Interview with 18 insiders reveals the rise and fall of OpenSea and its dispute with the SEC in a lengthy article

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2024-08-29 21:07:07
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The rise and fall of NFTs narrates the rise and decline of OpenSea, once the largest NFT trading market. This article, which interviewed 18 insiders before the U.S. Securities and Exchange Commission (SEC) issued a Wells notice to OpenSea, reveals the chaotic work environment, internal and external challenges, and the cat-and-mouse game with regulators in 10,000 words. After reading this article, you will believe that NFTs will not perish with the decline of OpenSea.

Original Title: The rise and fall of NFTs made and unmade OpenSea

Original Author: Ben Weiss, theverge

Original Translation: Arain, ChainCatcher

In April, on a cloudy spring afternoon, I attended the seventh NFT.NYC, a paradise for all believers in price-tagged monkey JPEGs and other NFTs. That day, the Javits Center was pouring rain, and the "NFT Super Bowl" themed gathering felt somewhat abandoned.

"This year's attendance is definitely lower than last year," Ric Johnson, who was promoting an NFT that lets people vote on whether Donald Trump should go to jail, politely told me.
An attendee who only gave me his online name, Big Mac (the cryptocurrency space has a strong culture of anonymity), said that this conference felt less like the "Super Bowl" of NFTs and more like a "preseason."
Tom Smith, a person selling anthropomorphized marijuana plant NFTs at a booth, bluntly stated, "It looks fucking dead here."

As one of the most well-known companies in the industry, OpenSea was one of the sponsors of this conference, but the 33-year-old co-founder and current CEO Devin Finzer was nowhere to be seen. OpenSea's other co-founder, Alex Atallah (who later distanced himself from the startup), did take the main stage early on, but he didn't want to talk about the technology that had made him and Finzer paper billionaires twice. Instead, he mainly discussed artificial intelligence.

While the value of cryptocurrencies may rebound, one highly hyped narrative from the last crypto boom has not returned: NFTs. According to CryptoSlam, in January 2022, the monthly total sales for this asset class peaked at over $6 billion. By July 2023, that number had dropped to below $430 million. NFTs are still hanging on, but they are in a tough spot.

"My mom thinks I'm a scammer," I overheard one attendee say.

At OpenSea, which was once the largest marketplace for NFTs, more storms were gathering. This one-time most valuable private startup born from the Y Combinator incubator is now facing a pending lawsuit from the Securities and Exchange Commission (SEC), previously unreported "matters" from the Federal Trade Commission (FTC), scrutiny from U.S. and international tax authorities, intensified competition, allegations of gender discrimination, and employee turnover.

Through interviews with 18 current and former employees, as well as internal company documents and conversations with investors, artists, and other stakeholders in the NFT industry, a story emerges of how a startup inspired by cat JPEGs evolved into what one former employee called a Meta "lite" version, but now seems lost between big tech and cryptocurrency culture.

Emerging from the Incubator

Finzer once described OpenSea as a gateway to a vast new internet. But now that the NFT hype has faded, that statement seems shallow.

In 2017, Finzer, then in his twenties, partnered with Stanford graduate and fellow twenty-something tech worker Atallah to start a company. Initially, Finzer and Atallah planned to use cryptocurrency to pay for sharing Wi-Fi with strangers, and in January 2018, they successfully joined Y Combinator, a renowned incubator that has birthed tech giants like Airbnb.

It was also around that time that blockchain (a decentralized database with no central control) experienced another wave of hype, with developers promoting a new way to permanently store data on the blockchain. This new method claimed that these tokens were "non-fungible," meaning they weren't all the same like Bitcoin. In other words, NFT holders could boast that they were the true owners of a cartoon ape, with that ownership recorded in an immutable database.

Industry insiders say these tokens could represent almost anything: property deeds, patents, contracts, virtual real estate rights. But by the end of 2017, a company called Dapper Labs promoted a use case that appealed to the general public: CryptoKitties, a game where users could buy and sell cartoon cats on Ethereum (one of the most popular blockchains).

