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

توسط | ژانویه 31, 2022 | En NFT, Metaverse & NFT | 0 دیدگاه

LooksRare made its debut on Jan.10 and the recently launched 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 trading is a series of trading 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 wash 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.

فهرست مطالب

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 that could be 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.

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% to 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.

Basically, what the data shows is a very small group of users executing trades 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 traders seem to still be able to find a sweet spot to balance their cost and profit.

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