LooksRare — Real Yield Generator of the NFT Market
This article will cover some of the fundamental factors of the LooksRare platform and provide a deep dive into evaluation of the LooksRare platform as a Real Yield generating platform.
Real Yield
The market has been searching for protocols that have generated true yield without the sacrifice of the protocol token in exchange for factors such as liquidity or volume in the platform. This has been one of the most important reasons behind GMX rising as a superstar in the midst of a market with recording breaking inflation rates and multiple consecutive rate hikes in the past 6 months.
The beauty of GMX lies in the separation of GMX holders and GLP participants where true yield of the platform does not require high inflation of the GMX token to incentivize and attract users into the protocol. This allows GMX to remain valuable while not being exposed to high dilution of the native token over a short period of time.
LooksRare has been a fantastic protocol that stole a meaningful chunk of Opensea’s NFT volume when it first came out. However, the initial inflation of LOOKS was too high and the immaturity of the market allowed several users to take advantage of some of the services provided such as wash trading to earn a fixed number of LOOKS at an exchange for paying ETH in fees.
Regardless, LooksRare was built with fundamentally robust structure allowing it to generate Real Yield and potentially rise as one of the upcoming future superstars of the market in the near future.
Follow the Leader
Arthur Hayes has been a fantastical market mover in the recent few months.
If you take a close looks at Arthur’s wallets, he committed his money where his mouth is, in GMX and LOOKS. He has been accruing GMX since early on and has staked every single one of his GMX on the platform. He hasn’t unstaked any of it even when GMX has reached a second ATH of $56.
His wallet activity shows which kind of protocols he values over others. It seems one of the overlapping factors of tokens he has been staking is Protocol Revenue. You can acquire more insight on his protocol evaluation in his article where he gives a shout-out to few protocol models such as GMX and LOOKS. (Arthur’s Article)
This graph below shows the number of LOOKs he has staked to partake in the revenue distribution of the platform. He has been making frequent purchases of 100 ETH worth of LOOKS over 12 times in the past 30 days. Most of the staked LOOKS have been bought up and almost immediately staked.
LooksRare Mechanism
LooksRare is already a well-known protocol that shares 100% of all the fees generated within the LooksRare platform. Unlike Opensea that collects all fees and earns full revenue on it, LooksRare provides almost the same service at smaller fees structure (2%) and distributes all fees to LOOKS stakers in the platform.
There are mainly two ways to earn LOOKS:
- Trade NFTs to be eligible for the distribution of a fixed number of LOOKS each day (Users who make trades will get a fair portion of their volume rewarded in LOOKS)
- Stake LOOKs to receive fees generated by the platform + fixed number of LOOKS distributed (Users can choose to simply stake LOOKs and earn ETH + LOOKS, or compound stake LOOKS to have their ETH revenue sold to LOOKS and restaked to increase their staked position over time)
When average users evaluate the fees generated by LOOKS, it is generally calculated on the basis of USD (like most other protocols). However, the essential goal of LOOKS staking is not to generate USD but ETH.
By replacing the denominator of an asset with ETH, the value accrual of LOOKS needs to be calculated in a different manner. This may not be easy for users who evaluate everything in terms of USD, but many smart DeFi participants utilize ETH denominators for evaluation.
Valuing a Protocol
Before we look into evaluating LOOKS, we first need to look into what makes a fundamentally strong protocol.
The core thesis of DSV when evaluating protocol real value accrual is simple: when real APR > token inflation rate, the protocol is recognized as a fundamentally strong protocol.
The way we measure “real yield” may all be different; however, the core component is to not temporarily grow or generate yield in exchange for high token inflation.
Just looking at DEXs, we see multiple platforms simply provide their native token as rewards in exchange for providing liquidity. These causes LPs to lose stickiness and the LP churn rate to rise whenever another protocol provides higher rewards.
Therefore, we focus ourselves into searching for protocols that authentically generate yield in another form of asset other than the native token such as (most preferably) ETH or stables.
LOOKS Cheap
The metrics we will look into is how much real yield we can earn by staking LOOKS in LooksRare and have a thesis on why Arthur believes LooksRare is worth the LOOK.
180D Cumulative Trading Volume and Protocol Revenue of LooksRare
Token Terminal shows LooksRare has generated over $134 million in revenue in ETH that has been distributed to all LOOKS stakers in the form of ETH over the past 180 days. Although we are at a vertical downtrend in the volume of NFT trades in the general market, there is no doubt NFTs are here to stay and will continuously be traded in the market.
