Coinbase Ventures, which is the venture capital arm of Coinbase, has taken a closer look at “the LooksRare vampire attack of industry leading NFT marketplace OpenSea.”
This article features some key highlights from their analysis, which was published earlier today on the Coinbase blog.
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Coinbase started by explaining what a “vampire attack” is in the context of crypto:
“Vampire attacks are purely a crypto/Web3 phenomena. At their highest level, a vampire attack refers to a method for sucking users out of an existing platform into a competing one by offering some kind of incentive (typically tokens).“
As Coinbase points out, the best known example of a vampire attack in the crypto space took place in 2020, when “SushiSwap launched a near identical decentralized exchange to industry leading Uniswap with one key difference: users who migrated their liquidity from Uniswap to Sushiswap were given $SUSHI tokens.” These tokens “offered holders governance rights over the platform in addition to a cut of trading fees collected on SushiSwap.”
Next, they explained what are the three stages of a typical vampire attack, i.e.
- “Identify industry leader“
- “Build competing, yet strategically differentiated platform“
- “Offer superior incentive for users who migrate over“
Coinbase says that what LooksRare did to OpenSea was quite similar to what SushiSwap did to Uniswap — with the incentive for users of the incumbent platform to move to the challenger platform being the $LOOKS token — with one key difference: whereas SushiSwap used code that was almost identical to Uniswap’s code, LooksRare “appears to have built their own smart contracts.”
Coinbase says that “due to the open-sourced nature of blockchains, the LooksRare team was able to identify OpenSea users who had traded at least 3 ETH worth of NFTs over the prior six months and airdrop them LOOKS tokens.” To get these $LOOKS tokens, users need to first put an NFT up for sale on the LooksRare marketplace. Apparently, this strategy worked very well, with many NFTs soon listed on LooksRare, which helped the $LOOKS token to go up in price to around $7 “just 10 days after launch.”
Coinbase points out that LooksRare did not stop there:
“… users of the LooksRare platform could earn more tokens by staking their LOOKS and by trading NFTs on the platform. LooksRare charges a 2% fee for every sale (vs. 2.5% on OpenSea), and staking (locking LOOKS into a smart contract) entitles stakers to 100% of those fees. Stakers also earn additional LOOKS on top of trading fees. At the time of writing, staking LOOKS earns an eye-popping 500%+ APR.“
Most interestingly, when users buy or sell an NFT on LooksRare, they earn $LOOKS tokens.
According to Coinbase, although these incentives have been “enough to keep daily trading volumes outpacing OpenSea”, once “you look the total daily # of users, it’s clear that these volumes aren’t as impressive as they initially appear.”
Coinbase believes that there might be some wash trading going on because “while LooksRare is doubling OpenSea’s volume on any given day, OpenSea has 20–40 times more active users than LooksRare,” which could mean that “LooksRare’s volume is fueled by a small number of traders gaming the incentive system to earn LOOKS.”
Coinbase also has some good things to say about LooksRare:
“Even with washtrading eliminated, LooksRare’s launch can still be considered a success. Plus they offer other interesting and novel features such as no transaction fees for private sales and the ability to make a single offer across an entire collection of NFTs. Lastly, their ‘real volume’ is continuing to grow.“
But what happens once LooksRare’s generous trading rewards cease to exist (within the next couple of years)? Although by then it might not no longer be the top dog when it comes to trading volume, it could still continue to have a very profitable business.
Coinbase says that LooksRare’s future transition to a DAO could be “messy”. It also warns that whenever you have an anonymous team of developers, there always exists the risk of a “rugpull”.
The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.