On platforms that some claimed were the next generation of the internet, not only cat JPEGs circulated. There were also CryptoPunks, pixelated characters with mohawks and sunglasses; digital trading cards inspired by Pepe the Frog, a meme with a convoluted (and sometimes racist) history; and EtherTulips, virtual tulips that would "battle" each other.

Finzer and Atallah noticed this trend and decided to pivot.

"They were very ambitious," John Caraballo told me, a contractor hired for three months to write the initial code for OpenSea's website. "What they were building was very cutting-edge, something no one had done before."

In May of that year, after graduating from Y Combinator (which also included projects like cannabis-infused soda and VR-based therapy), Finzer and Atallah announced they had raised $2 million for their NFT marketplace, backed by notable investors including Peter Thiel's Founders Fund.

"Some completely different economic systems will emerge that are unlike anything we can imagine— we hope to help bring them to life," Finzer wrote in a blog post announcing the funding. "Things are just starting to get interesting…"

For nearly three years, the NFT industry was not exciting. According to DappRadar, throughout 2020, only a few hundred traders used the OpenSea platform daily. A former employee stated that the company had fewer than 10 employees at the time.

(OpenSea spokesperson Joshua Galper stated that tens of thousands of users were using OpenSea's website weekly by mid-2020.)

"Their whole lives were OpenSea," the former employee described other team members, including Finzer and Atallah. "It was really fun, but also very strict and very stressful."

A Shift with the Wind

Then, in March 2021, the NFT market began to heat up. Artist Mike Winkelmann (better known as Beeple) auctioned an NFT for $69 million. According to DappRadar, the value of NFTs sold on the OpenSea platform more than doubled from the previous month.

OpenSea could take up to a 10% commission on each transaction, and the increase in revenue piqued investors' interest. In the same month, Finzer announced that OpenSea had raised $23 million from investors, including venture capital giant Andreessen Horowitz, with the company's valuation reaching $1.23 billion. OpenSea was more prominent than ever, and the company began to expand.

"It was truly crazy at that time," a former employee told me. "We were all wearing many hats."

The NFT craze continued. After Beeple's artwork set sales records, a company called Yuga Labs launched the Bored Ape Yacht Club, an NFT collection of 10,000 cartoon apes, with holders promised exclusive events, perks, and products. People spent millions of dollars just to claim they were the true owners of a golden-haired or heart-shaped sunglasses-wearing ape.

"When I first saw the Bored Apes, I thought, 'What the hell is this?'" a former employee said, "Then I saw the prices people were paying for them— it was insane."
As more and more apes, punks, cats, and penguin images changed hands, the commissions OpenSea collected grew. According to internal company documents, revenue skyrocketed from $9 million in Q2 2021 to $167 million in Q3 and $186 million in Q4.

"That was a very exciting time," another employee said, "Whenever we launched a new feature, everyone would talk about it."

Suddenly, Finzer and Atallah's trading platform began generating substantial cash flow, attracting investors. In July, the startup secured another round of funding, raising $100 million at a valuation of $1.5 billion.

"Suddenly, celebrities were popping up, all kinds of money-grabbing activities, it was really exciting," a former employee said, "People I hadn't heard from in years were emailing me… everyone saw the opportunity to get rich."

Insider Trading, Cashing Out, Options Disputes… Trouble Arrives

But with the influx of funds came problems. "Every stressful thing felt like the end of the world," Finzer later recalled to employees in 2023 about the company's early days.
In September 2021, OpenSea asked product manager Nate Chastain to resign after some insiders discovered he was trading NFTs using insider information. Chastain's method was simple. Every few days, OpenSea would promote a new NFT collection on its homepage. Given that the platform was the primary venue for buying and selling NFTs, the prices of those tokens would rise after being featured on the site. Chastain knew which ones would be selected, so shortly after the NFTs appeared on the homepage, he would flip them for profit. "What Nate was doing at the time was pretty common in this circle," a former employee said.

Chastain was eventually sentenced to three months in prison— the first successful prosecution of NFT insider trading by the Department of Justice. However, insider trading was just the tip of the iceberg for OpenSea. Users were also frustrated with website outages, spam or fraudulent NFT collections, and stolen NFTs. "It was like a bloody carnival," one former employee described the serious plight. Another former employee said users joked that OpenSea should be renamed "BrokenSea."

