Bixin Ventures: In-depth NFT market data, exploring new trends in NFT market iteration

Original Title: 《The road ahead for the NFT marketplaces》

Authors: Henry Ang, Mustafa Yilham, Allen Zhao & Jermaine Wong, Bixin Ventures

Original Compilation: Evan Gu, Wayne Zhang, Bixin Ventures

As more new NFT marketplaces emerge, Opensea's position as the number one player in the NFT marketplace is increasingly challenged. The intensifying competition has led to more transformations and innovations in the field, such as projects like X2Y2 and Magic Eden directly announcing the abandonment of royalties. Opensea used to charge royalties and blacklisted NFTs that did not pay royalties. The emergence of X2Y2 prompted Opensea to change its original rules. In this wave of innovation across the industry, the transformation surrounding royalties is just one of many strategies to maintain price competitiveness in the NFT marketplace. Other strategies include lowering transaction fees and incentivizing NFT trading and listings through token airdrops.

As competition continues to heat up, several key questions are worth pondering: What will the future of NFT marketplaces look like? Will Opensea continue to dominate the NFT marketplace? First, this article will examine the current landscape by comparing three main stakeholders: direct markets represented by Opensea, aggregators represented by Gem.xyz, and new forms of markets represented by Sudoswap. Subsequently, we will explore some gaps in NFT marketplace projects and discuss emerging trends that may influence the future iterations of NFT marketplaces.

What are Direct Markets and Aggregators?

Direct Markets

Opensea, X2Y2, Looksrare, and Magic Eden can be seen as direct markets, as NFT listings and transactions occur here. The goal of direct markets is to attract as many creators and users as possible to achieve high transaction volumes, as their primary revenue comes from transaction fees. The main issues that direct markets aim to address are:

1. Balancing the need for royalties between creators and users. Direct markets need to maintain royalties to attract NFT creators, but there is a risk of alienating small but active users.
2. Protecting users from malicious NFT projects and phishing sites. A large number of scammers may flood in and steal user assets, so direct markets need safeguards to help users.
3. Providing stable APIs for Web2 markets and Web3 aggregators—direct markets are seen as the infrastructure for NFT trading and need to be combined with other platforms.

AMM NFT Markets

Similar to how Uniswap helps solve liquidity issues in DeFi, new markets like Sudoswap allow users to buy and sell NFTs from liquidity pools instead of trading with other users. Compared to traditional order book models, the AMM model has several advantages, such as providing users with instant liquidity since trades are executed automatically rather than waiting for matching orders on Opensea.

Another key selling point is that markets like Sudoswap are decentralized and on-chain, unlike most off-chain order book direct markets. On the other hand, NFT AMMs may be incompatible with certain categories of NFTs (e.g., blue-chip NFTs and art collectibles that emphasize rarity), as sellers typically want greater control over transaction prices. Another downside is that AMMs may be much more complex for ordinary consumer users, especially non-crypto-native users.

NFT Market Aggregators

Similar to aggregators in DeFi, aggregators like 1inch began to develop when users found it difficult to choose the best DEX from multiple products. NFT market aggregators like Gem and Genie allow users to easily purchase NFTs from various markets through a single interface. Aggregators can also help prevent trades from being manipulated. As Delphi pointed out in this article: "Encouraging users to list NFTs at reasonable prices leads to smaller spreads. Smaller spreads mean traders and collectors experience optimal prices, and optimal prices create sticky users and positive feedback." One way to avoid market manipulation of false trades is to use aggregators, and users have the following concerns when using aggregators:

1. User Interface: Displaying all the best prices from various markets.
2. User Interaction: Optimizing latency, gas fees, and API connections with relevant markets to show the latest price updates.
3. One-stop Tools: Useful tools that complement the purchasing process, such as analytics, chat boxes, lending, and BNPL services.

Direct Market Analysis: Why Opensea Remains the King of the Market?

Top 3 NFT Market Overview and Emerging New Markets

As the pioneer of the industry, Opensea initially accumulated a substantial user base due to its user-friendly creation process, diverse range of NFT projects, and easy-to-navigate catalog system. Opensea also leveraged its initial user base by featuring well-known NFT projects and implementing popular features like multi-chain markets.

To attract users from Opensea, Looksrare not only employed a trading-to-earn strategy but also allocated token airdrops specifically for Opensea traders. In the short term, they ultimately captured 26% ~ 37.2% of market trading volume. Looksrare also implemented a more decentralized approach to revenue distribution, where 100% of transaction fees are distributed to $LOOKS stakers. While the rewards incentivized an increase in trading volume, they also led to a large number of wash trades. When incentives eventually decreased with the decline in trading volume, Looksrare failed to retain its user base and currently accounts for only about 0.7% of users in the entire industry.

