NFT Marketplaces Are Centralized, and It’s a Real Problem
There’s nothing stopping NFT communities (or users) from being de-platformed by these major NFT marketplaces. While the blockchain is decentralized, Opensea, Coinbase, and Metamask — for example — are highly centralized. Cryptopunks, Meebits, and Solana Monkey Business are some of the few projects that host their own marketplaces, but Opensea is still the largest and most popular NFT marketplace — it’s recorded $22.73 billion in NFT sales thanks to its 1.3 million buyers.
Using these major marketplaces may be the status quo now, but don’t expect it to persist. The need for more neutral decentralized services and platforms, such as community-hosted marketplaces, is clear. The economic calculus that makes NFT projects stray from hosting their own marketplaces will soon change. As new white-labeled marketplace solutions emerge, delivering a marketplace experience users enjoy and trust will become viable. Additionally, as the initial mint revenue gets depleted, communities will increasingly begin to question the value-add of marketplaces and seek to increase their take-rate. NFT projects will also favor hosting their marketplaces to offer better, more on-brand onboarding experiences.
This shift will have important implications for NFT buyers and existing NFT marketplaces.
Why NFT communities don’t host their own marketplaces
Currently, it doesn’t make much economic sense for NFT communities to host their own marketplaces. While there are some compelling white-labeled marketplace solutions that NFT communities can use off the shelf — such as Kred, Bitski, and Serotonin — they just aren’t as widely known as OpenSea, and may not be as user-friendly. Therefore, teams often choose to build their own marketplaces from scratch. This is an especially costly endeavor because marketplaces have numerous features (e.g., various auction styles, supporting different payment methods). Achieving feature parity with the major marketplaces like OpenSea thus becomes extremely difficult — and impossible for many.
Apart from costs, many communities just aren’t motivated to maximize their secondary sales. The royalty revenues from secondary sales pale in comparison to mint revenue. Suppose a project launches with 10K NFTs and takes a five percent royalty on each secondary sale. Even if the floor price is double that of the mint price, the sales volume needs to be 100k NFTs or 10 times the total collection size for the royalties to match the mint revenue. Few projects experience such significant price appreciation and high trading volume to make secondary sales matter.
Beyond economics, communities might also struggle to meet the trust concerns of users. Users might also be less willing to trust a community-built NFT marketplace as much as other battle-tested NFT marketplaces like OpenSea. Unlike minting of NFTs for which standardized contracts exist, the surface area of smart contracts to handle marketplace transactions is bigger, increasing the risk for users.
White-labeled marketplaces will change the economic calculus
Over the next year, we can expect white-labeled marketplaces, which offer users a compelling and safe experience, to emerge. The most notable player to look out for will be Shopify. In late 2021, Shopify announced it was looking to enter the NFT space. Since then, it’s opened up a beta program that allows merchants to run their NFT storefronts. Beyond Shopify, there are many startups/protocols like Reservoir, 54Nft, and NFTify working on this problem.
As mint revenue gets used up, communities would also be more likely to question the value provided by NFT marketplaces. Cutting out the middlemen will allow the community to increase its royalty and save money for sellers.
Bypassing NFT marketplaces will have negligible effects on the demand for the NFT project. The exploration and decision-making that happens on NFT marketplaces is intra-collection, not inter-collection. NFT marketplaces like OpenSea serve more as a trusted transaction layer than a discovery platform. NFT marketplaces aren’t a significant source of demand generation. Apart from high-level stats, OpenSea doesn’t make personalized recommendations or provide sufficient information for users to form convictions about a project. Users’ intent to purchase an NFT is usually formed through their social media interactions or word-of-mouth recommendations.
Benefits of community-hosted NFT marketplaces extend beyond economics
Hosting NFT marketplaces will allow communities to offer better onboarding experiences. Currently, the NFT buying and onboarding processes are disjointed. Someone may buy an NFT on OpenSea but it’s unclear what they can use it for or where they can use it. When communities host their own marketplaces, onboarding can become more seamless. For example, upon purchase, NFT buyers can be given information about where they can access gated content and how they join the community’s Discord, making for a better experience.
Community-hosted NFT marketplaces would also be in greater alignment with the Web3 ethos of reducing intermediaries. This will protect communities from being de-platformed and censored by the major NFT marketplaces.
Blue-chip projects will lead the way, and others will quickly follow suit
About a month ago, Chris Cantino, the founder of the CryptoPackaged Goods NFT projects, tweeted out a list of blue-chip NFT projects that he felt should host their own NFT marketplaces. Given the engaged member base and resources these projects possess, blue-chip NFT projects are best placed to lead the way and start hosting their own NFT marketplaces.
Other projects will likely follow their example, and launch their own community-hosted marketplaces making this the new default. It is important to note that, while the shift isn’t happening quickly, we are seeing new players enter the space. For example, in April 2022, Blockparty announced the public beta launch of its decentralized NFT exchange. Still, we aren’t quite to the point of BAYC launching its own marketplace… yet.
Until then, we’ll be watching, ready to embrace the change.
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