Was it the 8,000 ETH (~US$24m) sale of CryptoPunk #5822 that brought mainstream attention to Non-Fungible Tokens (NFTs)? Or was it the 1080 ETH (~US$2.8m) sale of Ape #232 in the Bored Ape Yacht Club (BAYC) collection? A Tuh-Maa-Tow Tuh-May-Tow argument if you were to ask us.

Regardless of what all of us think, NFTs are now a “too big to ignore” asset class. Application across art, gaming, supply chain, intellectual property, and more have made industries googly eyes over this new phenomenon. Over the past 12 months, weekly volumes have increased by 1,317.6% (US$78.7m to US$1.1bn)

Supporting this growth are NFT marketplaces, the key intermediaries that connect buyers and sellers of these million-dollar JPEGs. Today, the mother of all NFT marketplaces is OpenSea, a US$13.3bn behemoth that grossed over US$5bn in volume in January 2022 alone. Despite having numerous competitors, the centralized mammoth has held a monopoly over the NFT marketplace since the 2021 NFT boom.

This has led many in the community to frown, especially since Web 3.0 advocates are pushing for decentralization more than ever. Will the tides finally turn with the launch of LooksRare or will this be yet another futile attempt to dethrone the king? 

In this article, we embark on a journey to discover the LooksRare platform, a community-based NFT marketplace leveraging tokenomics to incentivize trading activity. In our analysis, we will study the competitive landscape of the leading platforms and offer our take on the prospects of this emerging space.

What is LooksRare?

Officially launched on 10 January 2022, LooksRare is a “community-first” NFT marketplace that actively rewards traders, collectors, and creators for participating. The platform prides itself on being community-centric by rewarding, empowering, and giving back to users of its platform. The two co-founders of LooksRare remain anonymous, going by the pseudonyms “Zodd” and “Guts”.

What Does Being “Community-First” Mean?

In LooksRare’s words, a community-first marketplace is one with systems designed to embrace shared ownership. Here are some of the benefits ascribed to users of the platform:

  • Users that buy or sell NFTs earn LOOKS tokens as rewards
  • A generous fee-sharing model where 100% of trading fees are earned by LOOKS stakers
  • An instantaneous royalty payout system contrasted by the monthly disbursements conducted by OpenSea

Platform Features

NFT Marketplace

The LooksRare platform connects buyers and sellers of NFTs. Aside from that, additional features unique to LooksRare include bidding on entire collections, instant royalty payout for creators, and purchasing of NFTs with the option of either WETH or ETH.

DeFi

LooksRare gives holders of their LOOKS token an opportunity to participate in the upside of the platform. Users can earn WETH and LOOKS rewards from staking LOOKS, and earn LOOKS rewards by staking LOOKS-ETH LP tokens (LOOKS-ETH pair available on Uniswap V2).

Go-To-Market Strategy

LooksRare’s user acquisition model was through a “vampire attack”, where the team orchestrated a well-calibrated strategy at launch to drain market share by incentivizing OpenSea users. To attract immediate platform adoption, LooksRare offered a LOOKS airdrop to OpenSea users that traded more than 3 ETH worth of NFTs on the OpenSea platform from 16 June to 16 December 2021. Users are required to list an NFT to claim the airdrop. The strategy was a success and created a large catalogue of collections for prospective NFT buyers on their platform.

Token and Tokenomics

As mentioned above, LOOKS is the native token of LooksRare and it is rewarded to users that buy or sell NFTs on the platform in the spirit of driving their community-first ethos.

Staked LOOKS are distributed 100% of the trading fees on LooksRare, thus giving users access to participate and receive rewards for the platform’s growth.

Token Distribution

The supply distribution of LOOKS clearly favors the community as 75% of all LOOKS are designed to be distributed to the community. This 75% is further broken down into airdrops (12%), staking rewards (18.9%), and trading rewards (44.1%).

Airdrops

LOOKS was airdropped to certain OpenSea users (combined 3 ETH trading volume or more on OpenSea over a six-month period) as part of its vampire attack to attract a large number of users from the get-go.

