Introduction

Competitors in the tokenized NFT marketplace race are still relatively scarce, with a handful seeking to dethrone OpenSea. Although LooksRare and X2Y2 drew first blood by releasing governance tokens, their effectiveness remains to be seen during the current bear market. The question of whether token rewards can sufficiently attract sticky users — especially amid wash trading concerns and turbulent market conditions — remains.

This report will cover how these platforms have fared since inception and compare their performance in their quest to become the go-to NFT platform.

For the purpose of this report, we will define what wash trading entails. Please be advised that these definitions may differ from other reports, as the data charted here specifically reflects the following definitions. Wash trading is defined by:

The wallet addresses of the seller and buyer are both controlled by the same individual, where the NFT sold returns to the seller’s address and/or;
The seller and buyer aim to manipulate market participants or marketplaces by changing the value or volume of an NFT to take advantage of trading rewards

Transactions within zero royalty collections on NFT marketplaces will not count toward wash trading despite making up a substantial amount. A stricter wash trading filter is required to get a true sense of how much is happening. Furthermore, Sudoswap’s implementation of zero royalties has resulted in X2Y2 offering optional royalty offerings, as it was proven to be a successful user acquisition feature. To learn more about the Sudoswap NFT marketplace, you can read about it here.

The Current State of NFT Marketplaces

NFT Marketplace Wash Trading Volume

Rarible was the first NFT marketplace to experiment with market liquidity mining, where sellers and buyers split an equal share of RARI rewards for being active community members. This resulted in an exponential volume rise over six months and reached an NFT volume dominance of 41% in December 2020 — of which the majority was wash trading.

However, Rarible’s experiment was a catastrophic failure, as the incentive to wash trade exceeded the cost of marketplace fees. With Rarible’s trading incentives plummeting, NFT enthusiasts and speculators eagerly traded on OpenSea, betting on the platform releasing a native token. Despite the heavy criticism regarding centralized operations, self-serving platform fees, and frequent phishing attacks, OpenSea dominated NFT volume on Ethereum, and market share peaked at 98% in early January 2022.

Reminiscent of SushiSwap’s vampire attack on Uniswap, LooksRare launched a tokenized marketplace with the intent of siphoning OpenSea users. The campaign included a generous airdrop specifically for OpenSea traders and aggressive trading rewards, attempting to create sticky users. As shown in the chart above, this appears to have been an overwhelming success, as LooksRare dominated 82% of all marketplace volume within just a few days of launching.

X2Y2 had a similar approach to attracting OpenSea users. But akin to Rarible, as their governance token value diminished, so did their volume dominance.

NFT Marketplace Organic Trading Volume

The juxtaposition of wash trading with the chart directly above paints a different picture of NFT marketplace dominance. Applying a wash trading filter shows the significant role liquidity mining had on artificial trading volume. It is important to note that Rarible’s wash trading is not eliminated in this chart. Data analytics websites such as NonFungible refused to record metrics on wash trading and instead completely removed Rarible from their system.

When removing wash trading, the launch of LooksRare’s LOOKS token resulted in just a 12% market share. This implies that 70% of all NFT trading volume during LOOKS’ launch was attributable to wash trading. LooksRare’s dominance has been trending downward and currently sits at 3% of NFT volume.

On the other hand, X2Y2 has been more successful in attaining organic trading volume and has maintained its market share since launch, sitting at 18%. Its relative success is largely attributable to having the cheapest service fees at 0.5% alongside Sudoswap, as well as optional royalty payments.

Even after removing the manipulated volume of competitors, OpenSea’s dominance has decreased over the past six months. After peaking in January 2022 at 98%, it has dropped to 70%. As NFT enthusiasts and speculators now have a thirst for incentivized trading, upcoming marketplaces will continually take some of the limelight from OpenSea. Many speculate that this may force OpenSea to finally launch its own token. However, there is also speculation that OpenSea will seek a more traditional route — an IPO.

Amidst market turmoil, NFT marketplaces must balance efficiently attracting users through tokens and creating a self-sustaining business model.