This allows us to have a general prediction on how much volume LooksRare will generate in the upcoming few months (unless we experience another exponential increase in NFT demand) and assess how much yield LOOKS can generate in ETH.
The important number that we have to look into is the current ratio of LOOKS / ETH. This allows us to more accurately measure how much is being staked and earned.
The chart below colored green represents the current ratio of LOOKS / ETH. The red box shows the current inflation rate of LOOKS annually. Note we have referred to simple staking instead of Compound Staking for ease of calculation (Compound Staking sells earned ETH routinely into LOOKS and re-stakes the bought back LOOKS).
Please note that the Inflation Rate does not include LOOKS that is being distributed in Staking Rewards as it is considered as a form of reward that is being distributed to actual participants with exposure to LOOKS, thus we will consider it as non-dilutive token factor not leading to potential sell pressure.
There is a chart providing comparison of the Inflation Rate including Staking rewards below just in case the reader is curious, but from now on, the definition of Inflation Rate will not include Staking Rewards.
- An important factor consider here is the LOOKS Team Vesting Tokens can take part in staking and receiving fee distributed by the LooksRare Platform
The calculation of inflation of LOOKS is simple:
- 1 Y Distributed LOOKS (Supply from t to t + 364) / Current Circulating Supply (Circulating Supply on the Day)
Here, we have taken into the full number of LOOKS distributed based on Token Unlocks instead of the deducted LOOKS MC provided by Coingecko
- When Real Yield > Inflation Rate, the protocol is generating more authentic yield than the loss of value it potentially creates through the inflation of the token distribution as rewards
Although the table looks very simplistic, take a close look at the how we calculate the value of LOOKS staked in ETH on the second row. We have translated the number of staked LOOKS in ETH and calculated the APR of the platform by:
This allows to evaluate the yield accrued in ETH terms relative to the value of LOOKS. It is very obvious that the APR can change under mainly 3 circumstances:
- The price of ETH fluctuates (ETH $ ↑ bring APR ↑ )
- The price of LOOKS fluctuates (LOOKS $ ↓ brings APR ↑ )
- Volume of NFT trade fluctuates (Volume ↑ brings APR ↑ )
- Number of LOOKs staked fluctuates (No. of Staked LOOKS ↓ brings APR ↑)
We will first assume number 3 and 4 will remain constant to show how relatively valuable staking LOOKS may become in comparison to the price discovery of ETH vs LOOKS and later on add factor 3 to show its impact.
Currently, because the inflation rate of 44.22% is > than real yield accrued in ETH of 40.81% (based on 90 D average volume), the platform is diluting more LOOKS than it is generating in revenue. However, this rate may very easily change once the ratio of LOOKS / ETH decreases.
Here we have decreased the LOOKS / ETH ratio by 3.34% and the APR of the platform reaches the same rate as the inflation rate simply because ETH price remained constant and LOOKS decreased in price (by $0.01).
This translates to when ETH price remains constant, and LOOKS value goes down, the platforms’ yield generation relativity becomes greater, thus making LOOKS a more attractive asset to buy and stake.
Then let’s assume, many users recognized this scenario and bought up LOOKS to bring it up to $0.50. This ultimately causes more ETH to be staked to receive the same number of ETH and also stake while the dilution of LOOKS is > than the revenue you are being distributed through the platform.
Therefore, the value of LOOKS (or ETH) is a double edged sword that needs fundamental growth also in LOOKS, Marketplace Volume, and no. of LOOKS staked. You can also expect similar result by reversing the price direction of ETH (when ETH ↓, APR ↓ | when ETH ↑, APR ↑).
Optimal Range of LOOKS / ETH
We will now look into an optimal range in terms of LOOKS / ETH based on the inflation of LOOKS to measure when Real Yield > Inflation of LOOKS.
Here we have calculated the inflation of LOOKS for Trading Rewards and Staking Rewards in number of LOOKS distributed. Because the distribution was based on blocks (not specific dates), the document of LooksRare (based on date estimate) and Token Unlocks (based on block) contract has a bit of discrepancy on number of days and daily distributed amount.
We are currently in Phase 3 where we have 492,828 LOOKS from Trading Rewards and 211,212 from Staking Rewards (a total of 704,040 LOOKS / day). We will measure inflation starting from May 12, 2022 (the start of Phase 3) for 365 days and also take into account the change in number of LOOKS distributed starting Phase 4.
Like mentioned above, Inflation Rate will fluctuate over time as the calculation of Inflation Rate is based on the formula below:
As suspected, there are big vesting unlocks on specifics dates such as Team Token, Treasury Token, and Strategic Sale.