"OpenSea is trying to stay responsive and attentive to users," Galper said.

According to several former employees, to cope with the sudden surge in transaction volume and other issues, Finzer and Atallah needed to expand OpenSea's workforce and began bringing in talent from large tech companies or those with corporate backgrounds.

"There was no promotion mechanism within the company," a former employee stated.

"They hired these damn beasts, these 'spiders' from Amazon, Facebook, Google, and the like," another former employee said, "It was like in Game of Thrones, the White Walkers were coming in through the cracks."

Most of the current leadership team members joined in the second half of 2021 and the first half of 2022, including Chief Operating Officer Shiva Rajaraman and Chief Technology Officer Nadav Hollander. At its peak, OpenSea had about 300 employees— a significant expense, which Finzer and Atallah cut just a few months later.

Galper wrote, "Our top priority has always been to find the best talent anywhere, whether from large tech companies, small companies, or native talent from the cryptocurrency industry."

However, funds were still flowing in at that time. OpenSea's revenue reached a historic high of $265 million in Q1 2022. The two co-founders also completed their largest funding round to date: $300 million from blue-chip venture capital firms, bringing OpenSea's valuation to an astonishing $13.3 billion. According to Forbes, by the end of 2021, Finzer and Atallah each owned 19% of OpenSea. On paper, they had become billionaires. (Galper stated that reports about the co-founders' ownership percentages in OpenSea were incorrect. However, Forbes did not issue a correction regarding the co-founders' ownership percentages.)

The company's investors included not only venture capitalists focused on the cryptocurrency space but also well-known figures from inside and outside Silicon Valley. These included Shark Tank star Mark Cuban, basketball star Kevin Durant, actor Ashton Kutcher, and DJ 3LAU, all of whom were publicly disclosed investors. According to an internal company document, OpenSea's shareholder list also included James Musk, YouTube co-founder Jawed Karim, Adobe Chief Strategy Officer Scott Belsky, and former Microsoft strategy chief Charlie Songhurst.

According to a source familiar with the transactions, during this massive funding round, Finzer, Atallah, and a few early employees quietly cashed out some of their shares.

Galper confirmed to me that some employees were indeed able to "sell their shares during the Series C funding round," but he did not specify the scale of Finzer and Atallah's profits.

Galper added, "The team and investors felt it was the right thing to provide some liquidity for those who had worked hard to help the company reach this milestone."

Five former employees told me that the co-founders never disclosed the secondary share buyback to all employees. "It surprised me a bit because they seemed very transparent on other decisions,"

Two former employees stated that those who received shares only after the Series C funding round were subsequently prohibited from selling their equity.

(Galper said, "The company does not recall any employees requesting to sell shares to specific investors after the Series C funding round.")

One former employee said, "The biggest news would be these secondary market share sales. The rest isn't as interesting."

Declining from the Peak

OpenSea seemed to be heading mainstream, but troubles kept coming. Shortly after current CTO Hollander joined the company, his team discovered a serious vulnerability in the company's code that could allow attackers to receive payments without sending NFTs to victims. Although no actual attacks occurred, Finzer later told employees in 2023, "It was one of the scariest things."

In March 2022, just as Finzer celebrated OpenSea's inclusion in Time magazine's list of the 100 most influential companies of the year, the NFT craze began to cool. According to CryptoSlam, total sales across the market plummeted from about $6 billion in January 2022 to just over $1 billion in June. OpenSea's quarterly revenue also declined, dropping to $171 million in Q2.

Worse still, according to former employees who attended an all-hands meeting, until the first half of 2022, OpenSea still held most of its cash reserves in ETH (the second-largest cryptocurrency by market cap). During the meeting, Finzer informed employees about the company's financial situation. He stated that OpenSea had not converted its cryptocurrency funds into less volatile assets but wanted to be consistent in supporting the cryptocurrency industry. The only problem was what? By June 2022, ETH's price had dropped nearly 80% from its peak in November 2021.

OpenSea still generated $171 million in revenue in Q2 2022, but after accounting for losses from price declines and other debts, it reported a net loss of $170.7 million.

(Galper disputed this figure but did not provide financial data.)

