The road ahead for the NFT marketplaces

With increasing entrants into the NFT marketplace space, Opensea’s dominance as the leading NFT marketplace has been constantly challenged. The increased competition in the space has led to transformative trends, such as marketplaces like X2Y2 and Magic Eden initially choosing to forego royalty requirements. After Opensea opted to enforce royalties and implemented a blocklist code that banned NFTs from being traded on marketplaces that don’t fully enforce royalties, marketplaces like X2Y2 reversed their decision. In an industry-wide movement, the debacle around royalties is merely one of many strategies to remain price competitive in the NFT marketplace space. Other strategies include reducing transaction fees and incentivizing trading and listing NFTs through airdropping tokens.

As the competition continues to heat up, key questions to ponder are — what will the future of NFT marketplaces look like? Will Opensea continue to hold dominance as the de facto marketplace? Firstly, this article will examine the current landscape by comparing three key stakeholders — direct marketplaces like Opensea, aggregators like Gem.xyz and new forms of marketplaces like Sudoswap. Subsequently, we look at some of the gaps in the marketplace space and discuss emerging trends that will potentially shape future iterations of NFT marketplaces.

What are the direct marketplaces and aggregators?

Direct Marketplaces

Opensea, X2Y2, Looksrare, and Magic Eden are considered direct marketplaces since the primary listing and trading of NFTs take place here. The goal for direct marketplaces is to attract as many creators and users as possible to achieve high trading volume, as their primary revenue is derived from trading fees. For direct marketplaces, the main problems that they aim to solve are

1. Striking a balance between creators and users in the implementation of royalty fees — Direct marketplaces need to maintain royalty fees to attract NFT creators but at the risk of alienating active users who prefer to pay less.
2. Protecting users from malicious NFT projects and phishing websites. There has been an influx of scammers trying to list fake NFTs and steal users’ assets, so direct marketplaces need to have safeguards and warnings to help users.
3. Provision of stable APIs for Web2 marketplaces and Web3 aggregators — Direct marketplaces are seen as NFT trading infrastructure and need to be composable with other platforms.

AMM NFT marketplaces

Similar to how Uniswap helped solve liquidity on Defi, novel marketplaces like Sudoswap enable users to buy and sell NFTs from a liquidity pool instead of trading with other users. The AMM model offers several benefits over traditional order book marketplaces.Mainly, it unlocks instant liquidity for users as trades are executed automatically as opposed to waiting for a matching order on Opensea. Another key selling point is that marketplaces like Sudoswap are decentralized and are on-chain compared to most off-chain order book direct marketplaces. On the flip side, NFT AMMs might not be compatible with certain categories of NFTs (such as ones that have a heavier emphasis on rarities like blue chip and art collections) as sellers would typically want to have greater control over the transaction price. Another downside would be that AMMs could be considerably more complex to understand for an average consumer user, especially the non-crypto native ones.

NFT Marketplace Aggregators

Similar to the trajectory in DeFi where aggregators like 1inch thrived after users found it challenging to choose the best DEX out of multiple offerings, NFT marketplace aggregators like Gem and Genie made it easy for users to purchase NFTs from various marketplaces through a single interface. Aggregators also can serve the purpose of preventing wash-trading. As argued in this article by Delphi, one way to avoid market manipulation of wash trading is the usage of aggregators — “Users are encouraged to list NFTs at reasonable prices, which results in tighter spreads. Tighter spreads mean traders and collectors experience optimal prices. Optimal prices create sticky users and a positive flywheel”

When using aggregators, the following are important for users:

1. User interface: Showing all the best pricing across various marketplaces.
2. User interaction: Optimizing latency, gas efficiency, and API connection with the relevant marketplaces to show latest price updates
3. One-stop tools: Useful tools to complement the purchase process such as analytics, chat boxes,lending and borrowing, BNPL services

Analysis of direct marketplaces: Why is Opensea still the king of the hill?

