LooksRare wash trading reward simulation
Since its launch on January 10th 2022, LooksRare has been dominated by wash traders trading zero-royalty NFTs to gain trading rewards. I’ve written an article on CoinTelegraph to analyse the details of some wash trades (Dune dashboard can be found here). This article will look into the rewards allocation in the four different phases and simulate a wash trader’s profit / loss from these phases with assumptions of different market conditions.
If you prefer to watch the material instead, you can find the video explanations below on YouTube:
How are the trading rewards calculated?
LooksRare’s trading rewards are distributed over a total of 721 days over four phases. The daily reward is the highest during the first 30 days in Phase A and the total reward is the highest in Phase C (240 days) as shown below.
The amount of trading rewards a single trader can obtain for any given day is calculated as:
Trader’s volume / Total daily volume * $LOOKS Rewards/day
where the $LOOKS rewards per day differs in each of the four phases as shown in the table above.
How to calculate the profit / loss?
It’s not difficult to see from the formula that the more trading volume created by the trader, the more reward he/she gets. The incentive for wash trading is there if the rewards can cover the 2% platform fee and the gas fee. Apart from the trader’s volume and the total volume, the exchange rate between $ETH/$LOOKS is also important since the trading rewards are paid in $LOOKS and the trading volume and platform fees are calculated in $ETH. The three moving components in a wash trader’s PnL calculation are:
- u: Individual trader’s volume in $ETH
- v: Total daily volume in $ETH
- e/l: $ETH/$LOOKS exchange rate, where e is Ether’s price in USD and l is LOOKS price in USD
The following simulations will fix two out of the three moving components and look at how the remaining one component changes the PnL.
For simplicity, the cost of the trade is assumed to be only the 2% platform fee, assuming all wash traders only trade zero-royalty NFTs and no gas fees. The daily reward in $LOOKS from different phases is defined as R(i) where i = Phase A, B, C, D. Therefore, the PnL for any pair of wash trade (i.e. buying and selling the same NFT, and fees only paid from selling) in $ETH is: (u/v)*R(i)*(l/e) - 2%*(u/2).
Total daily volume simulation
To see how different levels of total daily volumes affect the trader’s profit, the other two moving parts — $ETH/$LOOKS and trader’s volume need to be fixed in the simulation. $ETH is set to $2500 and $LOOKS at $4.2 whereas three different levels of trader’s volume — 1, 5 and 10 $ETH are used to compare the profit.
As shown below, more trade volumes generate more profit up to a break-even point (red dash line) where the total daily volume is too big and the trading reward as a portion is too small to generate enough profit for the trader to cover the cost. This effect becomes larger in the later phases as trading rewards decrease over time. If the total daily trading volume stays at approximately where it has been since the launch, which has always been above 100,000 $ETH per day, then by Phase C there will be almost no profit from wash trades. Only if the daily volume drops below 90,000 $ETH per day will the wash trade becomes profitable again in Phase C.
$ETH/$LOOKS exchange rate simulation
Similarly, in order to see how different levels of $ETH/$LOOKS exchange rate will affect the trader’s profit, the other two moving parts — trader’s volume is fixed at 10 $ETH and total daily volume is fixed at three different levels — 200,000, 250,000 and 300,000 $ETH for comparison.
It is not difficult to see the profit decreases as $LOOKS value goes down. The larger the total daily volume is, the lower the trader’s profit is when he/she is trading 10 $ETH a day. The profit dramatically decreases as the trading rewards decrease over time. There is hardly any profit in Phase B unless the $ETH/$LOOK exchange rate goes below 600; and by Phase C and D, $LOOKS price needs to go even higher relative to $ETH in order for wash traders to make a profit.
Trader’s volume simulation
For this simulation, the trader’s volume is represented as a % of the total daily volume, which is fixed at $ETH 250,000. Different levels of $LOOKS price ranging from $2.5 to $5 are also fixed in the simulation for comparison.
It is interesting to see that in Phase A the profit is positive for all assumed $LOOKS price whereas for Phase B it’s only profitable if $LOOKS price is above $4.5. The larger the trader’s volume in % of the total daily volume, the larger the profit. But this is the inverse when the trade is in loss.
The takeaway from these simulations is that it is quite easy to profit in Phase A from wash trading. The required total daily trading volume, $LOOKS price relative to $ETH price, and the trader’s volume are all within the reasonable range and easy to achieve given the past observable history. It surely becomes more difficult to profit from Phase B, but it is still possible. In Phase C and D, it is almost impossible to profit from wash trading on LooksRare.