Similarly, X2Y2 initially adopted a List-to-earn strategy to attract new users and offered lower transaction fees than Opensea and Looksrare. This brought about another set of issues, including the inclusion of many low-quality NFTs that were only listed to earn rewards. X2Y2 eventually shifted to a trading-to-earn reward system, which again led to a surge in trades that were merely for the sake of transaction fees. Similar to Looksrare, despite X2Y2 redistributing 100% of its revenue to users, low trading volume and subsequently low fees earned were insufficient to incentivize users to stay long-term. As of the writing of this article, X2Y2 retained only 2.2% of users in the entire industry.

Looksrare and X2Y2 are not the first markets to attempt liquidity mining for tokens. Rarible, launched in early 2020, also tried to attract traders with their $RARI token but largely encountered the same fate.

Case Study: Why Rarible Fell Behind in the Competition with Opensea

By the end of 2020, Rarible had a monthly trading volume of over 4 million, tying with Opensea.

Subsequently, the gap between Opensea and Rarible widened, with the latter losing 75% of its trading volume by the end of Q1 2021. In contrast to the uproar from the community over Opensea's proposed IPO route, Rarible chose to become more decentralized by issuing their $RARI token. Following a strategy similar to X2Y2, Rarible's token rewards not only incentivized an increase in trading volume but also led to many wash trades in the initial phase.

There were other reasons for Rarible's disadvantage compared to Opensea, particularly Rarible's lack of partnerships with well-known IPs, leading to lower liquidity deployed in the market, and their inability to handle NFTs of fake IP types. On the other hand, Opensea quickly cracked down on fraud, launched time-limited orders, and partnered with multiple IPs to position itself as a trusted NFT marketplace. The data below illustrates the popularity difference between these two markets, showing that from December 2020 to November 2022, the blue-chip NFT BAYC had transaction counts of 27,442 on Opensea and 72 on Rarible.

The latest markets, Blur and Atomic0, attract new users with 0 transaction fees, optional royalties, and airdrops. Notably, Blur is not only a direct native market but also an aggregator, which we will explore in more depth in the following sections. Blur also attempts to incentivize users through a list-to-earn strategy. Blur stipulates that those who try to deceive the system by relisting at unrealistic prices or bringing back certain "dead NFTs" will be ineligible for airdrops. Other ways to qualify for the $BLUR airdrop include paying royalties and listing blue-chip series collectibles.

The actual airdrop will take place in January 2023, and only time will tell if their strategy will suffer the same fate as previous markets. From a product perspective, the main difference of markets like Blur lies in their excellent user experience—real-time bids, sales, and NFT data such as metadata, with much faster scrolling and loading of lists, allowing users to view NFT collections across multiple markets and make informed decisions through advanced portfolio analysis. Unlike previous competitors, Blur does not follow Opensea's model in terms of UI/UX.

Nevertheless, as of the writing of this article, Opensea remains the leading platform, accounting for approximately 72%, 82.7%, and 75.7% of market share in trading volume, unique buyers, and transaction count, respectively.

How Can Opensea Retain Users After New Competitors Emerge?

Despite a decline in Opensea's market share, it still holds the largest share of the market with over two-thirds of trading volume. Over the years, Opensea has undoubtedly built a strong brand moat in the NFT space. For instance, we notice that most NFT projects always officially list on Opensea for legitimacy, simply because people recognize and trust the brand. Whether on Twitter or Discord, most projects choose to direct their users to Opensea to purchase their NFTs. This leads to more projects being listed, which in turn attracts more users, resulting in more projects being listed, thus triggering a flywheel effect.

The main character of the competition ultimately remains liquidity—this means that the market with the most projects will win. Even with a poorer user experience and a lack of token incentives, people still choose to list and buy on Opensea because it is where you can find the most projects and traders. We believe that token incentives are not a long-term solution, as they are a strategy that only attracts opportunistic traders and does not build brand loyalty and product stickiness. Since users trade on these markets merely for incentives rather than believing it is a good trading platform, they will leave once these incentives inevitably dry up. Token incentives may be a good way to gain an initial lead, but ultimately only a good product and user experience can truly motivate users to stay long-term. Historically, this assertion has been repeated many times, as not only NFT markets have chosen liquidity mining strategies, but cryptocurrency exchanges have also adopted this strategy, but ultimately met with disastrous outcomes.

