I've seen plenty of chatter about the potential of NFTs as a technology & asset class. I've seen much less about the real money-makers in the space - NFT exchanges. Here's what I've learned so far. NFT EXCHANGES FOR DUMMIES:
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An NFT exchange is simply a collection of listed projects where users can buy & sell NFTs of their choice & are charged fees for doing so. Users determine price by making bids & offers for a particular asset & settle by trading an NFT for crypto via the blockchain.
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Much like an IPO, NFT projects sell initial supply either through a third party site or through the exchange itself. Secondary trading ensues after primary listing has finished. If an NFT project violates exchange rules it can be delisted for trading.
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Exchange trading dominates NFT volume, largely because no other venue exists to safely transact. OTC trading of NFTs is risky & more often than not results in scams or theft of assets. Exchanges offer safety & trust when trading NFTs.
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A recent example - when a guy got his BAYC NFTs stolen the exchanges were the ones who became de facto regulators & froze the NFTs for future trading. Exchanges hold all the power when it comes to NFT transactions.https://twitter.com/calvinbecerra/status/1454892316200562692?s=20 …
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NFT exchanges have seen insane volumes & user growth since this summer - monthly trading volumes still clock in north of $2+ billion after an initial August frenzy:pic.twitter.com/MKDWD8Sdfx
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NFT exchanges are generally separated by chain - I'm going to focus on Ethereum & Solana in this thread. Ethereum NFT trading is overwhelmingly dominated by OpenSea, the largest & most valuable exchange by a long-shot.https://www.theblockcrypto.com/post/111977/opensea-secures-100-million-in-series-b-round-at-1-5-billion-valuation …
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The reason OpenSea is so valuable is that revenue capture on its volume is astronomically high. OpenSea charges a 2.5% fee on every trade - more than twice Coinbase's retail revenue capture of ~1.3%, which is considered rich. No wonder everyone wants to get into NFT trading!
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There are other benefits to being the #1 NFT exchange. Because NFTs are not securities, manipulation & collusive trading activity isn't securities fraud. OpenSea execs have openly engaged in insider trading with no legal consequences so far:https://techcrunch.com/2021/09/15/opensea-admits-incident-as-top-exec-is-accused-of-trading-nfts-on-insider-information/ …
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Ethereum NFT trading is dominated by OpenSea. Solana NFTs are more fragmented for now - trading is split between Solanart, Magic Eden, Digital Eyez, SolSea & Alpha Art. Competition for NFT market share on Solana is intense.
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How does an NFT exchange compete for volume & revenue? One way is offering competitive fees, but most retail users don't care about transaction costs yet. Exchanges generally compete on UI/UX, intense marketing & networking with top NFT projects - a classic retail strategy.
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One unique thing about the NFT world is exclusive listing agreements - an exchange will pay an NFT project for exclusivity in its first x amount of days listed, capturing the lionshare of trading volume before other exchanges can list the project. An example from
@SaibaGang:pic.twitter.com/6W2HJ3Ld0m
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The recent news of FTX & Coinbase entering the NFT space is important & highlights the question of network effects. FTX has already launched a Solana NFT exchange but hasn't gained a ton of traction so far, at least anecdotally. Brand name isn't everything in exchange world.
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When a project first lists on one venue it's very hard for another exchange to become the go-to place for trading. Buyers are attracted to the exchange with the most listings & the best prices, which is normally the incumbent. Liquidity is hard to disrupt no matter the asset.
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I think Coinbase & FTX will eventually control a significant share of NFT volume, but it won't be an overnight success. Coinbase should have the upper hand with a more entrenched US retail presence & better UI.
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What's next for OpenSea & the other NFT exchanges? My guess is we'll see NFT venues start to offer mobile apps which will then become full crypto trading destinations. Just like FTX is going downstream from crypto to NFTs, OpenSea can swim upstream & challenge FTX in crypto.
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I like NFTs & think they're a fun evolution of digital culture. I think NFTs will grow sizably in the coming years led mostly by Coinbase's entry into the space. I'll be writing more about NFT exchanges in an upcoming post - sign up below if interested:https://frontmonth.substack.com/
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