Overview of Top 3 NFT marketplaces and emerging latecomers

As the first mover in the industry, Opensea was able to accumulate a sizable user base in the beginning over their competitors due to factors such as ease of listing, the wide variety of NFT projects and easy-to-navigate cataloging system. Opensea capitalized well on its initial user base by attracting more quality listings from notable NFT projects and implementing popular features such as multi-chain markets.

In order to acquire users from Opensea, Looksrare not only implemented a trade-to-earn strategy but also allocated token airdrops specifically for Opensea traders. In the short term, they ended up acquiring a peak amount of 26% ~ 37.2% of transaction volume in the market. Looksrare also took on a more decentralized approach by implementing revenue distribution whereby 100% of trading fees are earned by $LOOKS stakers. While the rewards incentivized increased trading, it also resulted in the problem of wash-trading which dominated most of the trading volume. When the incentives eventually became lower along with the dip in trading volume, Looksrare failed to retain its user base and is currently occupying ~0.7% of users across the industry.

In a similar sense, X2Y2 initially adopted a list-to-earn strategy to attract new users and offered lower transaction fees than Opensea and Looksrare. List-to-earn presented another set of problems including listing of many low quality NFTs just to earn rewards. X2Y2 eventually pivoted to a trade-to-earn rewards system which once again led to the proliferation of wash trading.Similar to Looksrare’s situation — even though X2Y2 redistributes 100% of their revenue back to users, the low volume and subsequently low fees earned are not enough to incentivize users to stay for the long term. X2Y2 still retains 2.2% of users across the industry as of writing.

Looksrare and X2Y2 were not the first marketplaces to experiment with marketplace liquidity mining. Rarible was a NFT marketplace that launched in early 2020 that also tried to lure traders with their $RARI tokens but also largely suffered the same fate.

Case study: Why did Rarible fail to compete with Opensea

In late 2020, Rarible tied with Opensea with over 4 million monthly transaction volume.

However, the gap between Opensea and Rarible grew wider and culminated in the latter losing 75% of their transaction volume at the end of 2021 Q1. As opposed to Opensea’s proposed IPO route which resulted in an uproar from the community, Rarible opted to be more decentralized by issuing their $RARI tokens. Following a similar trajectory, the token rewards incentivized volume as well as wash trading in the initial period. There were other reasons that made Rarible an inferior product compared to Opensea — notably Rarible’s lack of cooperation with renowned IPs which resulted in less liquidity to be deployed on the marketplace and their failure to deal with fake listings. On the other hand, Opensea combated fraud more quickly, launched time-limited orders, and cooperated with several IPs to position itself as a trustworthy credible NFT marketplace. The divergence in the popularity of the two marketplaces can be seen from the data below which shows that blue-chip collection BAYC was traded 27,442 and 72 times on Opensea and Rarible respectively from Dec 2020 to Nov 2022.

The newest marketplaces Blur and Atomic0, launched the platform with 0 transaction fees, optional royalty fees, and also enticed new users with airdrops. Notably, Blur is not only a direct native marketplace but is also an aggregator which we will delve deeper in the sections following. Blur also tried to incentivize users by using a list-to-earn strategy — albeit specifying that people who try to game the system by relisting NFTs at unrealistic prices or dead collections will not be entitled to the airdrop. Other ways of obtaining $BLUR airdrops include paying for royalties and listing of blue chip collections. The actual airdrop will only take place in January 2023 and only time will tell if their strategy will suffer the same fate as the previous marketplaces. From a product perspective, the key differential for marketplaces like Blur is the stellar user experience — NFT data like listings, sales and metadata appearing in real time, it is much faster to scroll and load through listings, users are able to sweep collections across multiple marketplaces and make well-informed decisions through advanced portfolio analytics etc. This is unlike previous competitors who have largely followed Opensea’s playbook in terms of UI/UX.

Despite all that, Opensea is still the leading platform that takes ~72%, 82.7%, and 75.7% on volumes, unique buyers, and transaction count respectively as of writing.

How is Opensea able to retain its user base despite the emergence of new competitors?

