trading on the platform makes one question whether or not users really see it as a serious competitor.
LooksRare launched on January 10th and has garnered a lot of attention, not only because its daily trading volume on day 2 of going live is more than double that of OpenSea, but also because it has become the new playground for wash traders.
Wash trading is a method in which traders buy and sell an asset to deceive the market, create artificially high volume and manipulate market prices.
In the United States, wash trading has been illegal in traditional financial markets since 1936, and the most recent public scandal surrounding wash trading was the manipulation of LIBOR in 2012.
While wash trading has been closely monitored by exchanges and regulators, it appears to have made its way into the crypto space, particularly in NFT markets like LooksRare.
Community-owned marketplace is a double-edged sword
LooksRare started with the good cause of sharing profits in the community. Incentive tokens and trade rewards are essentially the high volume secret weapon beating OpenSea shortly after launch, but these factors are also used by gun wash traders in this market.
LooksRare seems to have anticipated it capability Wash trades can be generated through lucrative trading premiums, but they believe the transaction costs from platform fees and royalties will be too high to incentivize wash trades. But reality shows the opposite.
LookRare Trade Volume and Unique User vs. OpenSea | Source: Dune Analytics
Volume and Transactions of LookRare vs. OpenSea | Source: Dune Analytics
The charts above show that LooksRare’s number of users and daily transactions is only a small fraction (2%-3%) of OpenSea, but the transaction volume is more than three or even four times the OpeaSea time.
On January 19th as an example, the average trading volume on LooksRare is around $380,000 per user, while on OpenSea it is only $3,000. Likewise, the average volume per transaction on LookRare is around $415,000, while on OpenSea it is only $1,676.
Essentially, the data shows a very small group of users who made transactions worth hundreds of thousands of dollars. This is definitely not a playground for casual NFT buyers. With 2% platform fees, royalties and gas fees varying from the Ethereum network, wash traders still seem able to find a reasonable balance between their costs and profits.
Here’s how Wash dealers benefit from buying and selling the same NFT.
How to assign trade rewards
Distribution of LooksRare trade rewards. Source: LooksRare
LooksRare trade rewards are spread over a total of 721 days, spread over four phases. Daily rewards are highest during the first 30 days of Phase A and total rewards are highest during Phase C (240 days).
Distribution of LooksRare trade rewards. Source: LooksRare
The number of trade rewards a trader can receive is the product of the fixed daily LOOKS trade reward (2,866,500 LOOKS) and the ratio of the individual trade volume to the total trade volume within a day. So, the more gold traders generate, the more rewards they get. This mechanism creates great momentum for large volume wash trades.
In addition to trading rewards, traders can also earn a portion of platform fees charged based on LOOKS staked, as well as staking rewards and liquidity provider rewards. But compared to the trading rewards earned from wash trading, the other rewards are too small to be included in this article.
Consider Wash Traders with a daily trading volume of $90 million
LooksRare’s one-day trading volume peaked on January 19, 2022. By charting the top 10 wallets traded that day, there are two prominent wallets with over $90 million worth of transactions. The activity of these two wallets also shows the buying and selling going back and forth between them, which is a clear sign of wash trading.
Top 10 traders with the highest volume on January 19, 2022 | Source: Dune Analytics
These wash traders choose NFTs with 0% royalties like “Meebits” or “Terraforms” so the only transaction costs are 2% platform fees and gas fees. In this particular example, on January 19th, the trader bought and sold Loot multiple times, using these two wallets for around 6,500x the reserve price.
An example of a wash trade on “Loot” | Source: LooksRare
Based on the distribution of trading rewards and assuming that the two wallets belong to the same trader, the total trading volume of this trader as of January 19 is 186 million USD; the reward earned from transactions is USD 6.2 million; and a fee of $3.7 million (LOOKS market price of $4.9 and 2% platform fee). The net profit made by the trader is $2.5 million, which is a daily profit of 1.34% or an annual profit of 12,661%.
Purchase volume on 01/19/2022 from two whale wallets | Source: Dune Analytics
January 19, 2022 sales volume, from two whale wallets | Source: Dune Analytics
Most trade rewards on LookRare are owned by Wash traders
Reward received in the last 24 hours (January 24, 2022) | Source: Dune Analytics
On January 24th, 29% of the LOOKS rewards went to the top 10 retailers. Similarly, in the largest trading volume on January 19th, 28% of the rewards went to the top 10 traders.
Reward received on January 19, 2022 | Source: Dune Analytics
A large portion of the rewards go to a couple of wash vendors. This doesn’t quite match LooksRare’s “NFT of the people, for the people” philosophy. Community profit-sharing seems to have failed and they seem to be owned by only a few traders anymore.
As Delphi Digital has pointed out, this pattern is unsustainable over the long term and trading volume is likely to decline significantly as wash traders gradually exit when it is no longer profitable.