Case Study: First-Mover Advantage Is Not Everything—Magic Eden

Given that Opensea is the first NFT marketplace, it raises the question of whether their status as market leaders is primarily due to their first-mover advantage. We can examine the NFT market ecosystem on Solana from a historical perspective to further appreciate the value of first-mover advantage. Magic Eden is currently the leading NFT marketplace on Solana, but contrary to popular belief, it is actually the third marketplace launched on Solana. The first two markets were Solanart and Digital Eyes in 2021, which initially captured most of the trading volume at that time.

Eventually, Solanart lost the community's trust after incidents of false listings and stolen digital assets, prompting users to turn to Digital Eyes. Magic Eden was able to replace Digital Eyes because it offered superior UI/UX and user experience. Magic Eden continues to develop its moat by launching features like a launchpad that incubates new NFT series and integrates with all wallets on Solana. This is why Magic Eden has been able to surpass its competitors to dominate the Solana ecosystem, currently boasting nearly 98% of daily active users at the time of writing.

Product Innovation Drives Growth

From the insights gained from the above case study, we realize that product-led growth is a sustainable way to capture long-term market share. Common complaints about Opensea's user experience include high gas and transaction fees, high latency, slow interface loading, and so on. We believe that unless these issues are addressed and a better user experience is provided, Opensea's brand equity will continue to be diluted with innovations from other platforms like Blur.

As mentioned earlier—besides the liquidity of their own market, Blur also aggregates liquidity from other markets, making it more convenient for users. On the other hand, while competitors like X2Y2 and Looksrare offer lower transaction fees, the general user experience is not significantly different from what Opensea provides. For example, snapshots of the BAYC series across various markets clearly show which market has a differentiated user interface. Ultimately, the market that can provide the best user experience will attract the most listings and traders, forming a brand moat thereafter.

Here are some comparative service data from several NFT markets:

Aggregator Analysis: Why Has the Aggregator Model Never Truly Emerged?

With multiple direct markets, the development of aggregators makes sense as they can provide integrated information across all markets. Instead of manually combining Opensea, Looksrare, and X2Y2 for the best prices, using an aggregator is more convenient. However, as seen from the data below, most transactions still occur on Opensea. The data also shows that while the trading volume of aggregators like Gem and Genie initially surged, it has since declined compared to Opensea. We believe there may be several reasons for this. Before delving deeper, it would be helpful to identify two major demand-side profiles:

(1) NFT community users who know exactly what NFT collectibles they want, and their purchasing journey usually begins by clicking on official links on Twitter or Discord,

(2) Speculators looking for good deals, such as purchasing high-quality collectibles at low floor prices or mispriced NFTs.

First, considering that most NFT projects currently use Opensea links for legitimacy, we believe that NFT community users often make Opensea their first stop. Secondly, we think opportunistic traders are more likely to use aggregators, as they typically do not consider NFT collections but rather seek out trades with good value.

While trading volume on Gem and Genie has decreased, another aggregator—Blur—has seen a rebound in trading volume. Of course, it is still too early to determine whether Blur has pioneered a successful aggregator model.

Case Study: How Gem Replaced Genie to Become the New Leader

Genie was a pioneer in the aggregator market, but it did not address some product optimization issues, such as UI/UX layout and high gas costs. In contrast, Gem helps users save up to 40% on gas costs.

Currently, Gem has become the largest traffic window for direct markets like Opensea, X2Y2, Looksrare, and Larva Labs.

Why Has Gem Not Captured a Larger Market Share?

The data below shows that about 33% of NFTs are purchased through aggregators, and before Blur's launch, Gem accounted for approximately 70-80% of the previous aggregator market share.

Although 33% of NFTs are traded through aggregators, the data below interestingly indicates that 90% of transaction value is conducted through direct markets. This means that most high-value transactions occur in direct markets rather than aggregators. This may reflect users' trading preferences for blue-chip high-priced NFTs in direct markets and low-value NFTs in aggregators.

The following additional data highlights the user stratification in the NFT market. It shows that less than 5% of users visit other markets after accessing Opensea. On the other hand, 74.76% of Gem visitors subsequently visit Opensea, as do Blur and Genie (43.76% and 40.55%).

Source: similarweb.com

Can Uniswap's New Market Compete with Other Aggregators?

Genie was acquired by Uniswap in June 2022 and has recently officially joined the Uniswap ecosystem. Users can now trade NFTs across various markets, including Opensea, X2Y2, Sudoswap, etc. Uniswap's NFT interface is fully open-source and claims to help users save up to 15% on gas costs compared to other NFT aggregators.

Visually, their user interface is simple and clean, adopting a look and feel similar to most markets. A notable distinction is that users can switch between ETH and USD pricing, which may be more friendly to non-crypto-native users.

