NFT Volume, DAOs, and LooksRare: A Deep Dive

Tracking the NFT Marketplace Landscape

Many, including myself, regularly monitor NFT marketplace volume to stay informed about the growing market for digital asset trading across various blockchains. This market involves the purchase and sale of digital signatures linked to images and other digital content.

Typically, the data exhibits relative stability. OpenSea generally maintains a leading position in terms of trading volume, with other smaller NFT platforms and blockchain-based games contributing to the overall activity.

For those interested in independent research, resources like DappRadar’s NFT marketplace data, NonFungible’s related data set, and The Block’s charted data provide comprehensive insights.

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LooksRare's Sudden Rise and OpenSea's Position

Recently, a significant shift occurred in the data. A new NFT marketplace, LooksRare, experienced a rapid increase in volume, quickly exceeding OpenSea and claiming the top position among its competitors.

Does this indicate trouble for OpenSea? Was LooksRare’s ascent driven by a superior business model, pricing strategy, or other competitive advantages? The situation is complex.

It appears that certain practices are being employed to artificially inflate the reported trading volumes. Therefore, a closer examination of incentives and governance tokens is necessary to understand the dynamics at play within LooksRare and the broader trend of financialization.

Understanding the Incentives

The core of the issue lies in how LooksRare incentivizes trading. Unlike OpenSea, which primarily relies on transaction fees, LooksRare distributes its governance token, LOOKS, to both buyers and sellers.

This token distribution creates a powerful incentive for users to trade on the platform, even if it means engaging in wash trading – a practice where users buy and sell the same asset to themselves to generate volume and earn rewards.

The Role of Governance Tokens

Governance tokens, like LOOKS, are designed to give holders a say in the future development of a platform. However, in the case of LooksRare, the incentive structure has inadvertently encouraged manipulative behavior.

The focus has shifted from genuine trading activity to maximizing token rewards, leading to inflated volume figures that don't necessarily reflect actual market demand.

Implications for the Future

The situation with LooksRare highlights the challenges of building sustainable NFT marketplaces. Simply offering token rewards isn't enough to foster a healthy ecosystem.

A more balanced approach is needed, one that prioritizes genuine user engagement and discourages manipulative practices. The long-term success of NFT marketplaces will depend on their ability to attract and retain users based on the value they provide, not just on the incentives they offer.

The financialization of everything is a powerful force, but it must be tempered with sound economic principles and a commitment to transparency.

Understanding Incentives in the NFT Marketplace

Recent data reveals an interesting dynamic in the NFT trading world. Over the past 24 hours, LooksRare recorded approximately $290 million in NFT transactions, according to DappRadar. This contrasts with OpenSea’s $131.6 million during the same period.

Despite this significant difference, it doesn't necessarily indicate a shift in marketplace dominance.

A deeper analysis, utilizing data from Dune Analytics compiled by @hildobby_, is crucial to understanding the situation with OpenSea and LooksRare.

Transaction Volume vs. Total Trades

While LooksRare demonstrates a higher value of NFTs traded, OpenSea still processes a far greater number of total transactions. This discrepancy raises the question: are users on LooksRare simply dealing with more valuable NFTs?

The answer is partially yes, but the situation is more complex than it appears.

The introduction of the LOOKS token, earned through trading activity on LooksRare, has incentivized increased volume. However, the extent to which this volume represents genuine NFT sales versus wash trading – the practice of repeatedly buying and selling the same asset to inflate trading figures – remains unclear.

As stated on their website, LooksRare rewards users with LOOKS tokens for eligible NFT transactions. Furthermore, LOOKS is intended to become the governance token for a future DAO, offering users a stake in the platform’s direction.

The Incentive Structure and its Potential Pitfalls

Ideally, LooksRare’s system would function as follows:

• The platform offers slightly lower fees compared to OpenSea.
• Users earn LOOKS tokens for trading, gaining a stake in the platform’s governance.
• Legitimate trading volume generates LOOKS rewards, fostering a healthy ecosystem.
• The DAO launches successfully, benefiting all participants.

However, the reality appears to be different:

• LooksRare maintains lower fees than OpenSea.
• Users are rewarded with LOOKS tokens for trading activity.
• Users engage in wash trades of high-value NFTs to accumulate LOOKS tokens, artificially inflating trading volumes.

This practice concentrates LOOKS tokens in the hands of wealthy individuals, potentially influencing the future governance of the LooksRare DAO.

Alternatively, early LOOKS token holders may quickly sell their holdings if the wash trading scheme is exposed, causing the token’s value to plummet and jeopardizing the project’s viability.

Wash Trading Concerns and DAO Governance

The prevalence of wash trading on LooksRare is a widely acknowledged concern. Reports from CoinTelegraph, DappRadar, Gadgets360, and Nairametrics all highlight this issue.

This situation illustrates the challenges of combining democratic governance (DAOs) with financial incentives. Wealthy or sophisticated users can quickly acquire voting power, potentially undermining the principles of a truly decentralized organization.

Consequently, DAOs in this context may resemble oligopolies rather than democracies, which is a disappointing outcome for those hoping for a more equitable corporate structure.

Looking Ahead

While the NFT economy is still nascent and DAOs are evolving, these early indications raise concerns about the effectiveness of key mechanics touted as fundamental to web3 and the future of the internet.

It’s important to remember that this sector is still in its early stages. However, the current situation warrants careful observation and consideration as the landscape continues to develop.