A comprehensive analysis of how OpenSea became the most popular NFT trading platform

Written by: Supreet

Compiled by: Alex, TechFlow

It’s the winter of 2018, and the crypto markets have crashed, with even blue-chip tokens like Bitcoin and Ethereum down 90% from their all-time highs. One after another, projects that launched with so much fanfare are shutting down. Your Thanksgiving dinner is really awkward after your uncle sarcastically asks, “So…how’s your Bitcoin investment?”

As other projects shut down, one project has the conviction to continue building: OpenSea. Launched in February 2018, Opensea has persisted in pursuing its vision of becoming the "eBay of cyptogoods." This persistence has paid off, as it has become the most popular NFT marketplace, with a recent valuation of $13.3 billion. This post attempts to analyze what has led to OpenSea's huge success as a product and where it can go from here.

But first, what are NFTs?

Well, NFTs (Non-Fungible Tokens) are a way to store ownership of assets on a blockchain. It can be digital assets like pictures, music, or even real-world assets like land titles, diplomas, etc. Since blockchains are completely decentralized and censorship-resistant (at least Ethereum is), you don't have to trust a third party to maintain a record of this ownership.

OpenSea is a marketplace that interacts with the underlying blockchain to create and trade NFTs that represent digital assets like pictures, music, and even domain names on Ethereum. Marketplaces are places that facilitate the sale and purchase of products. Think Amazon, Uber, and Airbnb. A key feature of most marketplaces is that they don't actually own the inventory of products, they just allow others to sell (there are some exceptions, like Amazon also sells their own products).

Is OpenSea really that popular?

Let’s look at the numbers. The table below compares different NFT marketplaces based on the number of users, transaction volume, and ETH volume over the past 30 days. These statistics come from DappRadar, which queries the Ethereum blockchain to track various metrics for Ethereum applications.

It’s clear from the above that OpenSea has left the competition in the dust, or should I say in the drops (get it?). In the last 30 days, it has facilitated around $4.5 billion worth of trades (that’s 1.5 million ETH), far outpacing all of its competitors. To put that into context, eBay was doing around $6.6 billion worth of trades per month last quarter. While they deal in completely different products (OpenSea in blockchain digital assets and eBay in physical goods), I appreciate that OpenSea is keeping up with traditional markets despite operating in the crypto space.

What did they do right?

The success of a project can’t be attributed to just a few factors. It requires a great product, a great team, great timing, and a whole lot of luck. While OpenSea seems to have all of these, we can at least try to assess what exactly they did right to get to where they are now.

Quickly establish supply and demand relationships

As Lenny Rachitsky (former product manager at Airbnb) discusses in his newsletter, one of the biggest hurdles to launching a marketplace is what is aptly called the “chicken and egg problem.” How do you convince suppliers to list their products with you when there are no users on the platform buying them? How do you convince buyers to come on board unless there is already inventory of products for them to check out?

Most traditional markets have achieved success by focusing on building supply first. The same is true for OpenSea. As The Generalist reports, they went to great lengths to build initial supply, which Richard Chen (general partner at crypto investment firm 1confirmation) summed up perfectly in the quote below:

“Devin and Alex [OpenSea’s co-founders] did an amazing job discovering new NFT projects in Discords and outperforming Rare Bits [its then-close competitor] in getting them listed on OpenSea and attracting the majority of volume to OpenSea instead of Rare Bits. When we invested in April 2018, OpenSea was already doing ~4x the volume of Rare Bits.” - Richard Chen

All of these efforts have led to early collaborations with multiple projects/artists. This includes supporting Axies (arguably the most popular game built on Ethereum), using its native token MANA to purchase decentraland (an Ethereum-based virtual game similar to Minecraft), partnering with Major League Baseball to sell MLB digital collectibles, offering official Deadpool digital collectibles, partnering with German football club Bayern Munich to list player card NFTs, and supporting trading for all those fancy .eth ENS names. This non-exhaustive list demonstrates the team’s passion to work with as many projects as possible to build a stable supply stream, and the vision to cater to NFTs in a wide range of categories such as gaming, art, sports, entertainment, domain names, etc.

This buzz is complemented by user-centric features that make it easy for vendors to enter this market. NFT listings are permissionless and do not require any approvals or complex onboarding. Additionally, OpenSea has created a way to shift the cost of minting new NFTs on Ethereum from sellers to buyers. Both of these features have significantly lowered the barrier to entry for new artists/projects, which has greatly contributed to the growth of NFT inventory on the platform.

Once a steady supply is established, traditional markets begin to focus on building demand. For OpenSea, doing this was a little simpler. After being busy getting early partnerships and establishing itself as a platform to list NFTs, all the newer projects began listing their NFTs there and bringing their customers. The projects themselves were also incentivized to encourage their customers to use OpenSea, as the project would receive royalties on every secondary sale of the original NFT. Additionally, the NFT mania that began in the summer of 2021 drove demand growth for OpenSea. Once the crypto world accepted this non-DeFi use case for blockchain, resulting in record transactions on Ethereum, guess who was there, ready to facilitate those transactions and make a fortune for everyone?

Maximize user happiness

As Sarah Tavel discusses in her blog post, marketplaces should not just focus on increasing supply, but also implement product features to maximize user happiness. Just like Uber created frictionless payments by automatically recharging credit cards, Airbnb created a superhost program where hosts who meet the requirements get a special display badge to make them more attractive for new bookings. OpenSea also excels in this regard.

