LooksRare Has Allegedly Made $8B in Ethereum NFT Wash Trading

According to CryptoSlam, the great majority of NFT sales on the LooksRare are illicit trades designed to distort the token rewards process. Even though looksrare users are a mere 5% of OpenSea, LooksRare managed 2 times more volume in sales.

from Dune analytics

The new NFT marketplace is riddled with wash trading as users try to cheat the trading incentives concept.

LooksRare is estimated to have generated over $8.3 billion in wash deals, accounting for the vast majority of its sales volume to date.

LooksRare appeared out of nowhere earlier this month to become the greatest opponent yet to major NFT marketplace OpenSea, but there's a significant asterisk next to the platform's spectacular trade stats.

CryptoSlam, an NFT analytics startup, announced Friday that it has discovered more than $8.3 billion in wash trade on LooksRare, accounting for the vast bulk of trading volume on the platform so far.

The majority of wash trading occurs with royalty-free collections, which implies that sellers are not required to pay the artists a secondary sale charge. Meebits, a Larva Labs project, has the most wash traded at $4.4 billion, followed by Terraforms at $2.9 billion, Loot at $705 million, CryptoPhunks (a CryptoPunks derivative project) at $251 million, and $62 million from other projects.

LooksRare has generated more than $9.5 billion in overall Ethereum trade volume since its introduction, according to public blockchain statistics compiled by Dune Analytics. If the results from both sources—which use data from the public Ethereum blockchain—are correct, LooksRare's trading volume to date matches CryptoSlam's wash trading criteria by roughly 87 percent.

What's the deal with some LooksRare users selling NFTs for ridiculously high prices? It all comes down to the trading incentives mechanism on the platform. Users who buy and sell NFTs on LooksRare can earn token incentives by receiving a percentage of the day's overall sales in the site's own LOOKS token.

Users can rig the system by artificially inflating the price of NFTs and selling them back and forth between their own Ethereum wallets in order to earn more LOOKS rewards than they would spend on LooksRare's 2% marketplace charge and the Ethereum network's own gas fees.

LooksRare also reimburses users who stake their LOOKS tokens in the platform with Wrapped Ethereum (WETH) payouts, providing even more motivation to accumulate and subsequently keep a significant number of them. LooksRare differs from OpenSea in terms of community reward schemes, however, with trading rewards at their maximum during the platform's initial 30 days, some users are abusing the system.

Data from CryptoSlam revealed that LooksRare users were selling Meebits, Loot, and other royalty-free NFTs back and forth between the same wallets for upwards of $50 million in ETH each direction soon after the launch on January 10. At the time, the average sale price for a Meebits NFT on OpenSea for the previous week was 4.1 ETH ($13,800).

The site did not implement procedures to disincentivize users from purchasing and selling their own NFTs at exorbitant rates, which made LooksRare's astonishing early trade volumes suspicious. LooksRare even retweeted a thread from an investor who referred to such techniques as "genius."

Last week, CryptoSlam, which received $9 million from Mark Cuban and others, deleted wash trading data from its total sales metrics and added a tracker for each NFT collection that indicates the entire amount of wash trading to date. The corporation published a lengthy article Friday explaining why it made the adjustments and how it has dealt with the matter.

CryptoSlam's founder and CEO, Randy Wasinger, said that the company now employs both automatic and human methods in a multi-step process to detect wash trading. To begin, a transaction for an NFT that was sold and then repurchased by the same wallet during the last seven days is automatically classified as a wash trade by CryptoSlam.

Moreover, any wallet highlighted for the first point that then buys and sells an NFT after holding it for less than 30 minutes is considered as a wash trade. Furthermore, CryptoSlam manually examines any transactions for NFTs that are "clearly way above the norm and not legitimate," according to Wasinger. As the platform's algorithm improves, that final step may be automated.

Since its introduction, LooksRare has generated a lot of publicity and has consistently delivered $20 million or more in total daily awards to customers. It comes as OpenSea has a record-breaking sales month, with a total Ethereum NFT trading volume of over $4.3 billion in January, surpassing the previous high of $3.4 billion set in August 2021.

However, with LooksRare's trading rewards set to drop significantly at the 30-day mark following the January 10 launch, we'll see if wash traders can continue to profit from the rewards model—and if the marketplace's soaring trading numbers crash as a result.