On January 10th, the LooksRare NFT marketplace made its debut with a voraciously vicious vampire attack against the not-so-beloved giant, OpenSea. Since then, users who have claimed the airdrop and staked their tokens have been drinking fine wine and collecting a steady stream of LOOKS and WETH rewards at an average of 600% APR.

It’s no secret that the WETH rewards have been almost entirely funded by the wash trading of zero royalty collections such as Meebits and Loot in order to stack LOOKS at a discount. Some say this was intentionally baked into the tokenomics as a means to inflate the APR in the early stages and make the platform more attractive to early users.

*Twitter user @hildobby_ has been doing an incredible job at creating graphs using Dune analytics in order to compare OpenSea and LooksRare. Compare both to see that volume does not correlate with daily active users and transaction volume. See OpenSea vs LooksRare here

LooksRare has been doing a stellar job growing the marketplace and recruiting new users in the last month, although a key driving factor to its growth can be attributed to the success of the rewards system and the juicy returns. A lot of the incentives pushing users to jump ship are linked to this system. If the wash traders were to completely stop trading tomorrow, the fast-paced growth of the marketplace could be hindered at an alarming rate.

So now we’re almost 30 days in, and according to the LooksRare documentation, we are exiting Phase A of LOOKS distribution and entering Phase B. This has sparked many worried tweets and discord debates in the last week and hopefully, the following can clear a few things up.

Why the wash traders won’t stop the washing

Before anything, I highly recommend reading Twitter user @ElYogui_PA’s thread analyzing LOOK’s valuation. In his thread, he shares a table detailing wash trading profits for a 2000 ETH trade based on LOOKS price and daily trading volumes.

In the first table, we can see profitability margins for wash trades in phase A. It shows that for a price of $4 per LOOKS, daily volume maxes out at around $500,000,000 to maximize profits. When we look at the second table, after halving the rewards, the daily volume ceiling is around $250,000,000. This shows us that there is still room for arbitrage and if there is money on the table, someone is going to collect it. If we wanted to bring the ceiling back to phase A levels, the LOOKS price would need to reach $8 a token.

Furthermore, most of the wash traders have been accumulating and staking their LOOKS. Why would they stop wash trading if it meant everything they’ve accumulated became worthless?

What to expect before February 9th

A price drop. There’s no surprise here and at the time of writing this, the price of LOOKS has been steadily declining every day (currently $3.60). At a high level, the halving of rewards truly sounds like a bad thing in the ears of investors that don’t research further than their noses. And unfortunately, these are the most vocal crowds. Right now, we’re actually seeing two different dumps play out, and it’s a vicious cycle. We have the paper hands selling their bags out of fear the wash traders will stop trading and we also have the riskier sellers looking to predict the pre-halving dump and buy back at lower prices. Both of these parties will be very vocal and negative once they’ve exited their position and will try to convert more stakers into sellers. Beware of the FUD.

What to expect on February 9th

It’s hard to say exactly what will happen on the first day but the APR will obviously drop quite a bit initially. Since staking rewards and trading rewards are halving, this means that we can expect the LOOKS % to halve and WETH % to halve as well due to traders adjusting to the new volume ceiling. We might be seeing the APR drop at around 150-200% which is still amazing returns. One certainty is that the APR will remain over 100%, LOOKS rewards itself accounts for almost 100% post halving. (depending on the total staked*)

At this point, we should see the riskier investors flood back in after the price of LOOKS bottoms out and a slow reversal will start. There is also a large number of first-time buyers that have been sitting on the sideline expecting a bottom on February 10th which might result in LOOKS bottoming out the day prior. This is an obvious entry point for most.

What to expect after February 9th

When users start realizing that the wash traders haven’t left the chat, more buyers will pile in knowing they are safe for another 90 days. Also, since the LOOKS inflow has been cut in half, this will create more pressure to the upside. When (if) the price reaches 8$ and holds steady, wash traders will have the exact same incentive they had in the first phase of looks distribution and everything will be back to normal, aside from the LOOKS APR which will forever remain cut in half for phase B.

In the end

This halving is not the end of our beloved WETH farm. The next 90 days are crucial for Looksrare however. It gives them enough time to grow the marketplace up to the point where organic growth is big enough to snowball on its own and take a large piece of the NFT market pie. Phase C not only marks the end of the wash trading era but also includes the unlocking of seed investor funds, which can result in catastrophic dumps. For now though, just sit back and relax for 90 days and let the future you worry about phase C’s problems.

Thanks for reading!
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