LooksRare vs. X2Y2: Twin Marketplaces

LooksRare vs. X2Y2 Valuation

The LOOKS token’s price rose immediately after launch, primarily driven by lucrative dual staking rewards in the form of LOOKS and Wrapped ETH (WETH). There was a lot of speculation surrounding LOOKS’ valuation against OpenSea’s colossal $300M raise at a $13.3B valuation. LOOKS peaked at $7 which valued LooksRare at a $7B FDV. With artificial volume painting LooksRare as a worthy competitor, it reached 53% of OpenSea’s valuation. This was short-lived and swiftly reversed, as wash trading, hyperinflationary token emissions, and wider market turbulence resulted in immense sell-side pressure. LOOKS currently trades at $0.20 — a 97% decrease from its highs.

The X2Y2 token tells a similar story of lucrative dual staking rewards and its peak valuation at a $4B FDV. The difference lies where X2Y2 attempted to amend the ‘wrongs’ of LOOKS by introducing a supply-burning mechanism to combat sell-side pressure. The supply of LOOKS experienced large jumps in early February and mid-June, increasing 2.5x and 2x, respectively. However, X2Y2’s circulating supply has doubled since inception. As of writing, LOOKS has released over 400M more tokens than X2Y2, despite both having a total supply of 1B tokens.

Due to a parameter error, 56% of the 200M X2Y2 staking rewards were distributed within the first 30 days — significantly higher than the originally planned 18%. This error, alongside token burning, undoubtedly added fuel to X2Y2’s token price decline. Burning tokens is a double-edged sword, as you are essentially burning token incentives to attract and maintain users on the platform. The logic of burning rewards to reduce selling pressure has not played out so far, as evidenced by X2Y2’s price being down 98% since inception.

Token Economics

The token allocations of LOOKS and X2Y2 are nearly identical. X2Y2 only made minor changes to LooksRare’s token strategy. The difference is X2Y2 allocating 2% from the presale evenly towards trading and staking rewards. Once again, X2Y2 has taken a community-first approach.

The minor pivot was a partial response to the scrutiny towards LooksRare raising from undisclosed crypto-Twitter influencers and advisors. But more notably, towards the capability of strategic sale participants and team members to receive staking rewards in WETH. X2Y2 presale investors can also receive market fee rewards, but they receive 66% less, slightly appeasing the community.

Despite the transparency in the LOOKS tokenomics, there was backlash towards the private sale and team & development tokens becoming eligible to take a share of fee distribution rewards. Many community members felt tricked by the locked tokens being labeled ‘non-tradable,’ thus assuming staking yield was out of reach. It’s important to note that private sale and team & development tokens are only eligible for WETH rewards and not LOOKS rewards.

Airdrop Tokens Claimed

There was a stark difference in airdrop tokens claimed among the two platforms.

82% of the 120M LOOKS tokens airdropped to OpenSea users were claimed within the limited nine-week window. As mentioned above, being the first competitor to vampire attack a leading platform has proven to be an efficient marketing and user-acquisition strategy (as per SushiSwap vampire attacking Uniswap). In the case of LooksRare, notable NFT influencers such as Pranksy, Zeneca, et al. championing the platform and OpenSea’s token-less state made it the zeitgeist of early 2022.

A month after LOOKS’ successful launch, X2Y2 initiated its time-limited airdrop. An underwhelming 19% of the 120M X2Y2 tokens were claimed. This was partly due to addressing a larger sample size, as they targeted OpenSea users who had traded over all of 2021, compared to LooksRare which targeted users within a 6-month time frame. Furthermore, many warned of X2Y2’s launch timing and ‘effortless’ fork as a potential rug-pull.

Staking

The retention of LOOKS on the LooksRare platform started off strong in January, with over 260M tokens staked. Airdrop recipients were enticed to stake their tokens for lucrative staking rewards. It has become common practice for protocols to add hyperinflationary emissions (distributed as rewards) alongside a token launch to disincentivize their newly formed community from dumping airdropped tokens. This causes the recipient’s psychology to be more risk-tolerant, as their tokens are ‘free.’

A significant 8% of all tokens were staked in each of the following two months. Given roughly 33% of total LOOKS available was staked in the first month, the fall in MoM staking after a massive inflow in January was to be expected.