One former employee thought after Finzer announced this financial blunder, "I thought at the time, 'What the hell, you're not someone's personal investor. Why take this risk when we have so much upside?'"

Despite facing financial difficulties, OpenSea still made a splash at the NFT.NYC conference in the summer of 2022.

"I heard OpenSea booked an entire hotel downtown, is that true?" conference co-founder Jodee Rich asked during a session at Radio City Music Hall.

"Sounds about right," Finzer replied with a smile.

According to two former employees, just that week, while most OpenSea employees were in New York, Finzer held an all-hands meeting to alleviate any concerns employees had about the company's future. Both former employees stated that the message conveyed in the meeting was clear: Don't worry.

Less than a month later, OpenSea laid off 20% of its staff.

Around the same time, Atallah announced he would step back from OpenSea but would remain on the board. Former employees were unclear about why Atallah decided to leave.

One employee said, "There was always a strange atmosphere between Devin and Alex; I don't think they got along very well."

Another employee stated, "I heard they disagreed on many things."

An OpenSea investor who requested anonymity said Atallah told him he left on good terms. The investor said, "I think he is the type who enjoys the early stages of a startup. Once the company starts to scale and becomes more corporate, I think he might say, 'I want to go do the next thing.'"

Atallah denied any implication of conflict with Finzer in a statement and echoed the investor's view: "I have always enjoyed early-stage matters and ultimately decided I wanted to explore my new ventures again."

But as Atallah left to pursue his next project, Finzer chose to stay and lead the startup, which at that point seemed in a very different condition than just a few months prior. In Q3 2022, revenue plummeted to just $32 million, and OpenSea lost over $27 million. A former employee stated, "Morale quickly became very strange."

Back into the Darkness

In October, a new thorn in OpenSea's side emerged: a new NFT marketplace called Blur. OpenSea had once nearly monopolized billions of dollars in NFT trading volume. But soon, it found itself fighting for scraps.

Blur was founded by a programmer known as "Pacman," who later revealed his real identity as Tieshun Roquerre, a twenty-something MIT dropout and Y Combinator graduate. Blur doubled down on the idea of financializing NFTs: treating NFTs as assets that traders exchange back and forth for profit.

Many professional traders wanted to maximize profits, and marketplaces like OpenSea that charged royalty fees cut into their profits. Blur prioritized trader privileges over creators, not giving artists a share every time a work sold on its platform. Coupled with promises to distribute cryptocurrency to its key users— essentially free money— NFT speculators flocked to this new marketplace.

Blur quickly ate into OpenSea's market share. According to DappRadar, by February 2023, with the promise of an upcoming cryptocurrency launch, Blur had surpassed OpenSea, with monthly trading volume nearly three times that of Finzer's startup. Meanwhile, OpenSea's quarterly revenue continued to decline, dropping to $23 million in Q4 2022 and further down to $19 million in Q1 2023.

Finzer felt he had to respond. A former employee stated that Blur's sudden rise "disrupted all our product vision. It was a disaster."

A current employee disputed that description. They told me, "In terms of Blur's emergence, it didn't really disrupt my work. I continued to develop projects and work as usual."

Several former employees told me that OpenSea quickly abandoned its mission to bring NFTs to the masses and instead decided to cater to speculators. According to a source familiar with the situation, Finzer even discussed the possibility of the company issuing its own cryptocurrency with cryptocurrency founders and lawyers.

Galper confirmed that company executives had previously discussed issuing a cryptocurrency, stating, "OpenSea has always focused on long-term growth rather than short-term changes in the competitive landscape."
However, issuing a token would be a high-risk move, as the SEC has repeatedly claimed that the vast majority of cryptocurrencies are unregistered securities. After the collapse of FTX in November 2022, the SEC launched a broad crackdown on the cryptocurrency industry, reaching settlements or filing lawsuits against some of the industry's largest players, including cryptocurrency exchanges Coinbase and Binance.

According to former employees, after the NFT.NYC conference in May 2023, OpenSea conducted another round of smaller, undisclosed layoffs. One former employee said, "The running joke was that everyone was afraid of NFT.NYC because all the layoffs happened after it."

