- Wash trading is a series of activities involving the same trader buying and selling the same instrument simultaneously, creating artificially high trading volume and a manipulated market price for the asset in play
- While wash trading 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 trading 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 traders are using to flood the marketplace.
LooksRare aims to be an alternative to OpenSea, but the amount of wash trading on the platform raises questions on whether users view it as a viable competitor. LooksRare made its debut on Jan.10, and the recently launched NFT marketplace has drawn a lot of attention. After all, its daily trade volumes were more than double Opensea’s on the second day of trading because it has become the new playground for wash traders.
LooksRare vs Opensea – @BoredApeYC
— LooksRare 👀💎 – NFT Marketplace (@LooksRareNFT) January 15, 2022
The buyer got $3.5k in trading rewards. On Opensea, they would have gotten none.
The seller saved $1.5k in fees and got $3.5k in trading rewards. That's $5k+ more than they would have gotten on OpenSea.
👀💎https://t.co/66hbVzLSXv#BAYC pic.twitter.com/x07xWPwPno
Wash trading is a series of activities involving the same trader buying and selling the same instrument simultaneously, creating artificially high trading volume and a manipulated market price for the asset in play.
In the United States, wash trading in traditional financial markets has been illegal since 1936, and the most recent highly publicized scandal related to washing trading is the manipulation of LIBOR in 2012.
While wash trading 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 trading 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 traders are using to flood the marketplace.
LooksRare appears to have foreseen the possibility of wash trading induced by the lucrative trading rewards, but according to LooksRare Docs, they believed the cost of trading from platform fees and royalty fees would be too high to create any incentives for wash trading. Interestingly, reality shows the opposite.
Using January 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 a very small group of users executing trades worth hundreds of thousands of dollars. This surely does not sound like a playground for normal NFT buyers. However, with a 2% platform fee, royalty fee, and the volatile gas fee from the Ethereum network, wash traders seem to still be able to find a sweet spot to balance their cost and profit.
The Allocation Of Trading Rewards
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). 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. Therefore, the more trading volume the trader creates, the more reward they get. This mechanism creates great incentives for large volumes of 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 and staking rewards and liquidity provider rewards. But compared to the trading rewards gained from wash trading, the other rewards are too insignificant and close to a rounding error, so they will not be considered here.
The largest LooksRare single-day trade volume was on January 19, 2022. By plotting the top 10 wallets traded on that day, two wallets stand out with more than $90 million U.S dollars 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.
EH/s. This recent increase represents three important metrics. One, it represents a 130 EH hash
rate increase on the network. Two, it represents 130 EH of new hosting infrastructure and
primarily new generation hardware deployment, and three, this deployment has taken place in
geographic regions that use far cleaner energy than the energy used in China.”
With this in mind, Feinstein noted that even though the BTC network has hit all-time highs in
terms of EH/s, due to the massive improvements in miner chip technology and geographic
distribution away from China, the network is now the most efficient and sustainable than it has
ever been. Feinstein added that this data is important because it shows how much energy every
terahash uses, generally represented by a metric called Jules/terahash. He noted that this ratio
had fallen greatly over several years, demonstrating a major increase in mining energy
efficiency.
Also Read: 5 NFT marketplaces that could overthrow Opensea in 2022