Even though Opensea’s market share has dipped, it still occupies a lion’s share of the market with over two-thirds of transaction volume. Over the years, Opensea has undoubtedly established a strong brand moat in the NFT space. For instance, we noticed that most NFT projects will always put their official listing on Opensea for the sake of legitimacy just because people recognize and trust the brand. Be it on Twitter or Discord, most projects choose to direct their users to Opensea to purchase their NFTs. This created a flywheel effect of more project listings leading to more users which again leads to more project listings, so on and so forth.

Ultimately, the name of the game is still liquidity — meaning that the marketplace with the most listings wins. Even with a poorer user experience and lack of token incentives, people still choose to list and purchase on Opensea because that’s where you find the most listings and traders. We feel that token incentives are not a long-term solution as it is a strategy that only attracts opportunistic traders and does not build brand loyalty and product stickiness. Since users trade on those marketplaces merely because of the incentives rather than believing that it is a great platform to trade on, they will leave once those incentives inevitably dry up. Token incentives might be a good way to get an initial headstart but ultimately only a good product and user experience will truly incentivize users to stay for the long term. Historically, this narrative has repeated several times before as not only NFT marketplaces have opted for liquidity mining strategies but also adopted by crypto exchanges that failed spectacularly in the end.

Case Study: First-mover advantage is not everything — Magic Eden

Given that Opensea was the first NFT marketplace, it begs the question of whether they are market leaders largely because of their first-mover advantage. We can examine Solana’s NFT marketplace ecosystem from a historical standpoint to further appreciate the value of the first-mover advantage. Magic Eden is the current leading NFT marketplace on Solana but contrary to popular belief it is actually the third marketplace to launch on Solana. The first two marketplaces were Solanart and Digital Eyes back in 2021 and they initially occupied most of the transaction volumes back then. In the end, Solanart lost the trust of the community after incidents such as fake listings and theft of digital assets which drove users to Digital Eyes instead. Magic Eden was able usurp Digital Eyes’ position as the former had a far superior UI/UX and general user experience. Magic Eden continued to develop on its moat by releasing features such as launchpads which incubated new NFT collections and also integrated with all the wallets on Solana. This was how Magic Eden was able to outperform their competitors to become the de facto marketplace on the Solana ecosystem h with close to ~98% of daily users as of writing.

Product led growth

Drawing insights from the case studies above, we realized that product-led growth is the sustainable way to capture long-term market share. Common gripes about Opensea’s user experience include high gas and transaction fees, high latency, slow-to-load interface and more. We believe that unless those problems are rectified, Opensea’s brand equity will continue diluting as other platforms such as Blur innovate to offer a better user experience. As mentioned earlier — besides their native marketplace, Blur also aggregates liquidity from other marketplaces which makes it more convenient for the users. On the other hand while competitors such as X2Y2 and Looksrare offer lower transaction fees, the general user experience is actually not much differentiated from what Opensea has to offer. Take for instance, the snapshots below of the BAYC collection across the various marketplaces clearly shows which one had a differentiated user interface. In the end, the marketplace that can offer the best user experience will attract the most listings and traders and subsequently develop a moat around their brand equity with trust and credibility.

Analysis of aggregators: why the aggregator model never truly took off

With multiple direct marketplaces, it would make sense for aggregators to thrive given that it provides consolidated visibility across all marketplaces. Instead of manually combing through Opensea, Looksrare, and X2Y2 for the best price, one can use an aggregator for convenience. However, data below have shown that the majority of transactions are still mainly completed on Opensea. The data also showed that while aggregators such as Gem and Genie enjoyed an initial spike in volume, it has since dwindled in comparison to Opensea. In our opinion, there could be several reasons for this. Before delving in, it would be helpful to identify the two large demand side profiles — (1) NFT community users who know exactly what NFT collection they are going for and their purchase journey typically starts from clicking an official link on Twitter or discord and (2) Opportunistic traders who are looking for good trades e.g. quality collections with low floor prices or mispriced NFTs.

Firstly, considering that most NFT projects currently use Opensea links for legitimacy, we feel that NFT community users will more often than not land on Opensea as the first touch point. Secondly, we feel that opportunistic traders would be more likely to use aggregators since they typically do not have a NFT collection in mind, rather they are hoping to search for a good value trade.

