The core needs in NFT trading are liquidity and price, so the actual moat of an NFT exchange should be built on the commodity’s liquidity and price advantage when sold.
Aggregators that change the landscape only as a front-end traffic entrance solve the problem of NFT pending orders scattered without fundamentally solving the liquidity problem.
The most likely solution to the liquidity monopoly is not the following exchange or aggregator but a protocol that can support the sharing of pending orders, thus breaking the boundaries between NFT tool platforms and NFT exchanges so that every front-end of traffic can become a trading platform and share its pending orders, forming a decentralized NFT trading ecology, solving the problem of fragmentation and liquidity of NFT pending orders.
A day in the cryptocurrency is like a year on earth; In the NFT world, it may only be 1 hour after minting due to the NFT mania and FOMO, which are far crazier than any other market, and NFT Marketplaces as infrastructure, have also gone through several circles but left few, because most of the marketplaces are not able to meet the secondary market NFT trading needs of all parties (as follows). Instead, they are obsessed with pseudo-needs to find a breakthrough. So I will try to analyze the needs of NFT trading and the changes in trading venues to explore better solutions for the future.
As for NFT, the current mainstream trading of NFT can be divided into blue and non-blue chips, while the non-blue chips can be broadly divided into three categories: PFP, Function, and other specials. (Individual blue chips also belong to Function or Specials categories)
For blue chips, the demand for liquidity is not that high because of their high price, and most blue-chip holders are more diamond-handed and price-oriented. Function NFTs like Pass card and Gamefi with practical application scenarios also have little demand for liquidity, so they are price-oriented as well. But more than 90% of NFTs in the market are PFP without empowerment, which is essentially a pass-a-parcel and requires exceptionally high liquidity. At this point, users will choose the marketplace with the best liquidity, OpenSea, rather than the others. Other special kinds of NFT, for the time being, do not have application scenarios and demand, and PFP still dominates the market, so it is not meaningful to discuss.
Thus, we can get that the needs of buyers and sellers finally fall on two points: Liquidity & Price (as shown below)
We need to explore what kind of marketplace is good and discuss it in five dimensions:
Most marketplaces are heavily homogenized, and the core barriers are the traffic brought by first-mover advantage, forming a brand effect and positive cycle. OpenSea uses it to attract most NFT liquidity, forming a moat.
In the case that the overall number of users in the NFT market is small (the total DAU of Top10 platforms does not exceed 100K in the May of 2022), whoever has more users will be able to seize the market.
Users are also divided into premium and non-premium users, and premium users may contribute tens or even hundreds of times the transaction volume of ordinary users, so the giant whale currently dominates the market.
The NFT market is still a market with a Matthew effect, so our focus on new users and volume growth rate can be a precise indication of the future development of the marketplace. The future NFT market is an incremental market rather than a stock market.
Through the medium of tokens, all participants and the platform in the bilateral market become a community of interest, using tokens to reasonably incentivize holders, winning the trust and support of users. However, traditional platforms cut the interests of users and themselves to earn more benefits. Hence, the platform will gradually evolve into a more beneficial form to users, and the evolution speed will differ according to the industry in which it is located.
We can get from the above five points after analysis: If the current NFT marketplace plans to join the game, it must take the vertical track and wealth effect two roads.
SuperRare, at the very beginning, is the first choice for artists NFT, and its strict invitation system creates a high-end brand image, while the NBA Top Shot decides to focus on a specialized group such as the basketball NBA, making it gain much exposure. But we need to note that if you choose a vertical track, you may only be able to build your core strengths on that track, which is not enough to compete with OpenSea. Plus, the current NFT time is still in the early days, and the number of users is too small to support narrow tracks. Therefore, some of the 2021 hitting NFT marketplaces are currently outdated.
One of the features of Web3 is the ability to change the distribution of profits, which is also one of the most controversial aspects of OS, unwilling to share the results with Web3 users. LooksRare started a top-down journey by launching a ‘vampire attack’ and trading mining model, and united with the giant whales and KOLs. Although it was criticized for wash-trading, it eventually attained some market shares; X2Y2 started a bottom-up effort by connecting the community through a “vampire attack” and listing mining model, and though it went through several black swan events, it eventually succeeded in getting great results. It even recently surpassed LooksRare to become the second-largest marketplace in the world.
From the success stories of the two challenger rookies, we can know that the initial motivation for the C-end users is essential, either by pulling in the upper KOLs and whales to make a stand or people at the bottom to use the community for propaganda, both models eventually formed an influence in their respective fields, instead of just being limited to a specific group, leading them to harvest market shares. In the process, they are willing to create more needs and attract outsiders. To achieve the goal, they distribute their interests to supporters and participants in the ecology through web3 tokens to make everyone linked up. Human nature is profit-oriented, and no one is willing to try a new marketplace without a reasonable incentive mechanism, which is one of the key factors why they succeeded in their challenge.
