Marketplaces need to effectively manage all the incentives of the participants to be successful. Crypto marketplaces have a number of additional factors to consider because the marketplace liquidity is designed to be open and accessible by the ecosystem. In this post, I’ll draw from my experience working on the OpenSea marketplace and share some of the key learnings.
OpenSea Marketplace
OpenSea is a marketplace for buying and selling NFTs. There are two major parts of the OpenSea product 1) Primary Sales and 2) Secondary Sales.
- Primary Sales: OpenSea allows users to mint the NFTs directly from the creator of these digital goods on our platform. OpenSea monetizes by taking a percentage of the purchase price, and the rest goes to the creator.
- Secondary Sales: OpenSea facilitates purchases between users through its platform. Users can make offers for one or many items and list one or many items for sale. OpenSea monetizes through a marketplace fee (a percentage of the transaction). Users can also add an optional creator “tip” which pays the creator a percentage of the transaction directly.
Marketplace Participants
- Buyers and Sellers: Collectors buy, sell, and hold NFTs, often possessing unique items for significant periods. Traders, on the other hand, focus on making profits using sophisticated tools and real-time data to buy and sell strategically.
- Creators: Creators mint new NFTs, driving new supply in the marketplace. While the volume of new projects is a good signal, the quality and legitimacy of projects are most important.
- Ecosystem: Developers create software and tools (e.g., analytics platforms) or “market-making” bots to drive price discovery. Partners typically develop new use cases for NFTs (e.g., game developers) or help new users onboard more easily (e.g., fiat onramps).
Why Crypto Marketplaces?
OpenSea is one of many NFT marketplaces powering peer to peer secondary sales of NFTs (other include Blur and Magic Eden). In my opinion the best features of secondary crypto marketplaces are 1) Public Inventory and 2) Instant Settlement 3) True ownership and 4) Open Rules.
1) Public Inventory
A public blockchain allows us to create a public inventory of wallets (owners) and items (NFTs) and organize them into collections (NFT contracts) and traits (item and collection metadata). Very practically this unlocks some very useful marketplace views which are hard to do with traditional web 2 marketplaces.
- Universe of items in a collection: See all the NFTs (items) in a collection of items which allows buyers and sellers to understand the entire universe of items (and their respective traits) that are available for a given collection.
- Ownership: See the current owners of items in a collection, how many items they own and the duration of ownership. Each item also has ownership history from on chain transactions so buyers can understand the provenance of an item.
- Listed/Unlisted: See what items are listed for sale and what items are unlisted. This gives a user a sense of how much of the collection is available for sale. When coupled with sales data users can get a sense of the liquidity of the items in a collection. Prospective buyers can also then make “offers” on items that may not even be listed, which is very hard to do in without public inventory and ownership.
2) Instant Settlement
One of the killer features of crypto and smart contracts is that each transaction settles instantly. The moment the transaction is confirmed, the buyer gets their item, the seller gets their money, the creator gets their tip and OpenSea gets their marketplace fee. In traditional marketplaces the marketplace itself typically acts as the custodian of all the items and the money.
In traditional marketplace there is significant risk (counterparty, fraud) and complexity (settlement math) associated with traditional marketplaces especially the experience is made to feel real time for users. In crypto marketplaces the two areas of risk are theft (stolen NFT, compromised wallet) and smart contract risk (hacking, bugs in the logic).
I used to make mobile games and we had to wait 30 days for Apple and Google to pay us despite these companies receiving their money from the payment processors much faster. As such, we had to get high interest revolving debt which was basically secured on Apple and Google paying us (nice arb for the lender). We would have much preferred to get paid instantly when a user purchased a digital good from our product (at the point where they realize value).
3) True Ownership
In crypto, the marketplace does not own the item or custody the item, the user owns the item. This means that the user can take this item and transfer it to someone else, list it for sale across multiple marketplaces or accept inbound offers on their item. The transaction settles instantly and “trustlessly” with payment going directly to the participants (e.g. marketplace, buyer, seller, creator) and transfer of ownership all in the same transaction.
In traditional marketplaces, the bundle of services usually includes facilitating the transaction and providing custody to both the items and the payment. This often equates to significantly higher fees, a higher bar for trust and the lack of flexibility of listing items in many different locations.
4) Open Rules
Web3 protocols are usually open source (e.g. Seaport which powers the OpenSea marketplace) so the rules of how the marketplace functions, the configuration options and the boundary conditions are open. Seaport is a very flexible protocol by design so marketplaces which use Seaport can configure things like zones (validation before fulfillment), fee splitting, and the nature of fulfillments (combinations of items and currency). If the community does not like the implementation of Seaport on a marketplace like OpenSea they have the power to spin up their own marketplace or fork the protocol and modify the way it works. The challenge is how you migrate marketplace liquidity (listings and offers) to a different platform.
Open protocols lend themselves to lower fees over traditional marketplaces. OpenSea has a 2.5% marketplace fee but Apple/Google still charge over 30% on the value of digital goods sold on their platform because it’s a closed system with limited user choice and alternatives.
Why Makes a Marketplace Successful?
The focus for this section is the secondary marketplace (selling between users) and why a user would pick one marketplace over an other. In my mind there are five key levers that make marketplaces successful.
- Availability: Does the marketplace have the items I want to buy or sell?
- Liquidity: Can I get the best price(s) for the item(s) that I want to buy or sell?
- Cost & Incentives: Are the transaction fees the lowest and rewards the best?
- Product: Does the product experience have all the functionality that I want with the best user experience?
- Trust: Do I trust the marketplace?