However, a negative feedback loop began with the price of LOOKS falling. Lower prices resulted in lower yields and reduced trading incentives. This, in turn, reduced staking and increased selling. Albeit significantly less than LOOKS, the amount of X2Y2 staked has decreased by 41% since then. Since X2Y2 didn’t have the same magnitude of early staking, it has seen a gradual but positive staking trend. X2Y2’s record-high staking was 52M in August — a 2.6x increase since its first month. This trend correlates with the platform’s adoption, as we will see later in this report.

Percentage of Tokens Staked

At face value, upwards trends for both tokens are bullish, as staking appears to have created a successful supply sink. However, a direct percentage comparison of the tokens locked between LOOKS and X2Y2 is biased towards the latter.

The 94% of X2Y2 tokens staked is artificially inflated from the circulating supply undergoing a series of burns. On Mar. 26th, 11% of X2Y2’s circulating supply was burned. With a monthly burn in place, in two years, 36% of the total supply will be burned. The total supply of LOOKS staked is 25% lower, and can still be considered impressive as it maintains its total supply of 1B tokens. Still, it is logical to assume that the percentages will decrease if the market continues its downward trend, foreshadowed by LOOKS’ performance from May to June.

Since their inception, stakers on both platforms have faced a dilemma. Stakers benefit from service fee rewards from every trade, regardless of whether they are organic or washed. Yet, staking rewards are primarily dependent upon these market manipulators, and service fee rewards will plummet once LOOKS trading rewards have been sold. The difficulty for stakers lies in calculating the cost-benefit during the duration of staking vs. selling. Unfortunately, all users post-first month of staking have taken an enormous loss.

Wash Trading Volume by Platform vs. Token Incentives

LooksRare successfully siphoning NFT traders on launch is a severe understatement. Within the first 24 hours, over 29k ETH was traded, which amounted to over $100M USD in early January 2022. In comparison, X2Y2 only generated $11M USD in volume in its first month. Wash traders were transacting under the assumption that the rewards they were receiving in WETH and governance tokens were more valuable than the service and gas fees combined.

Rarible took the stance of blocking addresses from their platform in a failed effort to block wash trading. However, its successors were welcoming of such behavior. Observable in the chart above, the reduction in trading incentives caused a decline in volume traded. In the first 30 days, 2.9M LOOKS were available for trading rewards per day, which fluctuated between $5.7M and $14.3M USD. The number of LOOKS available dropped by over 50% for the next 90 days — a planned “halving” of rewards. The effect of this is visibly reflected in volumes.

Today, LOOKS rewards are down 99.9% from their January highs. X2Y2 has a linear trading emissions schedule of 625k X2Y2 per day, which has aided in maintaining volume. Over the past four months, volume on X2Y2 has been 3x that of LooksRare. Although X2Y2 planned for a consistently incentivized runway, it further reduced rewards by 39% on Oct. 5th.

Organic Volume by Platform vs. Token Incentives

When a wash trading filter is applied, it is unsurprising that LooksRare’s volume dropped 97% during January. The same applies to X2Y2, with its volume dropping ~92% over the past four months.

The surprising factor is how trading rewards didn’t seem to affect organic volume on either platform. Organic trades occurred regardless of whether incentives existed or not. From an organic trader’s point of view, why transact on an NFT marketplace like OpenSea when you can experience cheaper fees and earn tokens by simply using another one?

The transition is seamless, with its nearly identical UI/UX and bonus product features. On LooksRare, the activity feed auto-refreshes, and you can easily increase the price of the NFTs listed. Whereas with OpenSea, users need to re-list their NFT to change their offer. X2Y2 offers the option to checkout with a basket of different NFT collections, private over-the-counter sales, gas-less listings, and more.

Organic trading highs materialized during the month of April from the drop of highly anticipated projects such as Moonbirds and VeeFriends Series 2. This furthers the idea that organic traders are not concerned with reward schedules or maximizing rewards, but are primarily concerned by other factors such as optimal pricing. Incentivized trading is merely a bonus. Without greener pastures, incentivized marketplaces will continue to divert organic volume from OpenSea. As organic volume increases, wash trading should decrease under the notion that rewards become more shared.

Unique Users & NFT Sales

Comparisons between washed and organic sales and trades are indiscriminately compared to volume. Organic NFT Sales on X2Y2 comprised 47% of all sales on the platform, with organic NFT Sales on LooksRare edging slightly higher at 48%.