With the emergence of more NFT marketplaces, NFT listing orders are scattered on various platforms, and the core demand of users is to buy the cheapest NFT. At this time, the aggregator was born and became the unexpected winner of the battle of NFT marketplaces, changing the market pattern.
It may not be another desktop computer that defeats a desktop computer, but a more convenient and faster laptop or even cell phone.
The launch of Genie and Gem fulfills players’ needs for multi-marketplace shopping, facilitates users to find the cheapest NFTs faster, and unites small platforms to form a positive cycle (below). At this point, the marketplace becomes the back end as order books, the aggregator is the front end of the interaction, and both sides accumulate users. Users buy cheaper NFTs on the aggregator, and there will be more users using the aggregator; users of small platforms, because of the increased liquidity of NFT, will also be more willing to use small platforms due to the savings. As the number of users of aggregators and other platforms increases, OpenSea’s liquidity advantage brought by the leading monopoly is gradually broken, which in turn will further accelerate the development of other platforms and aggregators. So X2Y2, Looks, Gem, and Genie, the four platforms, achieved unprecedented results.
But other old platforms were not so lucky, such as Rarible and Foundation, because the birth timing was very competitive and bad; at that time, no aggregator could occupy the market, making most marketplaces being only a flash in the sky and born to die, and there was no way to gather the strength of the crowd to fight OS. Old platforms’ transformation process had not been successful in the full-category and product iteration. Ultimately, they gradually lost market shares due to liquidity problems and fell into OS’s ‘flywheel effect’. (Figure below)
Therefore, aggregators, the tool platform for NFT, have become the new favorite of NFT users, breaking the liquidity monopoly and reshaping the competitive landscape. With the positive cycle of aggregators, Top3 marketplaces and two aggregators have captured 99.7% of the market share (assuming Top10 volume as the total market), while OS accounts for only 63.5% of the market, breaking the myth of invincibility. (Note: The impact of the wash-trading presents in X2Y2 and Looks has not been removed)
Resource: 2022/5/31 https://dappradar.com/rankings/protocol/ethereum/category/marketplaces
(Note: The above data presents Gem and Genie data separately and does not subsume them into the marketplace data)
After dissecting the real pain point in the NFT trading for the brand effect brought by the liquidity monopoly, we may want to think about what is the solution that may overturn the existing pattern? Here I have a thought: Instead of being an upstream traffic port, it is more feasible to do the underlying protocol.
First of all, there is already a trend in the market in this regard. Seaport Protocol, the decentralized protocol officially launched by OpenSea in May 2022, wants to make the NFT trading market more decentralized, and its main features are shown in the following figure.
Essentially, Seaport only lowers the bar for NFT marketplaces, making it easy for most platforms to set up and not be held hostage by original marketplace like OpenSea, but it does not solve the problem of NFT trading liquidity, so the core demand remains.
Its barter function does not make the illiquid NFT more liquid but only makes users an additional choice. There is already a platform that implements this feature: NFT Protocol (https://app.nft.org/ethereum) (below), but its usage is extremely low, with almost no market share, proving that the demand is just a nice pseudo-need.
With the use of ERC-20 tokens and not just ETH payments, there is a significant portion of supporters in the market, which is closer to the shopping habits of traditional users, favoring NFT newcomers. I suppose this is an innovation, but technically speaking, the threshold is not high and does not have core competencies. The existing NFT marketplace can quickly iterate and update, and the reason for not doing so is that the market does not currently validate the demand. (NFT Protocol also has this function but still underperforms) And this also explains why the traditional cryptocurrency exchange is tough to march into the NFT world — The people of the NFT are the ETH native, while the majority of the cryptocurrency native is based on USDT and other stable coins, which is one of the moats of the NFT Marketplace. However, we look at NFT as an incremental market with a changing perspective, assuming that afterward, a large number of people from the cryptocurrency world enter the NFT world, then marketplaces with such an ETH-converting will be more favored by the market; plus ETH is currently in a bear market, then NFT follows suit and the demand for using stablecoins for settlement is getting higher, so we are optimistic about this feature.
Inspired by Seaport, I personally believe that only a genuinely decentralized NFT trading protocol (Decentralized NFT Protocol) can fundamentally solve the liquidity problem. It allows each front-end of the market, whether a marketplace, tool platform or even a project party, to become a marketplace itself and then shares the listing orders of each subject so that all of them form this decentralized trading ecosystem. Each order can have an equal opportunity to be seen and purchased.