- When there is a big distribution on the day = Denominator ↑ Inflation Rate ↓
- When there is a future big distribution with t + 364 = Number ↑ Inflation Rate ↑
This causes the inflation rate to spike up and down temporarily. Therefore, the graph includes a trend line making it easier to understand the general Inflation Rate of LOOKS. Note the direct impact of distribution on the day (denominator) is greater than future distribution being included within the calculation of LOOKS distributed in t + 364 (the numerator).
With the dark blue line representing the Inflation Rate (an optimal target the real APR will have to surpass to become truly value accruing), we will look into the effect of LOOKS / ETH ratio to the APR on the condition that:
- LooksRare Trading Volume remains the same based on the past 90 D Daily Average
- Number of LOOKS staked remains the same
Inflation Rate with Staking Rewards (Inflation Rate = 49.82%)
Inflation Rate without Staking Rewards (Inflation Rate = 42.22% | -7.6% Difference from APR above)
As shown above, the Real Yield moves inversely as the LOOKS / ETH ratio displayed in blue. As LOOKS outperforms ETH, real APR actually decreases because now you have to buy LOOKS at a higher price to receive the same number of ETH.
With the forumla above, we can reverse calculate the target LOOKS / ETH Ratio to match or potentially outperform inflation. Therefore, all LOOKS / ETH ratio below the purple line (as the APR and Ratio has inverse relationship) allows Real Yield to be greater than the Inflation Rate. The Target Rate gives us a lower bound on the performance of LOOKS relative to ETH to generate minimum Real Yield.
Lastly, we look into the impact of Volume to the APR of LooksRare as the revenue distributed in ETH increases directly based on the Volume of the platform. Here we have outlined the impact of how much difference the volume can make with the same LOOKS / ETH ratio.
- Red represents the APR based on 189 ETH being distributed daily (based on the Volume)
- Orange represents the APR based on 94 ETH being distributed daily (based on the Volume)
- Yellow represents the APR based on 76 ETH being distributed daily (based on the Volume)
We have replaced 180D calculation with 2x of 90D Volume because of the discrepancy of size causing the graph to not be able to contain the insight we are trying to provide
The points displayed in black shows a direct impact of Volume to the APR of staking LOOKs.
Here, we have included the Inflation Rate, an independent factor not affected by the LOOKS / ETH ratio. This gives us an easy overview as anything above Inflation Rate based on Volume or LOOKS / ETH ratio is generating higher yield than the Inflation Rate.
- Green Area = Real Yield > Inflation Rate
- Red Area = Real Yield < Inflation Rate
Therefore, the direct impact of LOOKS / ETH (a volatile factor) is very meaningful when evaluating the LooksRare platform. There are multiple catalysts that can cause this pair to move one way or another (such as the Merge that has direct impact on the price of ETH). However, we believe in the general mid-long term, the ratio of LOOKS / ETH will become more generalized and act as a standard when measuring the performance of the platform.
Conclusion
Nobody can determine the future of any protocol. Also, fundamental is not the only factor behind a protocol’s performance. Some protocols have better fundamental over others but underperform all the time. However, fundamentals have always played a key component in making a protocol good or bad regardless of price of user acquisition. Therefore, understanding the core fundamental of the LooksRare platform is very imporatnt.
The NFT market is here to stay and there are other participants joining the race such as SudoSwap. This means if we see another NFT bullrun, LooksRare is the one of the first protocols to gain attraction. Until now, NFT trades have been decreasing over time in general.
General NFT Trade Volume
LooksRare Daily Transaction Volume
Although the gives more focus on the LOOKS / ETH ratio to APR, it is important to understand once the LooksRare platform starts generating more Volume in the platform, the revenue distributed by the platform increases. This may easily bring up speculation for LOOKS, bringing up the LOOKS / ETH ratio, bringing down the APR.
However, displayed below, higher volume with greater LOOKS / ETH ratio can still match the APR of low volume and low LOOKS / ETH ratio. Therefore, the protocol can maintain higher Real Yield > Inflation Rate while allowing LOOKS price to go up, brining down LOOKS / ETH ratio.
All in all, multiple factors affect the earnings and revenue distribution capabilities of LOOKS. However, the three factors we have mentioned above are the three key factors that will determine how valued LOOKS is by the community and smart money movers (like Arthur). If NFT trading goes to zero, LooksRare cannot generate any fees like any other protocols that does not generate volume.
Internally, we believe LooksRare is still one of the few fundamentally strong protocols that can outperform other protocols and is here to stay in the long-run.
The information above is for information purpose only and not financial advice. All opinions are ours and was not influenced or encouraged by other third-parties.
