CryptoSlam says that the vast majority of NFT market sales are illegitimate trades made to manipulate the token rewards model.

In Brief

• New NFT marketplace LooksRare is plagued with laundering as users try to game the trading rewards model, according to analytics firm CryptoSlam.
• CryptoSlam estimates that LooksRare has generated over $8.3 billion in wash trades, accounting for the vast majority of its sales volume to date.

Seemingly, LooksRare came out of nowhere to become the biggest rival to leading NFT marketplace OpenSea earlier this month, but there’s a huge asterisk in the astronomical numbers of trade coming out of the platform.

It is marred by rampant wash trading, as users buy and sell NFTs between wallets they control in an effort to manipulate daily trading rewards. We now have an idea of ​​how bad wash trading has become since LooksRare launched on January 10th.

NFT analytics firm CryptoSlam reported today that it has identified more than $8.3 billion in LooksRare laundering trades, representing the vast majority of trading volume in the market to date.

Most of the wash trade comes from royalty-free collections, meaning sellers don’t have to pay creators a secondary selling fee. Larva Labs’ Meebits have seen the largest trade wash at $4.4 billion, with Terraforms at $2.9 billion, Loot at $705 million, and CryptoPhunks (a CryptoPunks spin-off project) at $251 million, plus $62 million from others. 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 approximately 87% of LooksRare’s trading volume to date matches CryptoSlam’s trade laundering criteria.

Why are some LooksRare users selling NFTs at grossly inflated prices? It all comes down to the trading rewards model of the platform. LooksRare offers token rewards for users who buy and sell NFTs on the site, offering them a percentage of the day’s total sales through 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 goal of earning more in LOOKS rewards than they would spend on LooksRare’s 2% market fee and the gas fees from the Ethereum network itself.

LooksRare also offers Wrapped Ethereum (WETH) rewards for users who stake their LOOKS tokens on the platform, providing an added incentive to accumulate and then hold a large number of them. Community rewards models set LooksRare apart from OpenSea, but with trading rewards at their highest for the first 30 days of the platform, some users are abusing the system.

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

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

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

Randy Wasinger, founder and CEO of CryptoSlam, told Decrypt via email that the company currently uses automated and manual methods to detect laundering operations in a multi-step process. First of all, CryptoSlam automatically classifies a transaction for an NFT that was sold and then bought back by the same wallet in the last seven days as a wash operation.

Also, if any wallet marked for the first point buys and sells an NFT after holding it for less than 30 minutes, those transactions are also classified as wash operations. On top of all that, CryptoSlam manually reviews any NFT transactions that are “clearly way above the norm and not legitimate,” Wasinger explained. Eventually, that last step can be automated as the platform’s algorithm is refined.

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

But with LooksRare trading rewards dropping significantly at the 30-day mark after the January 10 launch, we’ll see if it’s still profitable for wash traders to play with the rewards model, and if the growing trade numbers of the market collapse in turn.