As an aggregator, Uniswap's NFT market has fewer features than some of its competitors. Notably, Uniswap lacks advanced analytics such as underlying depth, transaction, and price history. It is also argued that in today's low gas fee environment, reducing gas fees may not be enough to attract users.

On the other hand, we believe Uniswap's moat lies in their Universal Router, which allows for the fusion between FT and NFT. With the Universal Router, users can execute multiple token swaps on Uniswap V2 and V3 and purchase NFTs from multiple markets in a single transaction. For example—users must exchange their USDC, ETH, and DAI into WETH through multiple transactions themselves before completing an NFT purchase. In contrast, Uniswap can achieve this in a single transaction, as shown in the diagram below:

This is crucial because Uniswap has the deepest FT liquidity in decentralized exchanges and a large flow of crypto users. This natural conversion between FT and NFT can provide users with more convenience during the purchasing process. This is indeed a game changer, as it significantly reduces friction for users, especially in a multi-crypto asset environment. The inability to purchase NFTs using ERC-20 tokens remains a significant pain point for other users of NFT aggregators.

Based on their experience in AMM and the groundbreaking innovation of the Universal Router, potential future developments include offering consumer-facing products independent of current NFT aggregators. Unlike Sudoswap's single currency, single pool trading, Uniswap can provide mixed payments and multi-currency trading similar to AMM relying on the Universal Router. Uniswap can also deploy new AMM pools—providing NFT project owners with more liquidity options beyond ETH. These products set Uniswap apart from other aggregators. Uniswap and NFTs are still in their early stages, and time will tell whether users will embrace them.

Current Gaps Between Different Models in the NFT Market

After delving into the current industry ecology of NFT direct markets and aggregators, this section will focus on user pain points and gaps between projects.

Transaction Fees and Royalties

From the perspective of NFT projects, the 0.5-2% cut from the market does not actually add any value to them. Most importantly, these markets have recently dominated NFT projects in deciding whether to charge usage fees. The lack of decision-making autonomy regarding royalties is a long-standing issue for NFT projects. Regarding transaction fees, NFT projects ideally want to retain them so they have more resources to add value to the community. Additionally, users may prefer to give fees back to NFT projects to accumulate more value for their NFTs.

NFT Market Token Economics Needs Reconfiguration

As discussed multiple times above—while there is a demand for decentralized communities to own markets, no market has effectively implemented a token model to stimulate organic growth. Most existing token economics only encourage behaviors that are detrimental to the community, such as wash trading or listings of low-quality collectibles. As Jhackworth detailed here—85% of $LOOKS airdrop holders no longer hold these tokens. Markets need to implement a model that goes beyond "free currency" governance, where users find more utility in holding them long-term.

Markets Are Too Generic

While most of the current NFT industry focuses on PFPs, we believe markets should continue to expand their scope to include other categories such as gaming, art, fashion, utility, and brand-centric NFTs. If all these NFTs are traded on a general market like Opensea, it will also create additional issues. For example, brands like Starbucks and Nike want to provide customized experiences for their customers, and purchasing gaming NFTs should not be the same as PFPs. The experience of purchasing NFTs should not be like homogeneous consumer goods that can be traded on a general platform.

The recently popular Blur is a trader-centric market, and some of its services align with the NFT industry's trend towards financialization: NFT loans, derivatives, indices, and tiered offerings. This confirms the demand for markets that treat NFTs as commodities or financial assets. For a multifaceted product like NFTs, the current market lineup may be too generic, potentially isolating different types of users/NFT projects.

Lack of Social Features

If you review the user journey: from discovering new NFT projects on Twitter to engaging and learning more about the community on Discord, and finally purchasing on Opensea, you will realize that the entire journey is highly socialized. However, if users attempt to buy or sell NFTs, there is currently no simple way to communicate with counterparties in the market. It is understandable that markets choose not to enable chat for reasons that make them redundant, as buyers and sellers can trade directly with each other. But this is still a feature that could greatly enhance the user experience, and the industry has yet to find a balanced solution.

NFT Infrastructure Needs Further Development

Whether in direct markets or trader markets, the emergence of different types of markets will mean that future integrations will be more specific and targeted to consolidate all fragmented liquidity, orders, and on-chain information. The lack of robust API integration will negatively impact transaction speed, accuracy of listing prices, and order aggregation, leading to suboptimal user experiences. For most users, a well-developed infrastructure would include user-friendly wallets that allow for crypto and fiat transactions (or a combination of both), the ability to use alternative payment methods like BNPL, loans, or even renting NFTs, and user-friendly secure methods of interaction, etc. The existing infrastructure sets entry barriers for new retail users who are already accustomed to the intuitive and straightforward interfaces of e-commerce websites in web 2.

