Coinbase Ventures' Around the Block blog series is devoted to research on key Crypto trends.
The authors of this article are Connor Dempsey, Justin Mart, and Mike Cohen.
A phenomenon that only occurs in the crypto space: a platform built in a few weeks by an anonymous founder can compete with the leading platforms in the industry.
This phenomenon is vividly illustrated by the newly launched NFT platform LooksRare, whose transaction volume in January reached more than 9 billion US dollars, almost three times the transaction volume of OpenSea in the same period. Not only that, but within 30 days of going live, LooksRare made $307 million in protocol revenue, while OpenSea only had $110 million in the same period.
However, these raw data do not reflect the full picture.
In this blog post, we'll explore how LooksRare conducted a vampire attack on OpenSea, the industry-leading NFT marketplace.
OG's vampire attack
Vampire attack is a phenomenon that exists only in Crypto or Web3. Broadly speaking, a vampire attack is a method of attracting users from existing platforms to emerging platforms by offering them some kind of incentive (usually a token).
One of the most notorious vampire attacks occurred in 2020, when SushiSwap launched a decentralized exchange platform very similar to the industry-leading Uniswap platform, which rewarded users who migrated funds from Uniswap to Sushiswap with SUSHI Tokens. In addition to enjoying lower transaction fees on SushiSwap, SUSHI Token holders will also gain the governance rights of the platform.
In the end, as Uniswap users transferred $1.2 billion of funds to Sushiswap, Uniswap's liquidity declined for a short time, and Sushiswap also fulfilled its promise and issued Token rewards to users. After that, the liquidity of Uniswap also returned to its original level, and they also launched their own Token. Even so, Sushiswap's liquidity was bootstrapped for a shorter period of time.
LooksRare's Vampire Attack
LooksRare's vampire attack follows that classic set of steps, as follows:
Identify industry leading platforms
Build a platform with competitive and strategic advantages
Offer generous rewards to those who migrate
The main difference between SushiSwap and LooksRare's vampire attack is that SushiSwap copied almost all of Uniswap's code (also known as a fork), and based it on Token incentives, according to LooksRare's documents, they seem to have built their own smart contracts. However, the rest of the approach is the same:
Identify the industry-leading platform: In this regard, it is better than OpenSea.
Build a platform that is both competitive and strategic: LooksRare created looksrare.org.
Provide generous rewards for those migrated users: issue LOOKS Token.
Initial Incentives
Due to the open-source nature of the blockchain, the LooksRare team was able to identify OpenSea users who had traded at least 3 ETH worth of NFTs in the preceding six months and airdropped LOOKS Tokens to them. However, in order to obtain these tokens, users must first issue an NFT on the LooksRare trading platform.
Airdropping Tokens to those active NFT trading communities has a significant effect, and NFTs have also flooded into new markets. LOOKS Token rose to a price of about $7 10 days after its release, and achieved a market value of $1 billion.
However, token airdrops are not the only incentive.
other incentives
In addition to the initial airdrop, users of the LooksRare platform can also earn more tokens by staking their LOOKS Tokens and the NFTs they trade on the platform. LooksRare charges a 2% fee for each transaction (compared to 2.5% for OpenSea), and after staking, that is, after the LOOKS Token is locked in the smart contract, the user is entitled to the full fee income. In addition, stakers have the opportunity to obtain additional LOOKS Tokens.
When I wrote this article, the annual interest rate of LOOKS's pledge income has exceeded 500%, which is very amazing.
LooksRare's incentives for trading are quite interesting, and the principle is very simple: users only need to buy and sell NFTs on LooksRare to earn LOOKS Tokens. LooksRare will set the reward ratio based on the daily transaction volume, and at present, LooksRare distributes about 2.8 million LOOKS per day, and its market price is about 10 million US dollars.
It’s safe to say that the free airdrop is enough to get people to the platform, and the $10 million per day reward makes LooksRare beat OpenSea in daily transaction volume. However, if we look closely at the number of daily users of LooksRare, we will find that its staggering transaction volume is not as simple as we thought.
brush transaction
While LooksRare has twice the transaction volume of OpenSea on any given day, OpenSea has 20-40 times more active users than LooksRare. This suggests that the trading volume of LooksRare is the result of a small number of traders taking advantage of the opportunism to earn LOOKS.
Since the daily reward amount on LooksRare is determined by the transaction volume of the day, even if there are transaction fees, users are willing to use their wallets to buy and sell the same high-priced NFT back and forth. In this way, if someone can complete 10% of the day's trading volume by brushing, then he can get LOOKS worth 1 million US dollars.
But the problem is that users have to pay a 2% fee for each transaction, and it is calculated in ETH. Calculations show that traders pay roughly the same amount of LOOKS rewards in ETH. Therefore, traders are basically exchanging ETH for LOOKS, and when LOOKS appreciates relative to ETH, users will get corresponding benefits.
Essentially, it's a game because if the LooksRare platform is successful, the platform's early adopters will benefit.
Real Trading Volume on LooksRare
Granted, LooksRare's staggering trading volume is really just due to their various incentives. However, that doesn't mean that LooksRare is just a faux pas.
Crypto Slam estimated at the end of January that about $8 billion of the $9 billion in transactions on LooksRare in January this year were fake transactions. However, the remaining $1 billion in NFT trading volume also still exceeds the full-year 2021 volume of other NFT marketplaces such as Rarible, SuperRare, Foundation, Makersplace, and Aysnc combined.
Even with the effects of fake transactions removed, LooksRare is still a successful platform. In addition, they offer other interesting and novel features, such as private buying and selling with no fees, or a single offer for the entire NFT collection. As a result, the "real volume" of LooksRare is continuing to grow.
Can the trading rewards continue?
LooksRare's trading rewards will taper off over the next two years, at which point it will have to rely on its product and community to compete in the marketplace. Whether LooksRare can continue to grow its market share without generous rewards will also depend on the anonymous team behind it.
We can get a rough glimpse of the future of LooksRare from SushiSwap. In many ways, SushiSwap has continued to grow beyond its initial rewards. Through continuous innovation and multi-chain deployment, the total locked value of SushiSwap today has reached nearly 5 billion US dollars.
However, the development of SushiSwap has not affected the status of Uniswap. Uniswap eventually launched its own token (some speculate that OpenSea will do the same one day) and remains the dominant DEX in the Crypto space, with over $7.5 billion in total locked value today. Not only that, but there hasn’t been any controversial hard fork (like Bitcoin Cash, Ethereum Classic, etc.) or vampire attackers (SushiSwap, Swerve, etc.) that have ever replaced an existing platform.
While Sushiswap is now a success, it has also experienced some setbacks. Internal conflicts between its core team and SUSHI Token holders have caused Sushiswap to lose several core team members, including the project's CTO. When the LooksRare team transfers governance rights to LOOKS Token holders, it may find that DAO governance is still immature and full of problems.
Finally, for LooksRare users, the anonymous team could run away at any time. Also, LooksRare's smart contracts are launched unaudited and there is no public GitHub repository, so traders should be cautious.