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

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.

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 @elenahooLooksRare 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…

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