LooksRare Deep Dive – Investment Report
Thesis
LooksRare is a decentralized NFT marketplace launched in January 2022 to combat OpenSea’s market dominance as a centralized entity. The platform airdropped LOOKS tokens to all users of OpenSea who had traded 3 ETH or more in volume. LooksRare incentivizes users by rewarding buyers and sellers of NFTs with LOOKS after each sale. Before June 13, the platform rewarded users for listing an NFT. 100% of the platform’s 2% fee on each transaction goes back to LOOKS stakers.
In its first month on the market, LooksRare accounted for 65% of the USD value transferred on Ethereum NFT marketplaces. Its market share dropped to 54% and 3.5% in the following two months. Many speculate that a majority of the volume on LooksRare is wash trading because the number of daily transactions and buyers on LooksRare has yet to eclipse that of OpenSea. Wash trading is when someone buys their own NFT to earn the LOOKS reward. This strategy is profitable when the incentive paid out is more than the 2% fee.
At its current, fully diluted valuation of $325M, LOOKS is a risky investment in our opinion because it has yet to attract a significant user base, a large share of its volume still relies on wash trading, and it currently pays out more in incentives than it gains in fees. For LOOKS to be a buy, it needs at least one of two things: 1) attract more users and daily transactions and 2) collect more fees than it pays in incentives.
Assumption
NFT marketplaces like LooksRare and its competitor X2Y2 will lose out to OpenSea because their incentive structures are not sustainable. The best hope for these marketplaces is for aggregators like Gem (acquired by OpenSea) and Genie (purchased by Uniswap) to gain more traction. Aggregators like 1inch in DeFi have not gained significant traction. Therefore it is unlikely they will find more success in NFTs. Eventually, NFT marketplaces will need to verticalize, leaving behind the current one-marketplace-fits-all style of today.
Market Size
The total NFT market is expected to grow to $147 billion by 2026. Last month, the leading Solana NFT marketplace, Magic Eden, raised $130M at a $1.6B valuation, representing a valuation nearly 5x that of LooksRare. In the past 30 days, Magic Eden has processed over 14 million transactions, accounting for $327M in volume across 272,000 users. Compare that to LooksRare over the same period, and find that the Ethereum NFT marketplace handled 41,000 transactions, representing $70M, for 15,000 users. The only LooksRare metric that comes within 5x of Magic Eden’s is volume, and this measure does not account for wash trading.
We get a similar result when doing the same comparison with OpenSea, which recently raised at a $13.3B valuation in January, or ~40x LOOKS FDV. The marketplace had 2.8M transactions totaling $829M in volume across 253,000 users in June. These results are more favorable for LooksRare but keep in mind OpenSea closed their round in the bull market and at the time, LOOKS market cap was nearly $900M. Over the last 30 days, OS has 47% of transaction volume compared to 40% for LooksRare and 13% for X2Y2, but OpenSea has 92% of the users and transactions.
LooksRare’s closest competitor is the recently launched X2Y2. The new decentralized marketplace aims to improve LooksRare’s existing product and reward more OpenSea users than only those with enough capital to trade more than 3 ETH worth of NFTs. To further incentivize new users, the platform reduced its trading fee to 0.5% and offered gas rebates on purchases. To eliminate the risk of wash trading, X2Y2 only rewards those that stake their token; the platform does not award trading rewards. Having just launched at the end of March, it is likely too early to tell if users will continue trading on X2Y2 or if they are taking advantage of the reduced fee launch.
Compounding
Staking the LOOKS token currently offers a 55% APR in both LOOKS and WETH. This yield represents a strong incentive to purchase and stake the LOOKS token. However, this rate will fluctuate and is likely to decrease as trading volume fluctuates and when the team receives LOOKS through an unlock this month.
Risk
The volume on the LooksRare marketplace is largely wash trading, and collectors don’t view LooksRare as a usable marketplace for day-to-day NFT trading. In June, wash trading accounted for between 69% and 7% of the daily trading volume.
LOOKS airdrop only selected the top 20% of OpenSea traders, leading many traders to resent the platform. The platform claims to be decentralized; however, this reveals that only the wealthiest NFT traders benefitted from the airdrop.
LooksRare has a completely anonymous team. They have continued to innovate and build on the platform, but they could rug in an instant. Additionally, the team transferred $73M in LOOKS to Tornado cash less than a month after the token launch.
