By Elizabeth Howcroft

LONDON, (Reuters) – On January 12, a computer-generated pixelated image was purchased for $50.6 million in cryptocurrency via a new marketplace for non-fungible tokens.

You can’t get more bizarre.

The same “Meebit”, a virtual character dressed in green shorts and sneakers, was sold to the original buyer for $49.6 Million.

Confused? Are you confused? As part of an emerging and unregulated economy in the highly-hyped metaverse, they have gained immense popularity.

Meebit is a picture that can be used for profile purposes. The Meebit was sent between two anonymous cryptocurrency wallets. The underlying blockchain technology records the sale of an NFT, but it does not record names. One person may have multiple wallets that act both as buyer and seller during a trade.

According to a Reuters analysis of public blockchain records, the digital character was one of many NFTs that appeared on LooksRare. It was sold between a few wallets for high prices and back again last month.

For example, a third Meebit NFT, this time sporting a sports outfit and ponytail, has been traded between three wallets over 100 transactions, most of which were in the range $3-15,000,000 to $15-15 million. A “Loot Bag NFT” representing virtual equipment used in online adventure games was traded between two wallets for $30,000 to $880,000 during the week Jan. 12-19.

LooksRare’s trading activity helped generate $10.8 billion of volume in the first month since its inception, data from market tracker DappRadar shows.

According to DappRadar data, January 31, the 27 highest-valued sales in the NFT industry totalled $1.3 billion. The top 100 sales were made by 16 wallets that trade on LooksRare.

“There is a lot of activity happening between a couple of wallets – let’s say wallet one selling to wallet two, and then wallet two reselling it,” said Modesta Masoit, DappRadar’s finance and research director. This is likely to be a fake demand and these trades may not even come from organic sources.

DappRadar (and CryptoSlam), another data provider who reported artificially high volumes on LooksRare said these trades may be tied to the platform’s rewards structure. Masoit however stated that the site also had “real” activity.

LooksRare calls itself “the community first NFT marketplace with rewards to participate”, and refers to its reward system that includes tokens being awarded to day traders depending on their overall sales volume.

According to LooksRare spokespersons, these tokens are called LOOKS and can be used to “stake” for a share of the platform’s revenues from the 2% transaction fee.

When asked about transactions that were reviewed by Reuters, and whether they artificially increased trading volume, the spokesperson stated that these practices are highly risky because traders will have to incur transaction costs which they cannot recover.

Traders are unable to tell until the end of each day if they have done enough trading to earn LOOKS tokens or not, as they do not know what trades have been made by others.

A spokesperson for LooksRare stated that the structure of LooksRare was intended to decrease the profitability and long-term viability of LOOKS’ “yield farming”.

LOOKS stakers are eligible for 100% of all trading fees. The LOOKS Staking Rewards System is the core reward system. The spokesperson stated that this fosters the development of a community among token stakers and users who are united in the goal to make the platform as great as possible.

(Graphic: LooksRare volume, https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkanbrpx/Chart%201%20-%20LooksRare%20volume.png)

“BYE BYE WAASH TRADERS”

The trading activity offers a glimpse into the mysterious and speculative NFT industry. It was worth $25 billion in sales value by 2021.

This new market is being fueled by cryptopunks and bored apes art collectibles. These are algorithmically created portraits that could sell for many millions. Their Bored Apes have been a hit with celebrities like Paris Hilton and Jimmy Fallon.

Numerous large corporations, including Coca-Cola and Gucci (NYSE:), are testing the temperature by using NFTs. NFTs accounted for just $1 of every $20 in revenue from top art houses last year.

John Egan CEO of L’Atelier (OTC) described the transactions in LooksRare that were reviewed by Reuters, as “wash trading” and would not be allowed on traditional markets, such as equities, or debt. They give the false impression of demand.

Two crypto experts said that such transactions in the nascent sector are legal because NFTs are not governed by similar rules.

Egan stated that LooksRare wasn’t responsible for the trades. He said that it was a marketing incentive. LooksRare effectively pays large investors to access their site. This attracts a lot more attention and leads to new users.

This strategy may prove to be an effective one for platform supporters to prosper in the virtual gold rush. Tech giants such as Meta (NASDAQ:), spend billions to advance their visions of metaverse and make way for future profit.

LooksRare was the market leader in NFT volume for four years, but it had fewer traders than OpenSea, which averaged 57,000 to 99,000 daily, DappRadar data shows.

OpenSea didn’t respond to a Reuters comment request regarding this article.

LooksRare stated that “dingaling”, a Twitter user (NYSE:), was an adviser and investor to the platform. On Jan. 12, “dingaling” posted a thread saying wash trading on Twitter looked terrible but could be one of the necessary steps to improve market share, transparency, and offer a decentralized marketplace for NFT members.

Wash trading has been a topic of great interest to many people, however I am still unable to comprehend why. “It’s a free marketplace,” said dingaling. It’s a free market once real volume has overtaken, and then it’s goodbye to the wash traders.”

(Graphic: LooksRare trader numbers, https://fingfx.thomsonreuters.com/gfx/mkt/gkplgjborvb/Chart%202%20-%20LooksRare%20trader%20numbers.png)

MET IN MEATSPACE?

International authorities are concerned about the potential for crypto assets to spread further, which could lead to financial system collapse, encourage crime, and cause harm to investors.

So far, efforts have been mainly focused on cryptocurrency rather than NFTs. This raises new questions about how to classify them, as they are unique – non-fungible and very diverse.

“Generally speaking, the majority of jurisdictions recognise that NFTs should not be regulated as financial products if each NFT represents a genuinely unique item – for example, a unique collectible, piece of art or piece of media content,” said Hagen Rooke, a partner at global law firm Reed Smith.

Sometimes traditional authorities might also have to cross a cultural divide.

LooksRare’s founders can only be identified by their pseudonyms Guts or Zodd. They are described as NFT geeks by the spokesperson. The platform’s founders were spread over different time zones and had not met in fleshspace.

Internet enthusiasts refer to meatspace as a way to describe the physical world.

Rizzle, a frequent NFT trader who uses OpenSea as his main platform is one of the major players on the market attracted to LooksRare’s reward system.

After receiving LOOKS tokens for free, Rizzle joined LooksRare. He then staked the profit to make it a profitable trade. Since then, he’s used the Marketplace for trading as he liked some of its features.

He stated, “I don’t think it would surprise me to see additional platforms emerge with more initial incentives in order to try to attract the same audience.”