One of their big accomplishments was implementing powerful filtering and sorting capabilities to allow for easy discovery of NFTs. This may seem trivial, but it is not. Each collection of NFTs has different characteristics and features. OpenSea allows for “custom” filtering and sorting that changes based on the collection being viewed so that users can refine their search based on that specific collection.

Different filters for different collections

Next, they took concrete steps to address the biggest problem plaguing NFT enthusiasts and general Ethereum users, namely the prohibitively high gas costs. Gas costs are fees charged on every transaction on the Ethereum network, which are paid to the individuals who run the network, also known as miners. But because demand for Ethereum is ridiculously high, and the current network capacity is fairly low, these fees can range from tens to hundreds of dollars per NFT transaction (depending on network traffic). While OpenSea has no control over the gas costs of the underlying Ethereum network, they have implemented several features that have at least somewhat reduced these costs. They enabled auctions to be run off-chain so that gas is only used once during the final sale, allowed auction prices to be lowered off-chain so that price changes don’t require gas every time, introduced “lazy minting” so that artists can mint NFTs for free, with gas paid by buyers the first time they buy an NFT, and integrated with Polygon, another blockchain network that interacts with Ethereum but with lower fees.

Continuing with the financial side of the product, OpenSea also allows the purchase of NFTs in cryptocurrencies other than ETH, especially stablecoins like Dai and USDC. This is particularly useful because purchasing with ETH triggers a tax event in many countries, and using stablecoins is an easy way to avoid this. That is, assuming you pay taxes on your crypto. If you don't, you should!!!

Make the right choice

A good product is only one driver of success; a critical one, but not the only one. Every project faces countless choices during its lifecycle, and the choices they make determine whether they ride the high seas or capsize and sink. OpenSea made many good choices on its way to the top.

The first is their belief in their mission. As reported by The Generalist, the reason for their conviction is something called ERC-721. This is a standard built in parallel by core Ethereum developers to dictate the creation and transfer of NFTs on Ethereum. The creation of this standard meant that the field was important enough to attract the attention of Ethereum developers and that all future NFT projects would adhere to it. So, they created a marketplace on top of the ERC-721 standard that could then support all future NFTs. By doing this, OpenSea provides buyers with a much more convenient experience by aggregating the supply of NFTs. Before this, each project had to create its own marketplace, for example, CryptoPunks and Axie had their own (and still do).

This belief in NFTs is also what allowed them to survive the crypto winter of 2018. When the crypto market was down and not many projects could survive, OpenSea operated with a lean team of only 7 employees, kept collecting transaction fees to keep the company afloat, and continued to build.

Recently, they faced some tougher choices when many high-value NFTs were sold at lower prices due to a bug in the code. They decided to compensate affected users for their losses. Likewise, in some cases, they also froze stolen NFTs. While they have been criticized by some because this goes against the basic spirit of crypto that is censorship-resistant, these steps have certainly helped build trust with users.

What’s next for OpenSea?

What’s next after conquering the ocean? You try to crush every competitor that dares to topple you and continue your dominance. OpenSea is currently already the dominant force in its NFT marketplace category. However, they face a very real threat from the new kid on the block, LooksRare. This recently launched NFT marketplace has a lot going for them - lower fees than OpenSea, has a native token which greatly increases its appeal to crypto natives, and shares all of its fees with token holders. As you can see from the previous table, LooksRare has surpassed all other platforms and is closing in on OpenSea in terms of both transaction volume and ETH traded.

So what is the answer for OpenSea to launch its own token? It’s not that simple. As a US company, OpenSea likes to play nice with US regulators and can’t risk launching a token only to incur the wrath of regulators and thus hamper their operations. Therefore, the path forward for OpenSea is to continue to maximize user happiness and potentially expand into other use cases. Here are some possible options:

1) More mobile. OpenSea already has a mobile app, but it is very limited and doesn’t even allow trading NFTs. The app needs to abstract away the process of creating a wallet, storing a seed (you can do this for advanced users), and complex gas estimates. Basically, make the experience seamless enough to onboard crypto newbies.

2) Explore the fragmentation of NFTs, where the original owner of an NFT can split ownership into multiple smaller tokens that can then be purchased by others. This allows for shared ownership of NFTs. Exposure to blue chip NFTs like BYAC and CryptoPunk, which most people can’t afford right now, will unlock new demand. Original owners can benefit from increased liquidity and potential “curator” fees they can earn from selling fragmented blocks. Win-win!

3) Consider partnering with a DeFi protocol (or creating your own!) to allow borrowing using NFTs as collateral, at least initially blue-chip NFTs. This cross-pollination could unlock a whole new user base and demand for OpenSea.

4) Vitalik recently talked about non-transferable NFTs which have potential uses such as issuing university degrees, land titles, etc. While there are still many considerations that have yet to be worked out (e.g. if the owner wants to transfer to their own second wallet due to security issues), OpenSea could lead the community discussion and possibly even write an ERC standard for it! They could even explore potentially creating a B2B solution to provide a non-transferable NFT implementation for businesses that might want to use it.

Some of the possible options mentioned above, such as the fragmentation of NFTs and their utility as collateral, could expose OpenSea to the scrutiny of regulators. So they have to tread carefully. In fact, regulation is a big potential obstacle that OpenSea needs to monitor continuously, as there is general uncertainty about the regulation of all cryptocurrencies. In fact, as a leading figure in the crypto community, they may even consider lobbying for crypto-friendly laws to help the ecosystem move forward. After all, with great power comes great responsibility!

Original link:

https://mirror.xyz/supreet.eth/5dRdAbJqGq3RoHvPG0DjzoANqw0xwXRlzDP8gZUoG7k