Galper wrote, "The company underwent a small reorganization that led to some team structure changes, resulting in a few employees leaving."

In August, the trading platform announced it would stop enforcing creator royalties, which left some employees feeling very frustrated. Former employees stated that this sparked a wave of internal dissent. One employee added, "I think OpenSea still hasn't really figured out who their target audience is and taken targeted action. They are just fumbling around."

SEC Regulatory Storm

As OpenSea's decision to eliminate royalties sparked controversy, according to Kuo's Instagram post, Finzer and his partner, former cryptocurrency hedge fund manager Yu-Chi Kuo, left New York City for a "desert adventure" to attend "Burning Man."
(Galper stated that this was Finzer's first vacation in over a year.)

While Finzer and Kuo were partying in the desert mud, the SEC took its first enforcement action against the NFT industry, stating that NFTs issued by media company Impact Theory, founded by Quest Nutrition's founder, were unregistered securities. Just weeks later, the SEC also charged Stoner Cats 2 LLC (an animated series supported by Mila Kunis, featuring Ashton Kutcher and Jane Fonda) with issuing unregistered securities. Impact Theory and Stoner Cats 2 agreed to cease and desist and paid legal fines of $6.1 million and $1 million, respectively.

Some OpenSea employees were unaware that their company was involved in two separate regulatory "matters." The SEC had issued a third-party subpoena to OpenSea, a mandatory information request involving other entities. Additionally, according to internal company documents, the SEC had assigned a dedicated attorney to OpenSea's "case" and was engaged in "document production."

Legal counsel described this back-and-forth negotiation as an "SEC matter" and listed OpenSea's defenses in an internal document. These defenses included: NFTs are not securities, OpenSea is not a securities exchange or broker, and OpenSea is protected by the First Amendment and Section 230 of the Communications Decency Act, which states that online operators are not responsible for third-party content on their platforms. SEC spokesperson David Ausiello stated, "The SEC does not comment on potential investigations that may or may not exist."

A Game of Cat and Mouse

OpenSea spokesperson Galper confirmed that OpenSea had received SEC requests since 2022. He stated, "As part of our standard practice, we cooperate with regulatory and law enforcement agencies, and we are committed to complying with applicable laws and regulations."

While some employees were unaware of the SEC matters, a vocabulary guide instructed employees to use appropriate terminology when discussing NFTs and OpenSea with each other or publicly. Legal counsel advised employees not to say "buying or selling on OpenSea," but rather "purchasing on the blockchain," "using MoonPay (a cryptocurrency payment company) to buy," or "buying using OpenSea." The guide stated, "It is very important to clearly distinguish this, as it affects our tax and legal obligations."

Other terms employees should avoid when discussing OpenSea included "exchange," "broker," "market," "profit," "shares," "stocks," "trading," and "traders"— terms typically used to discuss securities, which fall under the SEC's jurisdiction.

There was also a so-called "FTC matter," in which OpenSea submitted documents to the regulatory agency. The internal documents I obtained mentioned the existence of this correspondence but provided no further details, and the FTC did not respond to requests for comment.

Galper confirmed that OpenSea received document requests from the FTC and stated that the last time it submitted documents to the agency was in August 2023. He declined to specify why the FTC and SEC requested documents from OpenSea and did not comment when asked if OpenSea received a formal notice from the SEC indicating that a company or individual was about to face litigation— a Wells notice.

The day after I informed OpenSea of our plans to publish this report, Finzer announced on the X platform that his startup had received a Wells notice. "We are shocked that the SEC would take such sweeping action against creators and artists. But we are ready to stand up and fight," he wrote.

Christopher Odinet, a professor at Texas A&M University who has studied legal issues surrounding cryptocurrency, told me, "Typically, when an agency requests documents from a company, it is because they suspect something is amiss."

Christa Laser, a professor at Cleveland State University who has also studied the intersection of cryptocurrency and law, stated that while the FTC's information requests may stem from suspicions about OpenSea itself, its interest in the NFT market may simply be an attempt by regulators to better understand an emerging market.

She said, "Compared to the SEC, the FTC is more likely to make non-investigative document requests rather than an investigation."