Its central cores are as follows:
The order-sharing ecology allows each listing order to appear on multiple platforms simultaneously. OpenSea monopolizes most orders by first-mover advantage, while other platforms do not form an ecology to co-fight against OS but occupy their territory and fight each other. The user’s listing orders are not shared, dramatically reducing the mobility of NFT’s listing orders. So from the technical level, such as the protocol layer (Protocol), it makes NFT listing orders be shared in multiple platforms, then I believe that users are satisfied to try these small platforms. Drips can be a river, and the decentralized NFT ecosystem can also gain enough liquidity.
An example is the emergence of Gem and Genie, which has changed the competition. People are more likely to use such aggregators than individual platforms because every listing order on multiple platforms is valuable, but the platforms are not interoperable, which is why there is much demand to view NFT orders on different platforms simultaneously. And Gem and Genie propose the solution to solve the pain points, harvesting users. But Gem and Genie’s solution is still dependent on traditional NFT marketplaces such as OpenSea, the API interface may be held hostage by the platform, and the refresh speed of orders can be limited, making it difficult to achieve accurate real-time updates.
To further improve the aggregator model, being the upstream is not as good as the underlying protocol. When users list orders, they can be shared on multiple platforms automatically, so they do not have to switch back and forth. Any platform has the same orders, NFT liquidity will improve, overcoming the risk of being held hostage by large platforms and uniting small platforms to defend against large platforms jointly; At the same time, it also solves the liquidity problem of a mass of the long-tail assets listed on small platforms, similar to Uniswap.
The current NFT trading is still limited to NFT marketplaces. Many excellent NFT tool platforms are suffering from the plight of cash-out. They have users but only do accessible traffic import interface for marketplaces when users want to buy something. If the NFT tool platform can also directly trade NFT, getting profits by fees, NFT trading efficiency will improve significantly. NFT tool platform no longer needs to find a new mode of cash-out, and it can receive transaction fees so that the ecosystem becomes a complete closed-loop that is benign development of the tool platform.
Combined with the first point of ‘Listing order sharing model’, because most of the tool platform users are also NFT users, the sharing orders will also greatly increase the liquidity, thus enriching the ecology. The current situation is unfair to the tool platform, which deserves a share of income after they channel traffic for marketplaces, but now the marketplace does not reward the tool platform. Therefore, this also solves the needs of the tool platform. It is clear from Uniswap’s acquisition of Genie that the ‘Traffic + Trading Protocol’ model may be a better combination for future traffic platforms as they enter the NFT world.
There is still room for a reduction in transaction fees. As seen in the path of challengers, lower fees will be sought after by the market. For example, OpenSea is 2.5%, but X2Y2 is currently only 0.5%, which is one reason why many PFP short-term speculators firmly choose X2Y2. So the future solution is likely to be a lower commission to kick off and more profits to motivate new users to try.
The current right to set royalties is devolved to the platform level, so project owners who want to collect total royalties need to go to each platform to set their royalties in person, which is obviously much work. But through the shared listing model, the royalties set by the project owner will be directly synchronized to multiple platforms without missing, which is a massive benefit for the project owner and urges them to shift from the original platform to the new sharing platform.
I insist that after making the above points, new players will overturn the existing competition pattern — looking forward to witnessing the history.
For NFT marketplaces, folks are always envious of their vast market and the market share of OpenSea, so countless people show up, one after another, painting a rosy picture after another with the disguise of a pseudo-demand. When the tide finally goes out, we will know who is naked. If 2021 is the first year of the NFT market booming, then 2022 is when the competition in the NFT market will change drastically. Only can we swim against the tide in the bear market wtih capturing the core demand and blossom in the next bull market. What scares OpenSea is not the next trading platform but the aggregator like Gem that solves the liquidity demand, and the next one that beats Gem and the trading platform may not be the next aggregator or marketplace but the solution that solves the liquidity problem in a more profound level at the protocol layer — Decentralized NFT Protocol.
Foresight Ventures is dedicated to backing the disruptive innovation of blockchain for the next few decades. We manage multiple funds: a VC fund, an actively-managed secondary fund, a multi-strategy FOF, and a private market secondary fund, with AUM exceeding $400 million. Foresight Ventures adheres to the belief of “Unique, Independent, Aggressive, Long-Term mindset” and provides extensive support for portfolio companies within a growing ecosystem. Our team is composed of veterans from top financial and technology companies like Sequoia Capital, Google, Bitmain and many others.
Get fresh takes, analysis, and essays on emerging tech in our monthly newsletter.