NFT Marketplaces
Note: Data in this section last updated May 28th, 2022
What are NFT Marketplaces?
Marketplaces are online platforms that allow users to buy, sell, create, display and trade NFTs.
At the time of writing, most NFT marketplaces are decentralized, which means that users make transactions directly on a blockchain. As such, the user interface is different from a centralized service such as Coinbase and requires a:
Crypto wallet: Wallets are needed to store cryptocurrencies, connect to a blockchain and make trades
Cryptocurrencies: Most NFTs are priced in cryptocurrencies, such as ETH, instead of dollars. As such, users need to hold them
Account: Like a traditional website, users have to set up an account on the platform (although unlike a traditional website, they can be anonymous)
Because these marketplaces interact directly with an underlying blockchain, users must pay gas fees in addition to platform fees.
How do NFT Marketplaces work?
OpenSea is the dominant marketplace for NFTs. The company was founded by Devin Finzer and Alex Attalah in 2017 and is backed by several notable investors including A16Z, Michael Ovitz and Ashton Kutcher.
Currently, OpenSea has more than 1.5 million active users generating over $2B in monthly volume and ~$200M in monthly fees. The platform supports the Ethereum, Polygon, Klaytn and Solana blockchains and hosts over 40 million NFTS across a variety of genres including art, virtual land, music, gaming assets, collectibles, social tokens, domain names and many more.
OpenSea’s Monthly Volume Consistently Exceeds $2B
So how exactly does OpenSea work?
While it’s easy to imagine that marketplaces such as OpenSea hold your assets, initiate transactions and transfer payments between users when they buy and sell – like a crypto equivalent of eBay – this is not what actually happens.
Instead, Open Sea is “non-custodial” which means that it DOES NOT:
Store Assets: NFTs are stored on a blockchain
Initiate Transactions: Permissions are given to the smart contract platform directly through a user’s wallet
Transfer Payments: Transactions are done and assets are transferred via smart contracts on the blockchain
Instead, OpenSea serves two functions: 1) it provides a graphical display that allows you to look at what’s already on the blockchain and 2) it acts in a manner similar to a broker, relaying your desires to a smart contract platform such as Ethereum. To accomplish the latter, they allow consumers to use one of their pre-made smart contracts (via their “Wyvern Protocol”) to tell a blockchain to list an asset, buy an asset, sell an asset, create an asset, etc…
For example, let’s say Alice wants to list her BAYC for 100 ETH through OpenSea:
Alice has shared her public address with OpenSea, so they can read the Ethereum blockchain to see that she owns Bored Ape Yacht Club #0001
As such, OpenSea will display the image of that ape on their website, along with a big button that says “list for sale”
When Alice is ready to list, she pushes that button and chooses 100 ETH as the price
OpenSea then writes a smart contract to Ethereum that says “sell this NFT if anyone offers 100 ETH or more”.
Alice must approve this contract through her wallet
Once live, anyone who wishes can see that listing on the Ethereum blockchain (whether they are viewing it through OpenSea or another marketplace) and write a smart contract to pay 100 ETH
Once purchased, the Ethereum network transfers the asset from Alice’s address to the buyer’s address (and transfers 100 ETH in the other direction)
Now, when Alice views OpenSea, she will no longer see the Bored Ape, because it is no longer connect to her address. The buyer, however will (although he will now have 100 fewer ETH in his wallet).
So while OpenSea makes this all very simple to do, in practice they’re actually not doing much more than letting you use one of their pre-written smart contracts (and charging you 2.5% in return).
If this sounds critical of OpenSea, that was not my intent. While the platform does have its detractors, it offers a strong user interface and its smart contracts are generally quite well-formed and “battle-tested”.
Perhaps that’s why it generates an estimated $1B+ of revenue per year and recently achieved a valuation of over $13B.
Key Players
In addition to OpenSea, LooksRare is another major marketplace, and the two together control 80% of all-time volume. Several assets – including Axie Infinity, CryptoPunks and NBA Top Shot – also host their own marketplaces and generate considerable volume.
The Top Two Marketplaces – OpenSea and LooksRare – Control 80% of Volume
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