LooksRare Has Reportedly Generated $8B in Ethereum NFT Wash Trading

LooksRare seemingly came out of nowhere to become the biggest rival yet to leading NFT marketplace OpenSea earlier this month, but there’s a big asterisk on the astronomical trading figures coming out of the platform.

It’s marred by rampant wash trading, as users buy and sell NFTs between wallets they control in an effort to manipulate daily trading rewards. Now we have a sense of how severe the wash trading has become since LooksRare launched on January 10.

NFT analytics firm CryptoSlam reported today that it has identified more than $8.3 billion worth of wash trading from LooksRare, making up the vast majority of trading volume on the marketplace to date.

Most of the wash trading comes from royalty-free collections, which means that sellers don’t have to pay the creators a secondary sale fee. Larva Labs’ Meebits has seen the most wash trading at $4.4 billion, with Terraforms at $2.9 billion, Loot at $705 million, and CryptoPhunks (a CryptoPunks derivative project) at $251 million, plus $62 million from other projects.

According to public blockchain data collected by Dune Analytics, LooksRare has amassed more than $9.5 billion in total Ethereum trading volume since its launch. If the figures from both sources—which pull data from the public Ethereum blockchain—are accurate, then about 87% of LooksRare’s trading volume to date matches CryptoSlam’s criteria of wash trading.

Why are some LooksRare users selling NFTs at vastly inflated prices? It all comes down to the platform’s trading rewards model. LooksRare offers token rewards for users who buy and sell NFTs on the site, offering them a percentage of the day’s total sales via the site’s own LOOKS token.

Users can game the system by selling NFTs back and forth between their own Ethereum wallets via artificially inflated prices, with the aim of earning more in LOOKS rewards than they’d spend on LooksRare’s 2% marketplace fee and the Ethereum network’s own gas fees.

LooksRare also provides Wrapped Ethereum (WETH) rewards for users who stake their LOOKS tokens in the platform, providing further incentive to amass and then hold a large number of them. The community reward models set LooksRare apart from OpenSea, but with trading rewards at their highest level during the platform’s first 30 days, some users are abusing the system.

Soon after the January 10 launch, data from CryptoSlam showed that LooksRare users were selling Meebits, Loot, and other royalty-free NFTs back and forth between the same wallets for upwards of $50 million worth of ETH each way. At the time, the average sale price for a Meebits NFT over the previous week at OpenSea was 4.1 ETH ($13,800 at the time).

LooksRare’s staggering initial trading numbers looked suspect, and the platform did not institute measures to disincentivize users from buying and selling their own NFTs at exaggerated prices. In fact, LooksRare retweeted a thread from an investor that called such tactics “genius.” LooksRare did not respond to Decrypt’s earlier requests for comment.

CryptoSlam—which recently raised $9 million from Mark Cuban and others—removed wash trading data from its total sales metrics last week, and has implemented a tracker for each NFT collection that shows the total amount of wash trading to date. Today, the company shared an extensive post about why it made the moves and how it has approached the situation.

Randy Wasinger, CryptoSlam’s founder and CEO, told Decrypt via email that the firm currently uses both automatic and manual methods to detect wash trading in a multi-step process. First off, CryptoSlam automatically classifies a transaction for an NFT that was sold and then repurchased by the same wallet within the last seven days as a wash trade.

Furthermore, if any wallet flagged for the first point then buys and sells an NFT after holding it for less than 30 minutes, those transactions are likewise categorized as wash trades. On top of all of that, CryptoSlam manually reviews any transactions for NFTs that are “clearly way above the norm and not legitimate,” Wasinger explained. Eventually, that last step may be automated as the platform’s algorithm is refined.

LooksRare has generated a lot of buzz right out of the gate, and has routinely delivered $20 million or more worth of total daily rewards to users since launch. It comes as OpenSea itself enjoys a record sales month, with Ethereum NFT trading volume now over $4.3 billion for all of January, topping the previous record of $3.4 billion from August 2021.

But with LooksRare’s trading rewards set to drop significantly at the 30-day mark following the January 10 launch, we’ll see if it remains profitable for wash traders to game the rewards model—and whether the marketplace’s ballooning trading numbers crash in turn.