LooksRare has been the big news in NFT marketplaces in 2022 due to its impressive rewards for users, its incredible sales volume, and its exceptional amount of wash trading. Of course, these elements go hand in hand, and one has to consider the likelihood that the ability to openly wash trade without penalty is a feature rather than a bug. But paying people to be your friend can fall apart when the easy payouts disappear. So while LooksRare may have finessed its rapid rise to the heights of the hype cycle’s ‘Peak of Inflated Expectation,’ the ‘Trough of Disillusionment’ still awaits.
LooksRare: From OpenSea Killer to Money Printer
LooksRare launched this past January 10th with the concurrent announcement of its $LOOKS token airdrop. Though there were multiple ways to earn $LOOKS on the LooksRare platform, the airdrop, based on one’s OpenSea history and rewards for trading NFTs, drove incredible initial uptake.
By January 11th, it was clear that OpenSea had a major new competitor with $110 million in trading volume on LooksRare’s first day.
By January 12th, it was clear that wash trading was driving LooksRare’s sudden dominance as CryptoSlam began publicly discussing how they would handle that data. NonFungibles announced a restriction of LooksRare sales data until “recent activity subsides.”
By the end of the month, DappRadar had released multiple reports analyzing LooksRare’s success while including wash trading activities. CryptoSlam had a postmortem on LooksRare’s debut and their removal of LooksRare sales data derived from wash trading.
And, yet, general discussion on Twitter appears positive, in that lots of artists and collectors are involved with the platform, and, yes, happy to be getting paid. So it seems that negative public sentiment about wash trading isn’t that potent when so many are being rewarded.
How Are Traders Rewarded on LooksRare?
LooksRare rewards can be earned in three ways, in addition to claiming one’s airdropped tokens. Daily rewards are distributed to traders for trading. Trading fees taken in by the platform are redistributed to $LOOKS holders who stake $LOOKS. LooksRare is also adding liquidity rewards via Uniswap.
LooksRare breaks down its tokenomics and rewards system in its docs.
To further understand how traders are manipulating trading fees, check out these pieces from DappRadar and Cointelegraph that take a detailed look.
Once those wash trading figures are removed, one can see that while OpenSea is still king and LooksRare is still an awesome success.
LooksRare: Super Rapid Hype Cycle?
LooksRare’s rapid rise and partial fall maps easily onto the Gartner Hype Cycle. First, an “event generates press and industry interest in a technology innovation” followed by a “wave of ‘buzz'” called the “Peak of Inflated Expectations.”
In one sense, that’s certainly where LooksRare seems to be. And so, the “Trough of Disillusionment” will follow as people discover the limitations of the platform and inevitably experience disappointments. Then the startup must do the daily work that makes any business a real success.
But didn’t that happen awfully quickly? Are things accelerating that rapidly in NFT/Crypto Land? Or are we seeing new dynamics that suggest alternatives to the established Hype Cycle?
Maybe my fellow writers who jumped on the Hype Cycle and I are simply confusing the fact that the Gartner Hype Cycle is about technology adoption rather than the trajectory of a single company.
And, to be honest, it doesn’t really apply here, even if the Hype Cycle was about individual companies.
LooksRare launched with a “vampire attack,” not a “technology innovation.” It’s buzz came about because of a token airdrop followed by the opportunity to earn more through wash trading. Negative media coverage for wash trading doesn’t exactly sound like an “inflated expectation” to me, but that coverage has become part of a larger buzz surrounding the company.
So Wash Trading Is a Form of Marketing?
A DappRadar opinion piece discusses whether LooksRare’s opportunity to wash trade is “marketing genius or foul play.” In the end, the CEO says it is not for DappRadar to decide. But what seems like a chaotic ride for a new platform makes a lot more sense when one views every act through the lens of marketing.
LooksRare states in its docs:
“The trading rewards system has been designed and iterated upon to heavily dissuade users from trading for the sole purpose of farming LOOKS rewards.”
So the company considered the issue of wash trading beforehand and did not expect it to be that likely. To be honest, I have trouble taking this statement at face value.
It’s clear that LooksRare is being run and advised by extremely savvy individuals. From the airdrop and easy wash trading to creator-savvy coming features, such as creator-owned smart contracts and creator royalties, this team clearly understands what motivates key participants.
And, honestly, rewarding those with 3+ ETH in the airdrop and requiring that users post an NFT in the marketplace to claim that airdrop were both brilliant onboarding moves. In terms of financial activity, users are prequalified and have an account with an active listing ready to go before they’ve even received their free money. And then, even if they don’t anticipate further involvement, buzz about wash trading alerts them to the fact that they, too, could be making more money, and so they join the fray.
Beware The Trough!
While the Gartner Hype Cycle might not be intended for individual companies, so much as new technologies involving a wide range of companies, the idea of a product getting a lot of hype and then things calming down after reality sets in is easy to understand since we see it on a regular basis.
In the case of LooksRare, the company’s marketing efforts have been a success. Even what could be considered negative press for wash trading serves to alert traders that they could be making money at LooksRare.
In the old world, this approach would mean a company is potentially bankrupting itself by spending too much on acquiring customers. In Web3, the company just prints the money.
Ultimately, the incentives for wash trading will slowly be reduced, and LooksRare can also choose to address extreme examples. What matters after that is the ongoing development of the service and the community. One can see from LooksRare’s Twitter feed that those involved are already turning to the work necessary for long-term success as a functioning marketplace. As with so many key projects in NFT Land, only time will tell if LooksRare will become a core platform for NFT creators and traders.