While volumes on Gem and Genie have dwindled, there has been a resurgence of volume on another aggregator — Blur. It is still early to see if Blur pioneered a winning aggregator model.

Case study: How did Gem overtake Genie as the de-facto aggregator

Genie was the first mover in the aggregator market and did not address several product optimizations such as UI/UX layouts and high gas costs. On the other hand, Gem helped to save up to 40% of the gas cost compared to Genie which resulted in a migration of traffic.

Currently, Gem has become the largest traffic window for direct marketplaces such as Opensea, X2Y2, Looksrare, and Larva Labs.

Why is Gem not occupying a larger market share yet?

The data below shows that approximately 33% of all NFTs are purchased through aggregators and out of that fraction, Gem transactions constitute about 70–80% out of all aggregators before Blur launched.

Even though 33% of all NFTs are transacted through aggregators, the data below interestingly shows that 90% of transaction value takes place through direct marketplaces. This means that the majority of high-value transactions take place on direct marketplaces rather than aggregators. This possibly reflects the user preference for transacting blue-chip high-value NFTs on direct marketplaces and lower-value NFTs on aggregators.

Additional data below highlights the user funnel for NFT marketplaces. It shows that less than 5% of users will visit other marketplaces after visiting Opensea. On the other hand, 74.76% of Gem visitors will visit Opensea afterward, and similarly for Blur and Genie (43.76% and 40.55%).

Source: similarweb

Can Uniswap’s new marketplace compete with the other aggregators?

Genie was acquired by Uniswap in June 2022 and was officially integrated into Uniswap recently. Users are now able to trade NFTs across various marketplaces including Opensea, X2Y2, Sudoswap and more. Uniswap’s NFT interface is fully open sourced and claims that their aggregator is able to help users up to 15% of the gas costs as compared to the other NFT aggregators.

On first glance — their UI is simple and clean, adopting a similar look and feel to most marketplaces. A notable difference is that users are able to toggle between ETH and USD pricing which might be more user-friendly towards non-crypto native users.

As an aggregator, Uniswap’s NFT marketplace has fewer features than some of its competitors. Most notably, Uniswap is lacking advanced analytics such as floor depth, transaction and price history etc. It can also be argued that in today’s low gas fee environment, reduction in gas fees may not be a sufficient factor to attract users over.

On the other hand, we feel that Uniswap’s moat lies with their Universal Router which allows for the convergence between fungible and non-fungible tokens. With the Universal Router, users can execute multiple token swaps on Uniswap V2 & V3, and buy NFTs from multiple marketplaces all in one transaction. For instance — a user has to swap their USDC, ETH and DAI to WETH through multiple transactions on their own before they can complete their NFT purchase. Uniswap enables the following via a single transaction as illustrated below.

This is crucial as Uniswap has the deepest liquidity of fungible tokens on decentralized exchanges as well as substantial traffic of crypto users. This natural synergy of fungible and non-fungible tokens allows for increased convenience for users in their purchase process. This is truly a game changer as it greatly reduces the friction for users especially in a multi crypto assets environment . The inability to use ERC-20 tokens for NFT purchase is still a massive pain point for other users of NFT aggregators.

Based on their experience with AMMs combined with the breakthrough innovation of Universal Router, future possible developments include providing a consumer oriented product offering independent of current NFT aggregators. Unlike Sudoswap’s single-currency, single-pool transactions, Uniswap can offer hybrid payments and multi-currency AMM-like interactions that rely on the Universal Router. Uniswap can also deploy new AMM pools — providing NFT project owners with more liquidity options other than ETH. Ultimately, these product offerings set Uniswap apart from the other aggregators. Alas, it is still early days for Uniswap and NFTs, time will tell if users will be receptive towards them.

Current gaps in the NFT marketplace models

After the deep dive into the current ecosystem of NFT direct marketplaces and aggregators, in this section we focus on the gaps and pain points that both users and projects are facing at the moment.

