LONDON, Feb 7 (Reuters) – On Jan 12, a computer-generated pixelated image of a person was sold for around $50.6 million worth of cryptocurrency on a new online marketplace that offers non-fungible tokens.
It gets weirder.
Five minutes later, the same “Meebit” NFT – a virtual character wearing purple shorts and green sneakers – was resold by the buyer to the original seller for approximately $49.6 million.
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Confuses? Welcome to the weird and wild world of NFTs, a new breed of crypto assets that represent digital items, from images and videos to avatar clothing. They’ve exploded in popularity 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. A person can own multiple wallets, acting as both a buyer and a seller in an exchange.
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 for unusually high prices last month, according to a Reuters review of publicly available blockchain records. .
Since January 11, for example, another Meebit NFT — this one with a sporty outfit and ponytail — has been passed between three wallets in over 100 sales, mostly in the $3-15 million range. During the week of January 12-19, an NFT “Loot” bag, representing virtual gear for online adventure games, was traded over 75 sales between two other wallets, for $30,000-$800,000 at that time.
The activity has helped LooksRare generate at least $10.8 billion in trading volume since its launch in early January, according to data provided by market tracker DappRadar.
The 27 most expensive sales recorded across the NFT industry in January, totaling $1.3 billion, came from just two wallets transacting on LooksRare, according to DappRadar data as of January 31, while Top 100 sales, worth $2.3 billion, came from 16 wallets trading on the platform.
“There’s a lot of activity between two wallets – let’s say wallet one sells to wallet two, then wallet two sells it,” said Modesta Masoit, director of finance and research at DappRadar. “It is very likely that this is not a real demand, that these trades are not organic.”
DappRadar and CryptoSlam, another data provider that reported artificially inflated volumes on LooksRare, said these transactions could be linked to the platform’s reward structure – although Masoit added that there was also a “real” activity on the site.
LooksRare describes itself as “the first community NFT marketplace with rewards for participation”, referring to its reward system which includes awarding tokens to daily traders based on the proportion of overall sales volumes they were responsible.
These tokens, called LOOKS, can then be used in a process called “staking” to claim a slice of the platform’s revenue from the 2% fee charged on all transactions, according to a LooksRare spokesperson.
Asked about the transactions reviewed by Reuters and whether the transactions artificially increased trading volumes, the spokesperson said such practices were very risky, as traders would have to pay transaction costs that they do not were not guaranteed to recover.
Traders don’t know until the end of the day whether they’ve made enough trades to earn LOOKS tokens, or how many, because they don’t know what others have traded.
The spokesperson added that LooksRare has a structure designed to reduce the profitability of LOOKS’ “yield farming” in the long run.
“The LOOKS Staking Reward System is the core reward structure of the token, in which 100% of trading fees are earned by LOOKS stakingrs. This fosters a community of users and token stakingrs who share the goal common to make the platform the best possible.” said the spokesperson.
‘BYE BYE WASH TRADERS’
Nonetheless, the trading activity provides a window into the nebulous and speculative nature of the NFT industry, which attracted $25 billion in sales volume in 2021.
The buzz around this new market has been spurred by art collectibles like CryptoPunks and Bored Apes, algorithmically generated portraits that can sell for millions of dollars. They have risen to stardom, with socialite Paris Hilton and TV host Jimmy Fallon recently showing off their Bored Apes.
Several large companies, from Coca-Cola to Gucci, test the temperature with their own NFTs. In the art world, meanwhile, just over $1 of every $20 in revenue at top auction houses last year came from NFTs.
John Egan, CEO of L’Atelier, the technology research arm of BNP Paribas, called the LooksRare trades reviewed by Reuters “sham trades” that would be banned in traditional markets like stocks or debt because they give a false Demand impression of an asset.
Still, 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 per se culpable” for the trades. “It’s a marketing incentive,” he said. “LooksRare actually pays big investors to use its site, attracting a lot of attention and new users in the process.”
For platform proponents, this may be a good strategy to thrive in a virtual gold rush, as tech giants like Meta and Microsoft spend billions of dollars advancing their own visions of the metaverse. and pave the way for future profits.
Exceptional activity in January helped LooksRare overtake four-year-old market leader OpenSea to become the largest NFT marketplace by monthly volume, despite fewer than 3,500 traders per day, compared to OpenSea’s 57,000 to 90,000, according to data from DappRadar.
OpenSea did not respond to a Reuters request for comment for this story.
A Twitter user called “dingaling”, who LooksRare told Reuters was an investor and advisor to the platform, wrote a thread on Jan. 12 saying the wash trade on the platform looked bad but could be part of the “necessary steps” to gain market share and provide a more transparent and decentralized marketplace for the NFT community.
“People are really crazy about wash trading, but I find it hard to understand why. It’s a free market,” Dingaling added. “Once real volume takes over, it’s over to wash out traders.”
MEETING IN THE MEAT SPACE?
From a regulatory perspective, authorities around the world are concerned that the rise of crypto assets more generally could undermine financial systems, foster crime and harm investors.
Efforts so far have mainly focused on cryptocurrencies rather than NFTs, which raises new issues such as how they should be classified, as they are unique – non-fungible – and very diverse.
“Generally, the majority of jurisdictions recognize that NFTs should not be regulated as financial products if each NFT represents a truly unique item – for example, a collectible, work of art or content unique multimedia,” said Hagen Rooke, a partner. at the global law firm Reed Smith.
Traditional authorities may also need to bridge a cultural divide.
The founders of LooksRare are identified only by the pseudonyms Guts and Zodd. The spokesperson described them as “NFT nerds” and said the platform team was spread across different time zones and had mostly “never met in the meat 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 market players attracted to LooksRare by its reward model.
Rizzle first joined LooksRare after receiving free LOOKS tokens, which he staked for profit, and since then he has been using the market for trading because he said he liked some of the features.
“I wouldn’t be surprised to see other platforms pop up with even bigger upfront incentives to try and capture that same audience,” he said.
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Reporting by Elizabeth Howcroft; Assembly Pravin Char
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