Staking Rewards

Users who stake LOOKS are rewarded with more LOOKS to incentivize staking and to reduce initial selling pressure. LOOKS staking rewards are split into 4 phases with reward rates per block declining over time as depicted in the table above. 

In addition, LooksRare platform fees are distributed to stakers in WETH tokens. These fees are accrued from the 2.0% take rate on all NFT sales excluding private sales. They are consolidated at the end of each recurring 6,500 Ethereum block period (roughly 24 hours) and then distributed to stakers in a linear fashion per block over the next 6,500 block period.

TL;DR: WETH tokens are consolidated at the end of each day and distributed to stakers over the next 24 hours.

Trading Rewards

LOOKS are rewarded to users who buy or sell any NFT on the platform. The main purpose of this is to bootstrap growth by incentivizing users to transact on LooksRare over competing platforms. Similar to staking rewards, trading rewards will also be earned in 4 phases, with trading rewards per day stepping down over time.

The remaining 25% of tokens are scheduled to be allocated to liquidity management (1.7%), strategic sale (3.3%), founding team (10%), and ecosystem development (10%).

Token Emissions

Is The High Staking APR Sustainable? 

In January, staking APR was in excess of 1,000+%, but has since come down to 184.2% as of 15 March 2022. This APR is made up of 112.9% of APR from platform fees paid in WETH and 71.3% of APR from staking rewards paid in LOOKS. 

Since its launch, there has been significant contention on Crypto Twitter (CT) on the sustainability of the high APRs. Let’s dive into the math behind the APRs of platform fees and staking rewards to deduce if it’s FUD or fact.

APR from WETH Platform Fees

Platform fees are a direct derivative of the trading volume. By comparing LooksRare and OpenSea’s daily volume, it is apparent that LooksRare’s volume dropped off significantly on the 10th of February, the same date where trading reward emissions were halved as shown in Figure 3. This could hint that trade mining (i.e. trading NFTs on LooksRare for the sole purpose of accruing LOOKS token rewards) was propping up the trading volume in the first month.

The opportunity for trade mining on LooksRare opens up when the value of the LOOKS trading rewards is greater than the 2% platform fee, resulting in trade miners artificially inflating volume by trading an NFT back and forth between different wallets that are controlled by the same trade miner to earn LOOKS.

Our suspicions were confirmed when we saw a large disparity in daily transactions and users between LooksRare and OpenSea.

Scanning through a few collections, we discovered that:

  • Trade mining typically occurs within collections with no creator royalties
  • The number of transactions would be low, although the dollar value of these transactions would be extremely high 
    • For example, on 10 February, Meebits were transacting for as high as 4,800 ETH on LooksRare even though the average transaction price on OpenSea was only 3.5 ETH

How Trade Mining Works on LooksRare

Trading rewards are distributed based on this simple formula.

To illustrate our example, we conducted a scenario analysis on 28 January 2022, prior to the halving of staking rewards. We assumed a $200k transaction volume for User A and no creator royalties on collection(s) traded.

On that day,

  • Total Platform Trading Volume = US$317.1m
  • LOOKS Rewards emissions per day = 2,866,500

This transaction will yield the trade miner a total of 1,807.8 LOOKS. 

Given that trading rewards are calculated daily and rewarded to users 2 hours after the end of each day, we used the closing price of LOOKS on 29 January, which was $4.99. This means that the LOOKS mined was worth $9,020.68. 

Given that there is a 2.0% platform fee for trades on LooksRare, $4,000 in platform fees were paid. 

As such, this trade mining transaction yielded a profit (before gas fees) of $5,020.68.

Is The Money Printer Going BRRRRR?

However, we believe that as trading rewards continue to halve in the upcoming phases, it could no longer be profitable to be a trade miner.

Referring back to figure 5, trading volume on LooksRare declined significantly following the halving of trading rewards. Despite this, we believe that it could go lower in subsequent phases, as the halving continues to make it less lucrative for users to trade mine.