Transaction fees and royalties

From the NFT projects’ point of view, the marketplaces’ take rate of 0.5–2% virtually adds no value back to them. On top of that, NFT projects were recently at the mercy of marketplaces who were mainly the ones who decided whether to charge royalty fees or not. The lack of decision-making autonomy for royalty fees is a long-term problem for NFT projects. For transaction fees, NFT projects would ideally want to capture them so that they have more resources to add value back to the community. Additionally, users will probably be more willing to contribute fees back to the NFT project in order to accrue more value for their NFTs.

NFT marketplace tokenomics need to be reconfigured

As discussed on several occasions above — we argue that while there is a demand for decentralized community-owned marketplace, there hasn’t been a marketplace that has effectively implemented a token model to stimulate organic growth. Most of the existing tokenomics only serve to encourage behaviors that don’t benefit the community such as wash trading or listing of low quality collections. As detailed by jhackworth here — 85% of $LOOKS airdrop holders are no longer holding the tokens. Marketplaces need to implement a model that stretches beyond “free money”, governance and that users find more utility in holding them for the long term.

Marketplaces are too generalized

While the majority of the NFT sector right now is focused on PFPs, we feel that this market will continue to expand and include other categories such as games, art, fashion, utility and brand-focused NFTs. It will be a problem if all of these NFTs are transacted on general marketplaces like Opensea. For instance, brands like Starbucks and Nike will want to have a customized experience for their customers and buying a gaming NFT should not be the same experience as a PFP. The experience of purchasing NFTs should not be like homogeneous consumer goods that can be transacted on generalized platforms.

The recent popularity of Blur, a marketplace aimed at traders and the NFT industry’s general move towards financialization — NFT loans, derivatives, indexes, fractionalization shows that there is also a demand for a marketplace that sees NFTs as a commodity or financial asset. For a multi-faceted product like NFTs, the current marketplaces lineup might be too generalized and thus risk isolating different types of users/NFT projects.

Lack of social features

If you think about the entire user journey — from discovering new NFT projects on Twitter to engaging and finding out more about the community on Discord to finally making a purchase on Opensea, you will realize that the entire journey is meant to be highly social. However, currently there is no easy way of communicating with the counterparty on a marketplace if a user is trying to buy or sell a NFT. Understandably, there is a reason why marketplaces choose not to enable chat just because it renders them redundant as the buyers and sellers can directly transact with each other. Alas, this is still a feature that could greatly enhance the user experience that the industry has yet to find a well-balanced solution to.

NFT infrastructure needs further development

Regardless of whether it is a retail or trader focused marketplace, the emergence of different types of marketplaces would mean that it will be even more pertinent to integrate all the fragmented liquidity, orders, and on-chain information in the future. The lack of a well-developed API integration will negatively affect the transaction speed, accuracy of listing price and order aggregation resulting in a less than ideal user experience. For most users, a well-rounded infrastructure will include user-friendly wallets that allows for both crypto and fiat transactions (or a combination of both), the ability to use alternative payment methods such as BNPL, loans or even renting NFTs, a user friendly approach to security and more. The existing infrastructure serves a barrier to entry for new retail users who are used to how intuitive and easy web 2 e-commerce is like.

What future models of NFT marketplaces will look like

Verticalized Marketplaces and Infrastructure

Verticalized marketplaces are not a new concept. Axie Infinity was the most prominent vertical marketplace that generated significant volume from sales of axies. In fact, the industry has slowly witnessed the emergence of community-owned marketplaces such as Apecoin DAO marketplace that was built especially for BAYC and Otherside communities. Apecoin’s marketplace not only charges less fees than the incumbent marketplaces (0.5% fees on ETH transactions and 0.25% fees on ApeCoin transactions — and holds 0.25% of each sale in a multi-signature wallet to fund future DAO initiatives) but also create a benefit loop for ApeCoin holders. Infrastructure and tools that allow projects to easily launch their own marketplace are also slowly emerging. One example would be Reservoir. Reservoir is a developer platform that aggregates NFT orders from across the Ethereum ecosystem and makes this liquidity available and fillable through API endpoints and SDKs. Similar to Blur’s strategy of gaining early traction, tools like Reservoir helps to solve the cold-start problem when projects launch their own marketplace as they are able to showcase listings not only on their native marketplace but also other marketplaces as well.