A more significant discrepancy is shown when comparing the number of sales. Despite launching later, X2Y2 facilitated over 1.1M organic sales — 7.5x more than LooksRare at 294k. This can be attributed to the former’s lower fees, collaborative NFT launches, and optional royalty payments. Only a minority of users are labeled as wash traders; thus, there is not much of a distinction after applying the filter. Wash traders on X2Y2 and LooksRare only amount to 0.68% and 1.5% of all users, respectively.

But X2Y2’s benefits could negate the growth of its community, as incentivizing wash trading can have long-standing ramifications. If collections are constantly traded at the same price, the organic price discovery of NFT collections is less effective. This results in a poorer experience for traders. Luckily, NFT aggregators such as Gem and Genie have mitigated this issue by increasing the number of NFTs on sale. As prices are compared across multiple marketplaces, data becomes less skewed from wash trading, which results in tighter price spreads for collections across marketplaces.

Fee Comparison

X2Y2 has gone through multiple fee iterations. In July, service fees were reduced from 2% to 0.5% to match competition from the highly-anticipated AMM marketplace, Sudoswap. Sudoswap again forced their hand regarding royalties. In late August royalties were made optional, which sparked backlash from the NFT creator community. In comparison, LooksRare previously supported the EIP-2981 royalty standard, which meant the fees signaled by the creator (within the NFT) took precedence over the seller’s royalty fee selection. LooksRare is now allocating 0.5% of its services fees to creators after removing royalty fees.

Fees Generated

With LooksRare previously charging a 2% service fee, over $2M USD in fees were generated and distributed in revenue to stakers within the first 24 hours of launch. Expectedly, the majority of this volume was driven by wash trading. However, in the past three months total fees have decreased. During October, LooksRare generated an average of $97k per day — down 39% from its July average. Despite X2Y2 facilitating 7.5x more sales, it generated 30% less revenue within the past three months. LooksRare has now allocated a quarter of its service fees to creators after removing royalties. Stakers will see a revenue drop, tightening the gap between the platforms.

So far, the trader-friendly features of X2Y2 have not attracted enough volume to compete with LooksRare on fees. The supply-side fees from royalties contribute to 18% of LooksRare’s fees, making it a more desirable platform for creators and users who wish to support the creator economy.

In February, the LooksRare team transferred around 10k WETH, which amounted to $30M USD, to their personal wallets. Hundreds of millions of dollars were being traded within the first month after launch, with 2% going to stakers and the LooksRare team. Despite being clearly stated in their documentation, LOOKS holders and the wider crypto community expressed distaste for the team’s extravagant payday. So far, 32.7% of all WETH allocated to stakers has been distributed to the treasury, strategic sale participants, and the team.

When comparing each platform’s price-to-sales ratio (P/S), we can see that X2Y2 has a much lower multiple than LooksRare. A lower ratio implies that when comparing the circulating market cap against the revenues of each platform, X2Y2 trades at a favorable multiple relative to LOOKS.

X2Y2’s circulating supply has undergone a series of burns as mentioned above. This, in part, is why its P/S multiple is lower. Since late September, LooksRare and X2Y2’s P/S ratios have increased.

Reward Distributions

The chart above classifies wash traders differently than this report.

In this instance, the definition applies to any address that has wash traded even once. Wash traders claimed 76% and 89% of all token rewards on LooksRare and X2Y2, respectively. This data aligns with the percentage of volume they are responsible for. It is logical to assume wash traders do not stake their tokens, as they must realize profits by liquidating rewards frequently.

This is a double-edged sword for stakers, as wash traders are currently necessary for most revenue generated. But the flip side is the value of staked tokens declines as these entities add consistent sell-side pressure.

Conclusion

LooksRare and X2Y2 currently face a dilemma in order to survive — let alone become serious competitors to OpenSea. Both platforms must hit some degree of escape velocity before wash traders become disincentivized by low trading rewards. If wash traders are suddenly lured by more lucrative rewards with a longer runway, token stakers will likely lose faith in the platform’s ability to generate enough revenue to warrant their loyalty.

While writing this report, Blur, a highly anticipated NFT aggregator and marketplace, announced its token. It will be interesting to watch the behavior of wash traders. Will they flock to greener pastures? Or will up-and-coming marketplaces restrict co-dependency with wash traders to generate volume?