As a result, unless we see an inflow of users and an increase in organic transactions on the platform, we expect trading volume to decline substantially, resulting in a lower amount of trading fees accrued by LooksRare. This will cause APR from platform fees to decline.

APR from LOOKS Staking Rewards

As seen in figure 2, staking rewards per block will continuously decline as each phase passes. Barring any sudden changes, both APR from platform fees and staking rewards will need to fall. As such, we portend that total staking APR is unsustainable unless there is an organic growth in demand to use the platform.

Competitive Landscape

Industry Growth

Conducting a Google Trends analysis of the terms “NFT” and “Crypto” over the past year, we observed that the search interest in NFTs surpassed crypto in early January 2022. 

This strong trend is in tandem with the bull run in NFTs in 4Q21 and 1Q22, where both transactions count and USD volume went parabolic.

On a regional basis, the Eastern Hemisphere has a relatively stronger interest in “NFTs” over “Crypto”, with Taiwan, Japan, and South Korea leading the pack. Satoshi Nakamoto, assuming ‘he’ was Japanese, would be happy to hear this.

On an absolute basis, China, Canada, and the U.S have shown strong interest in NFTs, with terms related to the Bored Apes Yacht Club (BAYC) collection leading the search count. The high interest in the BAYC collection is a possible contributor to the success of OpenSea, as it is typically the main platform that generative profile picture (PFP) projects trade on.

Moats in NFT Marketplaces

In our view, NFT marketplaces can create a competitive edge through network effects. A real-life example would be the difference between large and small shopping malls. Large malls attract high traffic as they tend to have many high-quality brands as tenants. Ultra-successful malls even have points-based loyalty programs that encourage spending. Thus, shoppers are willing to make a special trip to larger malls, despite having a smaller one in their vicinity.

This is no different in the case of NFT marketplaces. Successful marketplaces can create moats by having mechanisms that drive volume (i.e. foot traffic). 

On the supply side, marketplaces would need to incentivize creators (i.e. blue-chip projects) to list their NFTs on their platform. This gives a strong reason for buyers/users to patronize the platform – just like a large mall. 

On the demand side, there has to be a reward mechanism (i.e. mall loyalty programs) for users to purchase NFTs. Creating demand is important as marketplace liquidity is a self-reinforcing phenomenon – attracting more supply and hence more demand.

TL;DR, we think that “creator-first” or “collector-first” models are not sustainable, as both demand and supply-side dynamics will need to be intricately managed to create organic volume.

Competitor Analysis

LooksRare’s major competitors include both centralized and decentralized plays in the Ethereum ecosystem.

OpenSea

Since its inception in 2017, OpenSea has grossed over US$20b in total sales volume. Before the emergence of LooksRare, OpenSea held the lion’s share of the NFT market, contributing as much as 98.2% of the total NFT trading volume on Ethereum. 

Despite its large volume and user base, OpenSea has been privy to reputation and overall platform reliability issues. With regard to the former, ex-product head Nate Chastain was called out for insider trading back in Sep 2021 by 0xZuru.eth, tarnishing the platform’s reputation. On a separate occasion, opportunists managed to get away with over 14 BAYC NFTs after exploiting a loophole on OpenSea’s platform. Although victims were reimbursed, it paints a negative image of OpenSea. 

In addition, OpenSea had 25 incidents related to site outage, empty traits data, delayed APIs, and more between December 2021 and January 2022, creating much frustration within the NFT community. 

In our view, Opensea’s centralized model creates technical vulnerabilities and opportunities for “bad actors” to exploit users, causing extreme inconvenience and disruption. With Web 3.0 and DAOs gaining mainstream attention, OpenSea is facing growing pressure from users to decentralize its business model.

Rarible

Rarible is an Ethereum-based NFT marketplace that embraces decentralization through a Decentralized Autonomous Organisation (DAO) structure. Rarible is the true pioneer of community-centricity, with its native token, RARI, being the first to be used as a governance token amongst all NFT marketplaces. 

