[Xangle Originals]
by Ponyo
Translated by elcreto

Summary

• Unlike the NFT market, which stirred up the market with the notions of decentralization and distribution of ownership, the NFT infrastructure currently is dominated by OpenSea, a centralized exchange.
• But with the debut of Looksrare, an NFT marketplace that advocates for Web3's promise of distribution of ownership, such is no longer the case.
• Since its launch, trading and staking rewards have been cut in half, bringing the price of its own token $LOOKS down to half its peak value.
• Although the trend remains to be seen, there are positive factors, including: i) growth potential of the NFT market, ii) no. of users achieved in such a short period of time, iii) amount of $LOOKS staked and iv) craze for Web3 that LooksRare hails.

2021 Marking an Exponential Growth of NFT Market

The growth of the Non-Fungible Token (NFT) market is unprecedented, bolting from $100M in 2020 to $40B in a year. NFT is a token that has metadata and digital content in the blockchain and each NFT is one of a kind that has a specific value. There are various types of metadata in NFTs, including images, video, audio and any other forms of data.

Ownership, Scarcity and P2P Transactions—The Attributes that Determine the Success of an NFT

NFTs are breaking new ground in various industries with three key attributes, which are: i) ‘ownership’ of digital data that is perfectly verifiable on the chain, depending on the design, ii) ‘scarcity’ of being irreplaceable and iii) ‘P2P trading’ unique to crypto assets that enables borderless transactions. Today, NFTs have not only begun to evolve into various forms depending on the purposes and uses but take root as a cultural phenomenon. What lies at the core, however, is the promise of Web3: distribution of data ownership. More specifically, it envisions equitable monetary compensation for every creation by letting tokenized data be directly exchanged from peer to peer without relying on platform giants like Google, Meta and Amazon.

Centralized Exchange OpenSea’s Monopoly

Much to the contrary of decentralization and distribution of ownership that have driven the massive success of the NFT market, centralized exchange OpenSea has had a monopoly on NFT infrastructure. OpenSea, which represents the predominant majority of NFT trading volume, has monopolized users' transaction fees and provoked criticism for terminating trading of an NFT deemed ineligible for listing after a thorough screening of users and tokens. Even MetaMask uses the OpenSea API, making it impossible for users to retrieve their own personal NFT information on MetaMask without OpenSea.

The debut of Web3 LooksRare and Its Challenge to OpenSea’s Dominance

Then there came Looksrare, armed with Web3’s promise of distribution of protocol ownership. Debuting with the slogan of 'community first,' LooksRare not only airdropped 75% of its tokens ($LOOKS) to the community, but also declared that it would distribute 100% of its sales to $LOOKS holders, stealing the spotlight in the crypto market immediately after its launch. 

LooksRare’s Reward Structure

To explain the rewards and benefits that LooksRare provides to users in more detail, the structure can be divided into the following categories:

• Transaction Fee: Holders who stake $LOOKS receive 100% of the transaction fees generated on the exchange as a dividend. The transaction fee is 2% of the NFT transaction price, and the dividend is paid in wETH. The accumulated dividends can be withdrawn at any time.
• Trading Rewards: When NFTs are traded on LooksRare, users receive LOOKS tokens as a reward according to the trading volume. Once paid, the $LOOKS rewards are halved every 30 days, 90 days, 240 days and 361 days from the first day of disbursement (similar to Bitcoin’s halving). For the first 30 days, 441 $LOOKS is paid per block, but after the 30th day, starting from 9 am UTC on Feb 9 (at a point when the 14,172,012th block based on Ethereum is generated), the reward amount will be reduced to 209.475 $LOOKS per block.
• Staking Rewards: Holders who have staked $LOOKS can earn 100% of the transaction fees generated on the exchange, as well as additional staking rewards. The staking reward, like the trading reward, is halved every 30 days, 90 days, 240 days and 361 days from the date of the initial reward payment. Therefore, after 9 am UTC on Feb 9, 189 $LOOKS per block will decrease to 89.775 $LOOKS.
• LP rewards: This is a reward for providing liquidity on Uniswap V3. It is paid when liquidity is added to the LOOKS-ETH and LOOKS-WETH pairs. The reward program will end after 37 days of the initial reward payment (which is when the 14,172,012th block is generated). After that, the LOOKS liquidity in Uniswap will be managed directly by the team.