What Will the Future Model of NFT Marketplaces Look Like?

Vertical Markets and Infrastructure

Vertical markets are not a new concept. Axie Infinity is the most famous vertical market, achieving significant trading volume from the sale of axies. In fact, the industry has slowly witnessed the emergence of community-owned markets, such as the Apecoin DAO market built specifically for the BAYC and Otherside communities. The Apecoin market not only charges lower fees than existing markets (0.5% fee for ETH transactions, 0.25% fee for ApeCoin transactions—holding 0.25% of each transaction in a multi-signature wallet to fund future DAO plans) but also creates a benefits cycle for ApeCoin holders.

Infrastructure and tools that allow projects to easily launch their own dedicated markets are also slowly emerging. One example is Reservoir. Reservoir is a developer platform that aggregates NFT orders from across the Ethereum ecosystem and provides and fills this liquidity through APIs and SDKs. Similar to Blur's strategy for gaining early traction, tools like Reservoir help solve the cold start problem for their own projects, as they can showcase goods not only on their native market but also on other markets.

As noted in a Multicoin Capital article, "Markets should map to the unique characteristics of communities, not the other way around." As more NFT categories begin to gain attention, we expect to see some specialized markets that will slowly gain market share at the expense of general markets like Opensea. Additionally, there may be a long list of community-owned markets emerging in the footsteps of Apecoin. The next relevant question is: what will help connect all of these in the future NFT marketplace ecosystem? We believe the next iteration of NFT aggregators will be one that can effectively provide a unified experience without compromising user experience.

Membership-Based Exchanges

Mooar is a new membership-based NFT exchange developed by the STEPN team, positioned between community-centric vertical markets and direct markets like Opensea. Mooar adopts a membership model, with a 0% trading fee and a 2% royalty fee (which creators can adjust), allowing members to enjoy lower trading costs while giving back to creators. Mooar generates revenue by charging subscription fees. Members can vote on their preferred launchpad projects and gain access to exclusive NFT listings. For example, if members have a preference for high-value generative art projects, the market will correspondingly list more similar projects. Although there are doubts about its feasibility and scalability, this market category undoubtedly provides more autonomy for users and creators on the platform.

Trader-Centric Exchanges

As discussed regarding the increasing financialization of the NFT space, it is also necessary to cater to the needs of these users. The next generation of trader-centric exchanges must prioritize liquidity, speed, and analytical tools. Examples of features could include instant buying and selling (AMM model or better liquidity), improved pricing, enhanced collection sweeping, and more refined analytics.

Features Comparable to or Even Superior to Current E-commerce Shopping Experiences

In the next wave, we expect a large influx of ordinary consumers who are accustomed to how web2 e-commerce operates, such as Amazon and eBay. Beyond NFT marketplaces, the user-side infrastructure (such as wallets) should be more secure, easier, and more intuitive to use. Possible features include social and customer support chat boxes, multiple payment options, P2P trading, live streaming, push notifications, mobile applications, fraud detection, etc. We also expect further integration with existing web 2 applications and businesses, such as the ability to seamlessly connect your wallet to applications like Instagram, TikTok, Twitch, etc., to purchase NFTs directly from brands or creators.

Further drawing from web2 e-commerce, another possible development is for aggregators to adopt a Shopback business model. Shopback essentially serves as an e-commerce aggregator for major markets—charging commissions as long as transactions are made through their platform. Shopback returns a portion of the commission to users through cashback. In a similar sense, NFT market aggregators could consider this business model to create more value propositions for their users.

Conclusion and Reflection

We are still in the early stages of the entire development cycle of NFTs and marketplaces, as the first wave of NFT hype actually began in 2021. As analyzed in this article, we discussed various reasons why Opensea remains the dominant player in the market, as well as its shortcomings. Whether Opensea can maintain its moat, it is certain that there are gaps in the NFT user experience that need further improvement to attract the next wave of user adoption. The winners in future markets will be driven by product-led growth, innovations in user experience, and the ability to adapt to the needs of different categories of NFTs.

Ultimately, our primary goal should be to build an NFT ecosystem that achieves a perfect product-market fit. Whether it is NFTs, marketplaces, wallets, communities, or projects, the overall user experience should be seamlessly integrated to attract and expand the next million-scale users.

If you find this discussion interesting and would like to engage, please feel free to reach out to us. If you are an NFT infrastructure project looking to optimize for the next wave of users, please also contact us.

Note: This article is not intended to and does not constitute financial advice, investment advice, trading advice, or any other advice or proposal.