While RARI was initially distributed as incentives to traders on Rarible, the DAO has since voted to cease this and instead channel the tokens to fund an accelerator program. Trade mining was cited as one of the issues when a proposal was cast to end the token incentives.

Despite Rarible’s user-friendly platform and forward-looking initiatives, not many creators use them as their “official secondary marketplace” when promoting their collections on social media. This could be a result of low trading volume on the platform, which deters them due to the opportunity cost of royalty revenues. In response, users may not want to patronize the platform, under the impression that it does not hold their favorite collections. Although this is untrue as Rarible includes OpenSea listings on their platform, it creates a vicious cycle as Rarible would need participation from both ends of the market to be successful. A classic dilemma of the chicken or the egg.

Foundation

Foundation is an open-sourced NFT marketplace built on the Ethereum platform. They are differentiated from their peers as listed collections are mostly 1-of-1s, as opposed to 1generative PFP collections commonly seen on OpenSea. In our view, the strategy of targeting a smaller niche of the market is a smart one as it reduces the number of targets on their backs.

However, high service fees may prove to be Foundation’s demise, as they charge a whopping 15% on initial sales and 5% on secondary sales. High fees deter potential users, especially those with a smaller investment quantum, which results in low volumes.

The Bottom Line

It is without a doubt that OpenSea remains the dominant NFT marketplace given its first-mover advantage that has allowed it to amass the highest amount of listings. Therefore, OpenSea remains a strong and trusted reference for floor prices. Furthermore, OpenSea has more analytics, which makes it highly convenient for volume-driven traders.

When OpenSea is not ClosedSea, their UX is second to none.

Risks

Cybersecurity Attacks

Billions of dollars have been lost in crypto scams and hacks, as growing interest in this asset class inevitably attracts criminal activity. According to CryptoSec.info, there have been 83 recorded DeFi exploits to date, with amounts stolen as high as US$326m (Wormhole).

The two most common tactics adopted by hackers are phishing and malware attacks.

Phishing Attacks

In fishing, what used to be copper spoon lures back in the 8th century have now evolved to ultra-realistic plastic lures seen in current times. Just like fishing, hacking techniques designed to “hook fishes” (i.e. gullible humans) are becoming more sophisticated.

The above figure shows a real example of a phishing attack where a phisher bought a google adword for “SpiritSwap” (A Decentralized Exchange on Fantom) to lure unsuspecting users to a phishing website instead of the actual web page. Notice how the website is “spiritsiwap” instead of “spiritswap”?

Phishing hacks often come in the form of websites and emails that look like they come from the real source. The intention of this is to trick users into visiting a website designed to look like the real thing and prompt them to sign off on a transaction with their hot wallet. Doing this effectively gives hackers access to draw funds out of the wallet – something we all wish to avoid.

Malware Attacks

Malware is a form of malicious software that is designed to disrupt the ordinary functions of our operating devices (i.e. Windows, macOS, Linux, etc). Hackers can lace files with Malware such as keyloggers and clipboard hijackers that may result in the loss of precious funds.

Keyloggers have the capability to detect the entry of seed phrases, and hackers can use this information to infiltrate hot wallets. On the other hand, clipboard hijackers change wallet addresses from those saved in a user’s clipboard to others owned by these criminals.

How Could LooksRare Be Affected By These Attacks?

In January 2022, sports NFTs marketplace Lympo fell victim to a cybersecurity breach that saw 165m LMT tokens1 being withdrawn from operational hot wallets. Let’s not forget that LooksRare is run by humans, and they too are susceptible to negligence. As of 15 March 2022, LooksRare’s contracts hold WETH and LOOKS with a combined notional value of US$61.4m – an enticing bounty for all cybercriminals. If any of these contracts were to be compromised, users on the platform may risk losing their funds.

“LooksRare? Looks easy.” – Hacker#1874

Anonymous Team

What do Zodd, Guts, Slug Chimp and Gizmo have in common? They are the anonymous team behind LooksRare. Anonymity in Web 3.0 is dangerous as founders can abandon a project without consequences to their in-real-life reputation. 