Obviously, LooksRare has introduced an exceptionally aggressive reward program. The APR of $LOOKS exceeded 2,600% on the first day of the airdrop and the actual rewards that could be obtained in NFT trading were much higher than this. But as the data above suggest, there was a flood of LOOKS tokens put up for sale, triggered by disappointment at the halving of $LOOKS rewards that arrive every 30 days, 90 days, 240 days and 361 days. The price of $LOOK is halved from its peak price of $7 to $3.5 and APR as of Feb 9 is 388%. Now that the price is half what it used to be, is now the time to buy $LOOKS?

On-chain Performance Analysis

1. Transaction Volume and No. of Users

By far the most important factor that determines the demand for $LOOKS is LooksRare’s performance (transaction volume and number of users). Evidently, the data below shows that LooksRare’s trading volume outstripped OpenSea's from the first day of its launch. The discrepancy is even more pronounced when the numbers are compared with other NFT exchanges other than OpenSea.

However, when it comes to DAU (Daily Active Users), one would notice there is something wrong about the above figures. Between Jan 16 and Feb 9, the average number of daily users of LooksRare was only 2,000, which is significantly lower than OpenSea’s 67,000,  yet LooksRare managed to post a much greater trading volume.

All this leads to a conclusion that LooksRare's trading volume has been seriously inflated by a small number of whales who engaged in wash trading to earn trading rewards. Although LooksRare looks like it has a long way to go when it comes to the number of users, it is worth noting that it has secured 1-2 thousand daily active users in less than a month since its launch.

2. Trend of the Amount of $LOOKS Staked

If you take a look at the trend of $LOOKS locked in the staking contract, the staked amount is trending upwards as the inflow is steadily higher than the outflow of $LOOKS. In other words, more investors want to hold $LOOKS rather than sell it.

The Future of LooksRare

Once called the OpenSea Killer, LooksRare debuted to an avid anticipation. But the disappointment from poor on-chain performance and trading and staking rewards that are cut in half resulted in a sell-off. Yet, given that there still are positive aspects, it may be too early to tell if this is a failure for LooksRare. The future trend remains to be seen but the positive forecast and risks for LooksRare at this point are as follows:

Positive Factors

• Growing NFT market: The NFT market has just come into being and is showing an explosive growth. As the market is expected to grow further in the future, there will be an opportunity for the latecomer to win the share of the pie.
• No. of Users Secured in a Month: Despite the significant gap between the numbers of users of OpenSea and LooksRare, LooksRare is a service that has just been launched less than a month ago. While a token rewards strategy (the so-called ‘vampire attack’) was deployed to funnel liquidity, LooksRare’s DAU that has already exceeded 1-2 thousand is still looking encouraging.
• $LOOKS’ Growing Staking Volume: The steady uptrend of $LOOKS’ staking amount indicates that a growing number of investors are agreeing with $LOOKS' long-term vision and wish to hold it.
• A Project That Symbolizes Web3: In the crypto asset market, the Web3 craze, along with its promise of decentralization and distribution of protocol ownership, is on the rise and does not seem to end up being a short-term thing. After all, the community will support a platform that distributes ownership. And by this very reason of LooksRare being the only exchange in the NFT market that gives royalty payment in full to token holders, it may still garner community’s support.

Risk Factors

• LooksRare’s Defeat in Competition With OpenSea: Currently, the number of LooksRare’s users is far behind OpenSea’s number and there has not been a notable trend of increase since its launch. Because it is in the business of exchange platform, which has a network effect, if it finds itself unable to overcome OpenSea’s moat, it will likely fall behind in the competition.
• Possible User Churn Triggered by Decreasing Rewards: The recent surges in LooksRare’s trading volume are strongly characterized by wash trading aimed at short-term gains. The trading volume that dropped when staking and trading rewards were cut in half demonstrates this. Going forward, the user churn will likely accelerate whenever rewards decrease.

Conclusion

LooksRare is one of the projects that symbolizes the recent Web3 movement and its debut is meaningful. If its slogan of community-first platform succeeds, it will further accelerate the Web3 landscape. Yet, if it loses the competition with OpenSea, it will remain a service that failed to overcome its limitations as a latecomer. On top of that, this may be indicating that users do not as yet prefer the idea of Web3 to an efficient and convenient service. Although it is difficult at this point to predict the success or failure of LooksRare as it has just recently come into service, I believe the direction of the project will pose many implications for the crypto industry.