On Jan. 12, a computer-generated pixelated image of a person was sold for approximately $50.6 million worth of cryptocurrency on a new online marketplace offering non-fungible tokens (NFTs). It gets weirder.
Five minutes later, the same “Meebit” NFT, a virtual character dressed in purple shorts and green sneakers, was sold back by the buyer to the original seller for around $49.6 million.
Confused? Welcome to the weird and wild world of NFTs, a new generation of crypto assets that represent digital items, from images and videos to clothing to avatars. Its popularity has skyrocketed over the past year as part of a nascent and largely unregulated economy for the much-hyped metaverse.
The Meebit, which can be used as a profile picture, was exchanged between two cryptocurrency wallets, which are anonymous. Although the underlying blockchain technology creates a public record when an NFT is sold, it does not record the names of those involved. One person can own multiple wallets, acting as buyer and seller in a transaction.
The digital character was among dozens of NFTs on the LooksRare marketplace that were sold back and forth among a small number of wallets in quick succession at unusually high prices last month, according to a Reuters review of available blockchain records. publicly.
Since January 11, for example, another Meebit NFT, this one in a sporty outfit and ponytail, has been passed between three wallets in more than 100 sales, mostly in the $3-15 million range. In the week of January 12-19, an NFT bag of “swag,” representing virtual gear for online adventure games, was traded in 75 sales between two other wallets, for $30,000-$800,000 a time.
The activity has helped LooksRare generate at least $10.8 billion in trading volume since it launched in early January, according to data provided by market tracker DappRadar.
The 27 most expensive recorded sales in the entire NFT industry in January, totaling $1.3 billion, came from just two wallets transacting on LooksRare, according to data from DappRadar as of January 31, while the top 100 sales, worth $2.3 billion, came from 16 wallets trading on the platform.
“There’s a lot of activity between a pair of wallets, let’s say wallet one sells to wallet two and then wallet two resells it,” said Modesta Masoit, director of research and finance at DappRadar. “It is very likely that this is not real demand, that these exchanges are not organic.”
DappRadar and CryptoSlam, another data provider that reported artificially inflated volumes on LooksRare, said such trades could be tied to the platform’s reward structure, though Masoit added there was “real” activity on the site as well.
LooksRare describes itself as “the community’s first rewards-for-participating NFT marketplace,” referring to its rewards system that includes awarding tokens to day traders based on their share of overall sales volumes. they were responsible.
These tokens, called LOOKS, can be used in a process called “staking” to claim a portion of the platform’s revenue from the 2 percent fee charged on all trades, according to a LooksRare spokesperson.
When asked about the transactions reviewed by Reuters and whether the transactions artificially increased trading volumes, the spokesman said such practices were highly risky as traders would have to pay transaction costs that they were not guaranteed to recover.
Traders don’t know until close of day if they have traded enough to earn LOOKS tokens, or how many, because they don’t know what others have traded.
The spokesperson added that LooksRare had a structure designed to reduce the profitability of LOOKS’ “yield farming” in the long run.
“The LOOKS Participation Rewards system is the core reward structure of the token, whereby LOOKS participants earn 100% of trading fees. This fosters a community of users and tokens who share the common goal of making the platform the best it can be,” the spokesperson said.
‘Goodbye wash merchants’
Nonetheless, the trading activity provides a window into the nebulous and speculative nature of the NFT industry, which attracted $25 billion worth of sales volume in 2021.
The buzz around this new market has been fueled by art collectibles like CryptoPunks and Bored Apes, algorithmically generated portraits that can sell for millions of dollars. They’ve gained celebrity traction, with socialite Paris Hilton and TV host Jimmy Fallon recently showing off their Bored Apes.
Several large companies, from Coca-Cola to Gucci, are testing the temperature with their own NFTs. Meanwhile, in the art world, just over $1 in every $20 of revenue at major auction houses last year came from NFTs.
John Egan, CEO of L’Atelier, the technology research arm of BNP Paribas, characterized the transactions in LooksRare reviewed by Reuters as “laundering operations” that would be prohibited in traditional markets such as equities or debt because they give a false impression of demand for an active.
However, such transactions are not illegal in this nascent industry because there are no equivalent rules governing NFTs, two crypto legal experts told Reuters.
Egan added that LooksRare was “not itself to blame” for the trades. “It’s a marketing incentive,” he said. “LooksRare is effectively paying big investors to use their site, attracting a lot of attention and new users in the process.”
For platform supporters, this may be a good strategy for thriving in a virtual gold rush, as tech giants like Meta and Microsoft spend billions of dollars to promote their own visions of the metaverse and pave the way for future profits.
Huge activity in January meant that LooksRare overtook four-year-old market leader OpenSea to become the largest NFT marketplace by monthly volume, despite having fewer than 3,500 traders per day, compared with 57,000 to 90,000 for OpenSea, according to data from DappRadar.
OpenSea did not respond to a Reuters request for comment for this story.
A Twitter user named “dingaling,” who LooksRare told Reuters was an investor and advisor to the platform, wrote a thread on Jan. 12 saying wash trading on the platform looked bad, but could be part of the “necessary steps” to gain market share. and provide a more transparent decentralized marketplace for the NFT community.
“People have been very angry with the wash trade, but I find it hard to understand why. It is a free market,” Dingaling added. “Once the actual volume takes over, it says goodbye to the washed-up traders.”
Did they meet in the meat space?
From a regulatory standpoint, authorities around the world are concerned that the rise of crypto assets in general could undermine financial systems, promote crime and harm investors.
Until now, efforts have focused mainly on cryptocurrencies rather than NFTs, which raises new issues such as how they should be classified as they are unique, non-fungible, and highly diverse in nature.
“Generally speaking, most jurisdictions recognize that NFTs should not be regulated as financial products if each NFT represents a genuinely unique item, for example a unique collectible, piece of art or multimedia content,” said Hagen Rooke. , partner. at the global law firm Reed Smith.
Traditional authorities may also need to bridge a cultural gap.
The founders of LooksRare go by only the pseudonyms Guts and Zodd. The spokesperson described them as “NFT nerds” and said that the platform’s team was spread across different time zones and for the most part “have never met in physical space.”
Meatspace is a term used by internet enthusiasts to refer to the physical world.
A frequent NFT trader known as “Rizzle”, who primarily uses OpenSea, is among the big players in the market attracted to LooksRare for its reward model.
Rizzle first joined LooksRare after receiving some free LOOKS tokens, which he staked for profit, and has since used the market to trade because he said he likes some of the features. “I wouldn’t be surprised to see other platforms come along with even bigger upfront incentives to try and capture this same audience,” she said.