As Multicoin Capital’s essay eloquently puts it — Marketplaces should map to the unique characteristics of communities, not the other way around. As more NFT categories start to gain traction, we expect the emergence of a few specialized marketplaces that will slowly gain market share at the expense of generalized marketplaces like Opensea. Additionally, there might be a long-tail of community owned marketplaces following in the footsteps of Apecoin. The next relevant question will be — what will help to tie all these together in the future NFT marketplace ecosystem? We believe that the next iteration of NFT aggregators will be one that can effectively provide an unified experience without compromising on user experience.

Membership-based exchanges

Mooar is a new membership-based NFT exchange developed by the STEPN team that lies somewhere in between a community focused verticalized marketplaces and direct marketplaces like Opensea. Mooar adopts a membership-based approach by setting the transaction fee at 0% and the royalty fee at 2% (creators can adjust it themselves), enabling members to give back to the creators while also enjoying lower transaction costs. Mooar adopts a different kind of revenue model by charging a subscription fee instead. Members can vote on which launchpad projects that they like and gain access to exclusive NFT listings. For instance, if members have a preference for high-value generative art projects, the marketplace will accordingly list more similar projects like that. While there are existing doubts over their viability and scalability, this marketplaces category undoubtedly gives more autonomy to the users and creators on the platform.

Trader-focused Marketplaces

As discussed with the increasing financialization of the NFT sector, it is also necessary to cater to the demands of these users. The next generation of trader-focused marketplaces must prioritize liquidity, speed, and analytics tools. Examples of features could be instant buy and sell (AMM models or better liquidity), better pricing, enhanced collection sweeping, and more granular analytics.

Features that are comparable to or even better than the current e-commerce shopping experience

In the next wave, we expect an influx of retail consumers who are highly accustomed to how web2 e-commerce works like Amazon and eBay. Outside of NFT marketplaces, user-side infrastructure such as wallets should be safer, easier, and more intuitive to use. Possible features include social and customer support chat boxes, multi-payments, P2P swapping, live streaming, push notifications, mobile apps, fraud detection, and more. We also expect further integration with existing web 2 apps and commerce — the ability to seamlessly connect your wallet to apps like Instagram, TikTok, Twitch, etc. to purchase NFTs from brands or creators.

Drawing further reference from web2 e-commerce, another possible development would be the adoption of the Shopback business model for aggregators. Shopback is essentially an ecommerce aggregator of primary marketplaces — they receive a commission fee whenever a transaction takes place via their platform. Shopback gives part of this commission back to the users via cashback. In a similar sense, NFT marketplace aggregators can consider this business model to create more value proposition for their users.

Closing Thoughts

We are still very early in the entire development cycle of NFTs and marketplaces — after all the first wave of the NFT boom really only started in 2021. As analyzed in this essay, we discussed the various reasons why Opensea is still the dominant marketplace despite its shortcomings. Regardless of whether Opensea is able to maintain its moat, it is certain that there are certain gaps in the NFT user experience that need to be improved further in order to attract the next wave of user adoption. Future marketplaces winners will be driven by product-led growth, innovations in user experience, and as well as the need to accommodate different categories of NFTs.

At the end of the day, the main goal should be building a NFT ecosystem that is able to achieve product market fit. Regardless of whether it is NFTs, marketplaces, wallets, communities or even projects, the entire user experience should be seamlessly integrated to attract and onboard the next million users.

If you found this discussion interesting and would like to participate, feel free to engage with us. If you are an NFT infrastructure project looking to optimize for the next wave of users, please reach out to us as well.

Note: The information and publications are not intended to be and do not constitute financial advice, investment advice, trading advice or any other advice or recommendation.

Written By Henry Ang, Mustafa Yilham, Allen Zhao & Jermaine Wong