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HomeNFT NewsClever 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 made its debut on Jan.10, and the recently launched nonfungible token (NFT) marketplace has drawn a lot of attention, not only because its daily trade volumes were more than double OpenSea’s on the second day of trading but also because it has become the new playground for wash traders.

Wash trades are a series trading activities that involve the same trader buying or selling the same instrument simultaneously. This creates artificially high trading volumes and manipulates the market price of the asset.

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

While wash trading is well regulated and closely monitored, it seems that it has found a new way in the unregulated crypto market and NFT marketplaces such as LooksRare.

A community-owned marketplace is a double-edged sword

LooksRare started with good intentions to share profits within the community. These same factors were the secret weapon that attracted large volumes and beat OpenSea in light speed fashion shortly after it was launched. However, they have now become the weapon of choice for wash traders who flood the marketplace with their token incentives and trading rewards.

LooksRare may have anticipated the possibility of wash trades that could be induced through the lucrative trading rewards. However, LooksRare , said that it believed that trading platform fees and royalty fees would make trading too expensive to incentivize wash trading. Surprisingly, the reality is quite different.

LooksRare vs. OpenSea volume and unique users. Source: Dune Analytics @elenahoo
LooksRare 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%-3%) of OpenSea, but the volumes are more than triple or even quadruple OpeaSea’s.

Using Jan. 19 as an example, the average trade volume on LooksRare is approximately $380,000 per user, whereas, on OpenSea, it is only $3,000. Similarly, the average trade volume per transaction is around $415,000 on LooksRare, whereas, for OpenSea, it is only $1,676. The data shows that there is only a small number of users who execute trades in excess of $400,000 each month. This certainly does not sound like a place for NFT buyers. Wash traders can still find a sweet spot where they can balance their profit and cost with a 2% platform and royalty fee. Let’s take a look at the profit wash traders make from selling and buying the same NFT.

How trading rewards are allocated

LooksRare’s trading rewards allocation. Source: LooksRare

LooksRare’s trading 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 trading rewards allocation. Source: LooksRare

The amount of trading rewards a single trader can obtain for any given day is the product of the fixed daily LOOKS trading reward (2,866,500 LOOKS) and the ratio between the individual trader’s trading volume and the total trading volume of the day. The trader who creates more trading volume will receive more rewards. This system creates huge incentives for wash trading.

In addition to the trading rewards, traders can also earn a portion of the platform fees collected based on the number of LOOKS staked as well as staking rewards and liquidity provider rewards. The other rewards, which are not as significant and close to rounding errors, can’t be considered in this article.

A closer look at a wash trader with $90 million in daily trade volume

The largest LooksRare single-day trade volume was on Jan. 19, 2022. By plotting the top 10 wallets traded on that day, two wallets stand out with more than $90 million traded 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 trading.

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

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

An example of wash trading on “Loot.” Source: LooksRare

Based on the trading reward allocation and assuming the two wallets belong to the same trader, the total trading volume from this trader on Jan. 19 was $186 million; the trading reward earned from the trades 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 trader’s two wallets. Source: Dune Analytics @elenahoo
Sell amount on Jan. 19, 2022, from the whale trader’s two wallets. Source: Dune Analytics @elenahoo

Most trading rewards on LooksRare go to the wash traders

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 traders. Similarly, when looking at the largest trade volume day, Jan. 19, 28% of the rewards went to the top 10 traders.

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

A large portion of the rewards goes to a small number of wash traders. This is not in line with LooksRare’s “By NFT People, for NFT People” philosophy. The majority of the profits go to a small number of traders.

As Delphi Digital rightly pointed out, this model cannot be sustained long-term and the trading volume will likely drop as more wash traders leave the system when it becomes less profitable.

LooksRare still needs to be competitive with OpenSea for both the number of users and trade volume. It will be interesting to see how the dynamic changes when the trading reward reduces by half in Phase B starting on Feb. 10, 2022.

The views and opinions expressed in this article are those of the author alone and do not necessarily reflect those of Cointelegraph.com. You should do your research before making any investment or trading decision.

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Henry Hicks
Henry Hickshttps://nonfungibletalk.com
NFT and Crypto Enthusiast. Loves Travelling and Exploring the Metaverse!
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