Meanwhile, various tax authorities, both domestic and international, were also continuously inquiring about OpenSea. For example, according to internal documents, the Australian Taxation Office (ATO) had repeated communications with OpenSea regarding whether the startup needed to pay taxes on the fees charged for each NFT sale on its platform and the full price of the NFTs.

According to company documents, in early October, OpenSea's legal team flew to Australia to argue that its platform should be exempt from harsher tax penalties. If the ATO does not make a favorable decision for OpenSea, according to figures discussed internally in August 2023, Finzer's startup would need to bear approximately $130 million in taxes. Not to mention inquiries from tax authorities in Washington State, India, and Taiwan.

The ATO declined to comment on OpenSea, citing confidentiality and privacy laws. Washington State also declined to comment for similar reasons. Tax authorities in India and Taiwan did not respond to requests for comment.

OpenSea spokesperson Galper declined to comment on the company's communications with tax authorities.

According to a document I obtained, OpenSea's former general counsel Gina Moon stated at an all-hands meeting, "We have indeed attracted significant interest from policymakers and regulators, and ultimately, the courts and the public will see our side of the story."

Will OpenSea 2.0 Arrive on Time?

On Halloween, as OpenSea's quarterly revenue fell to its lowest level since the NFT boom, Finzer and his partner attended the annual Halloween party hosted by Heidi Klum at Marquee nightclub in New York City. According to Kuo's Instagram, Finzer dressed as an "AI hacker," wearing glasses, a hoodie with the OpenAI logo, and carrying a keyboard. His partner dressed as his "AI girlfriend," complete with a blood-stained knife and what looked like mechanical limbs.

(OpenSea spokesperson Galper countered that Finzer's costume was thrown together at the last minute; he only showed up for photos and hurried home after walking the orange carpet to take work calls, continuing to plan a major transformation for his startup.)

Three days later, the day after FTX's former CEO Sam Bankman-Fried was convicted of fraud, OpenSea announced massive layoffs, resulting in over 100 employees leaving, about 56% of the workforce. Finzer stated on X that he was "realigning the team around 'OpenSea 2.0'," a strategy and product transformation for which he did not provide many details publicly.

"This is a huge bet, and it's quite radical," he later told employees.

According to a memo Finzer sent to employees, departing employees received four months of cash severance and other benefits, including six months of health insurance.

Finzer invited the remaining employees to an off-site meeting to discuss the company's new direction. According to a document I obtained, during an all-hands meeting at a mansion in Hollywood that once belonged to Katy Perry and Russell Brand, he said, "The real goal of these changes is to shift from a follower position to a leader."

According to executive team member Lorens Huculak during the all-hands meeting, OpenSea plans to "become the gateway to Web3," referring to the idea that the future internet will be based on blockchain. The startup plans to rewrite much of its code to make it easier for users to track crypto transactions on the platform without having to visit other sites. Huculak said, "We will become an aggregator, not just aggregating chains but also protocols, markets, and various liquidity, including tokens."

According to a source familiar with the new product, the product revamp also includes features that would make OpenSea more competitive with Blur. "It's just a rebranding of OpenSea Pro," they said, referring to the part of the OpenSea platform that serves NFT speculators. However, a current employee countered that the relaunch is not just an upgrade for traders and adding transaction tracking features. This employee declined to provide more details about the relaunch.

Galper stated in a release, "Our plans regarding 2.0 are confidential."

Clearly, the new product vision and massive layoffs did not initially inspire employees or investors. Shortly after the transformation, The Information reported that one of OpenSea's biggest backers, Coatue Management, had actually lowered the startup's valuation to just $1.4 billion in Q2 2023, a significant drop from the $13.3 billion valuation less than two years prior.

Subsequently, several OpenSea executives left after the layoffs, including the general counsel, vice president of operations, head of human resources, and head of communications. According to internal communications, OpenSea offered remaining employees a 20% cash bonus on top of their existing salaries to retain them.

("We paid people who didn't want to stay at OpenSea to leave, while those who believed in the company's future chose to stay and help us build," Galper said.)

According to internal documents, during the exodus, executives were concerned that there were no women among the remaining engineers or product managers, especially since some of those leaving the company complained of gender discrimination.