Aside from this risk, there is also uncertainty over the team’s track record, as there is no reliable way to verify any claims made. Additionally, anonymity is a huge barrier to institutional funds. Institutional investments tend to shed a positive light on targets due to the extensive commercial due diligence these investors are known to conduct for every deal.

Thus, long-term execution risk remains an overhang as users will have to simply trust that the founders will do good by them.

FUD Over Team Cashing Out WETH 

In mid-February 2022, there was significant FUD over the LooksRare team cashing out 10,500 WETH they earned from passively staking their locked LOOKS. 

The team has been called out for being ‘disloyal’ to LOOKS holders and being ‘sneaky’ with their tokenomics design. However, we hold a contrarian view due to the following reasons:

The Team Has Not Sold Any LOOKS

It must be emphasized that the team is still holding on to their allocated LOOKS which will only start vesting in about 5 months. 

Locked Team Tokens Can Be Staked, According To Documentations

A clear emission schedule of stakeable tokens was given in the documentation along with a clear definition of active vs passive staking. 

The Team Deserves To Be Paid

According to LooksRare, the team has been grinding night and day for over six months with zero compensation until the first team WETH distribution. In addition, team members collectively fronted more than 7 figures in costs prior to launch. Thus, we believe that it is only fair to the team that they receive compensation for their efforts and to recoup their initial set-up costs. 

We want to emphasize that the team did not commit any illegal act, they merely did what was outlined in the documentation.

The Treehouse View

What Have We Done On Our Personal Accounts?

If we had no LOOKS exposure, we would probably take on a small position in LOOKS, before staking it for yields. 

Our core thesis revolves around the belief that the NFT marketplace segment will grow as NFTs continue to gain mainstream adoption. As such, we want to ride the wave and are placing our bets that there is space for more than 1 dominant marketplace to thrive. 

However, we are avoiding outsized bets as LooksRare has not proven its ability to retain users and grow organic volume. In addition, their current business model is also easily imitable, given that decentralized marketplaces such as X2Y2 and Fraktal have also conducted vampire attacks on OpenSea.

Given that OpenSea last raised at a US$13.3bn valuation, investing in LooksRare at a US$1.3bn fully-diluted valuation provides us an asymmetric risk-return bet that we’re willing to take.

What Features Do We Hope To See On LooksRare?

Firstly, we hope to see greater analytics capabilities on their platform. While OpenSea is the frontrunner in this category, its analytics is still insufficient for sophisticated collectors. Serious collectors often subscribe to 3rd party platforms like icy.tools, which provide real-time data visualizations for NFT tracking.

Building on the first point, we hope to see some integration of the analytics features with the LOOKS token. We believe that the increased utility of LOOKS will accrue intangible value and ultimately drive the competitive moat of the platform.

Next, we wish to see an increased focus on the 1-of-1 collectibles market – a relatively untapped segment. For this to succeed, we believe that the team could think about designing an incentivization mechanism for prominent 1-of-1 creators to list their work on the platform. Ultimately, going back to our shopping mall example in “Moats in NFT Marketplaces”, users love variety, and this addition will give them just that.

Lastly, we hope to see a DeFi product line expansion down the road, specifically into the lottery space. Additional platform services like lotteries can be integrated with the marketplace to create network effects. We believe that expansion into integrated services will contribute to the long-term growth and adoption of their services.

Useful Readings

If you wish to learn more about LooksRare, you may find a list of Twitter threads and articles we found useful below.

  1. Game Theory of Looks
  2. How Long Will LOOKS Sustain a 800% APR
  3. Outlook on LOOKS
  4. Incentives Structures

Footnote

1Worth about US$18.8m at the time of the attack (referenced from 10 January 2022 spot price)

Disclaimer

This publication is provided for informational and entertainment purposes only. Nothing contained in this publication constitutes financial advice, trading advice, or any other advice, nor does it constitute an offer to buy or sell securities or any other assets or participate in any particular trading strategy. This publication does not take into account your personal investment objectives, financial situation, or needs. Treehouse does not warrant that the information provided in this publication is up to date or accurate.