In 2022/3 the market started getting chunked up with competitors building products that appealed to “pro” users who were high volume traders with price sophistication. OpenSea also built pro features in the core product but had shortcomings on the product (same interface catering to multiple user types), incentives (no token, awards higher fees), and marketplace liquidity (no aggregation).
Availability
For NFT marketplaces, availability means very strong coverage of all the popular and trending NFT collections. Practically this means having a good relationship with creators who are launching new NFT collections (who direct users to your marketplace), supporting a variety of blockchains and giving users the confidence that the collections are authentic and legitimate. It also means allowing users to be able to see the universe of items in a collection and their respective owners and make offers or purchase items directly.
This was an area where OpenSea excelled (especially early on), with fantastic support for all EVM chains, a simple system for creators to set up their collections before launch, and strong technical and operational practices to identify and remove copycat collections, driving up user trust in the collection legitimacy and availability.
Liquidity
Liquidity is all about getting the best price at the fastest speed for as many items as I want to buy or sell. A marketplace with “highest collection offer” (the best price you can sell any item) and the “lowest floor pice” (the cheapest listing) along with the best liquidity “depth” (the number of listed items or offers within a certain percentage of the cheapest price) it typically has the best liquidity. You can look at this across all collections (or a proxy like the top 10 collections by volume) to get a sense of how strong liquidity is on each marketplace. Many NFT marketplaces have open or der books that allow for “aggregation” (e.g. OpenSea Pro) which allows buyers/sellers to access liquidity from multiple different marketplaces.
OpenSea had an open order book (listings and offers) which allowed third parties to access these orders and fulfill them on chain without permission from OpenSea. This was a fantastic tool at driving marketplace liquidity across complimentary products in web3 – e.g. analytics tools. However, competitors (e.g. Blur) used the open order book to catalyze their own liquidity and then provided significant financial (token) incentives to list on alternative contracts that OpenSea was not able to match. OpenSea did not have the right mechanisms in place to wall off / protect marketplace liquidity which ended up being a strategic error.
Fees and Incentives
In crypto, incentives matter a lot and the power users (aka degens) who drive most of the transactions will go to the place with the best rewards. Rewards are often in the form of tokens (e.g. UNI in Uniswap) awarded for using the protocol (and product). Marketplace and Creator fees are modeled as percentage of the transaction amount (paid to the participant directly). Protocols like Seaport allow for creators, marketplaces and buyers/sellers to get paid instantly when a transaction settles.
OpenSea charged a 2.5% marketplace fee, which was fairly low compared to traditional marketplaces but new entrants emerged (mainly Blur) that had 0% marketplace fees, no enforcement of creator fees and substantial $BLUR token incentives). Price sensitive “traders” who primarily cared about the economic reward from buying/selling NFTs behaved economically rationally by moving most of their activity over to Blur. There was also not liquidity disadvantage in the short term because Blur aggregated OpenSea listings. Over time, Blur provided extra incentives for locking in liquidity (listings and offers) on their own protocol which led to market share erosion from OpenSea → Blur.
Product
The best experience is a very subjective term and needs to be unpacked. For NFT marketplace we usually have three marketplace participants: buyers/sellers, creators, ecosystem.
Within the buyer/seller segment we often segment the group into casual v.s. pro users. Casual users care about simple/transparent and understandable experiences. Pro users care more about the optimal price, density/speed of information. Super pro users interact with the marketplaces programmatically and need fast/available APIs and data.
Creators care about discovery of their projects, placement/featuring, earning revenue and giving their community a trusted experience. They also care about customer support and partnership with the marketplace.
Ecosystem participants are more nuanced and have different needs but mostly care about the speed and functionality of data access. They want access to the order book and NFT metadata extremely quickly so they can index and display that data in their products or use it for trading.
OpenSea served all these marketplace participants and tried to support them through parallel product initiatives. This meant that OpenSea had to make product tradeoffs (mostly in the casual v.s. pro segment) to serve both audiences. Long-term, OpenSea.io is meant for more casual users, and OpenSea Pro is meant for advanced users.
Trust
Trust and brand are a very important part of a marketplace’s moat, especially in crypto, where users are affected by scams/hacks all the time. Trust takes a long time to build and spans a lot of elements of the product — the user experience, the support experience, the protocol integrity etc. As a user, I care most about what my peers are doing and what projects that I support recommend.
OpenSea still has a very strong brand in the wider community because it was a pioneer in the NFT marketplace and has invested a lot of time/effort into trust and safety and support. Since the peak in 2021/22, the entire NFT market has contracted by about 80%. Although OpenSea has lost market share in terms of NFT trading volume (by $ value), it still has the majority of users and a disproportionally higher share of # of transactions. This Dune Dashboard is a great summary of NFT markets with a few key charts below for convenience.
I love the technology that powers NFTs. When I joined the industry, I was hopeful that NFTs would power a new wave of “digitally native property” which could then be used to create awesome new experiences, prove authenticity of content/creators and generally remove friction from global trade. Much of the growth in the last cycle was driven by speculation and ponzi schemes, and less from real-world utility which is why it became personally less fulfilling for me to continue to working int the NFT space.
OpenSea still has a very strong brand in the industry, a robust regulatory/compliance framework, and is the main destination where users go to interact with and manage their NFTs. I’m excited to see the industry evolves (ideally more real-world utility emerging) and also how OpenSea evolves with the industry — my gut says there is still a lot of the NFT story that needs to be written.
Disclaimer: I’m not a current OpenSea employee and I do not represent the company in any official capacity. This post aims to share learnings and draw from my professional experience.
Aadil Mamujee 
Leave a comment