(OpenSea had previously hired an external investigator to look into one of the complaints, which the investigator found to be unsubstantiated.)

Galper stated in a release, "If we receive employee complaints, we take them seriously and investigate them promptly. No allegations of gender discrimination have been substantiated, and we have never engaged in any litigation, arbitration, or mediation on this subject."

One of them stated, "Now there is a lot less nonsense, like Slack messages and meetings." Another stated, "What surprised me was how quickly people got back on track."

NFTs Will Not Fade Away with OpenSea's Decline

On the same spring day I visited NFT.NYC, I headed to a pier on the Hudson River.

OpenSea's competitor Magic Eden was hosting a so-called "Degen Yacht Party" on a floating casino converted into a party boat. In the rain, I queued to board and chatted with James Woods, a collector wearing a T-shirt featuring an NFT image he owned: a pink dog wearing black sunglasses, a sailor hat, and a brown hoodie. "At any NFT-related event or significant event in my life, I try to dress like this," Woods said, also wearing sunglasses, a sailor hat, and a hoodie. He even dressed like this on his first date at the casino: "It worked out great."

Eventually, we boarded the boat. There were ice sculptures, a DJ, free food (one attendee told me it was like a buffet at a bar mitzvah), free drinks, a gilded elevator, and energy drinks. I spoke with someone who called himself "Breads," another named "Toast" (the two had a warm reunion), someone who said "Cyber Frogs" changed his life, and a woman holding a plush toy named "Chonky."

Most of the people I chatted with had a poor opinion of OpenSea. After all, I was on enemy territory. "They haven't doubled down on supporting the creators who made them the best trading platform in the market," Woods said, referring to OpenSea's decision not to enforce royalty fees, "Instead, they betrayed all of us."

The yacht rocked back and forth in the rain, but we never left the dock. The storm was too fierce. Finally, on the third floor, I chatted with Magic Eden co-founder and COO Yin Zhuoxun. Like OpenSea, Magic Eden has also received backing from well-known venture capital firms, with a recent funding round valuing the company at over $1 billion. "This is not an industry where you can sit down and count chickens," Yin told me, whose nickname is Z, "Everything is changing rapidly."

While Blur has taken hardcore NFT traders from OpenSea, Magic Eden seems to be eating into OpenSea's popularity among creators. In February, the company behind Bored Ape Yacht Club and other blue-chip NFT collections, Yuga Labs, launched a competing marketplace with Magic Eden. In April, according to DappRadar, Yin's company surpassed OpenSea and Blur in monthly NFT trading volume.

Despite the market turmoil, most of the people I interviewed with economic interests in the NFT industry remained optimistic about its future.

"If anyone thinks OpenSea is declining and therefore NFTs are dead, they are mistaken," TJ Fuller, co-founder of Forgotten Runes, a fantasy project that allows fans to own characters as NFTs, told me. He believes the technology still has innovative potential: "It doesn't matter where we trade NFTs."

Most of the former OpenSea employees I interviewed also saw future use cases for these tokens: tickets for live events or items that users can more clearly state they own in video games. However, some added that the current culture of speculation cannot extend beyond cryptocurrency enthusiasts. "I think the current way is a bit broken," one former employee said. "I don't think selling JPEGs is worth it."

As the yacht party was coming to an end, I stepped off the dance floor, pushed past a man playing the flute like a member of Metallica, and said goodbye to Woods, who was still wearing his sailor hat. When asked for his final thoughts on NFTs, he said, "Buy them as collectibles. Don't expect to make money from them."

For OpenSea, that might be good advice. According to an internal document I obtained, the company lost about $30 million in the first three quarters of 2023. (However, it expects that the layoffs in November will reduce the company's expenses in 2024.) According to DappRadar, in June, the trading volume on its platform fell to a level not seen since before the NFT boom in early 2021.
OpenSea still has ample funds. According to an internal document, as of November 2023, it had $438 million in cash and $45 million in cryptocurrency reserves, relying on these funds in hopes that the "2.0" transformation will help it weather the storm.

Finzer has said he hopes his startup can build an ocean rather than an aquarium.

But if the NFT market continues to decline, OpenSea will not lead the ocean of digital collectibles— it will drown in the water.

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