The NFT market has tanked over the last few weeks — sales volume for Ethereum NFTs has fallen from $3.8 billion (second week of January 2022) to $183 million (last week). Despite this, Ledger, Gamestop and Reddit have all launched NFT marketplaces recently.
In this deep-dive, we’re going to look at why these companies are launching NFT marketplaces, and how they will play a role in their core business.
NFTs: what are they?
NFTs (non-fungible tokens) enable ownership of a digital good. They are “non-fungible” because each one is unique, unlike a token of Ethereum which is identical to any other token of Ethereum.
NFTs enable the following:
- Ownership. They help identify ownership of a digital good. The digital good could be a song, video, picture, etc.
- Trustless. They do not require the user to trust or depend on a third party. If you buy an NFT from Google, Google may shut down their product but they can’t take the NFT away from you.
- Default open. NFTs promote open systems instead of closed ones. In the example above, your NFT from Google could be sold on any marketplace, not just Google’s (subject to it supporting the blockchain the NFT is on).
If these seem abstract to you, read on - we’ll revisit these characteristics below.
The NFT market right now: down, down, down
NFTs have taken a real beating over the last few weeks.
Of all the blockchains, Ethereum and Solana are the two biggest for NFTs. The graphs below show NFT volume in $ terms and the number of unique buyers for Ethereum and Solana.
- NFT volume has fallen off a cliff in $ terms. The July 2022 level for Ethereum is the same as January 2021.
- The number of unique buyers dropped for the first time in June / July.
- The number of unique buyers on Solana has matched the number of unique buyers on Ethereum, even though Solana launched NFTs much later.
Why an NFT marketplace?
NFT marketplaces have the potential to become cash cows for businesses.
This is driven by two factors:
- NFTs tend to be bought and sold a lot, at least in a bull market.
- The margin on each sale is substantial.
The table below shows the average fees charged by popular NFT marketplaces.
Every time an NFT is bought, these marketplaces are making between 2% - 5%. In the second week of January this year, when the NFT market was at its peak, Opensea made $1.26 billion in revenue.
We’re far from that at the moment — last week, Opensea made ~10% of that ($123 million), but that’s still a tonne of revenue. Bear in mind, that there is no variable cost from this revenue either (it’s a pure software play).
My main takeaway:
If you believe the NFT market will grow, an NFT marketplace is a good bet.
Let’s overlay this against the 3 businesses that have chosen to launch NFT marketplaces: Ledger, Gamestop and Reddit.
A ledger is a hardware wallet — a USB device that provides an added layer of security when you transact with crypto.
Users use wallets to transact in crypto. Every wallet has two keys: public key (what I use to find you), and a private key (like a password). Wallets like Metamask store your private key on your computer. This is dangerous because anyone who has access to your computer could steal the key. A hardware wallet saves your private key on a small USB device (referred to as a “cold wallet”).
Anyway, this company that specialises in wallet security decided to launch a marketplace called “Ledger Market”.
They’re doing this with an obvious value prop: security.
NFTs are a breeding ground for scams (read this if you are interested in the different types of scams, and how to protect yourself). Ledger is positioning itself as the most secure way to trade NFTs.
They’ve also launched a product called Ledger Enterprise. Brands like Nike and Adidas are using NFTs for partnerships and marketing. If you’re Nike, the last thing you want is for your customer base to be exploited and have their NFTs stolen.
The most common scam is to create an NFT collection, sell the NFTs and scoot (called a rug pull). By curating the creators on their platform, Ledger may be able to build a marketplace that is trusted. A quick peek at their marketplace shows that they have the likes of Tag Heuer and Nike. Based on their FAQs, it sounds like you need to be approved before you can list an NFT with their marketplace.
The success of Ledger’s marketplace will depend on the creators they onboard.
Gamestop is a video games retailer. They gained fame in 2021 when retail traders sent the share price sky rocketing. Gamestop announced that they were launching their own wallet a while ago. This week, they announced an NFT marketplace.
The marketplace lists NFTs of every kind, but the focus is gaming. They’ve teamed up with ImmutableX, a layer-2 solution on Ethereum that makes it cheap to mint and buy NFTs.
For years, gamers have sought to make their characters and avatars unique by using skins. The will and want for gamers to own something is a given. The real question is whether NFTs add something unique to that experience.
I believe NFTs add something unique because:
- Most games are “closed” economies. This means that users typically buy from the game developer or a central entity. An NFT marketplace transforms them into “open” economies — I can buy from you, and you can buy from me.
- They make games trustless. Gamers do not need to depend on the game developer to maintain their assets. Even if the game shuts down, the asset remains and can be sold elsewhere.
Given NFTs’ use case in gaming, Gamestop could pull this off if they execute well.
Reddit is a discussion website that’s been around since 2005. Avatars have always been a big part of Reddit. Their alien mascot “Snoo” has been a big part of the platform since its inception. Avatars are the main way for users to showcase themselves.
Last week, they announced a new marketplace for users to buy avatars. The marketplace is powered by Polygon, an L2 on Ethereum:
- Reddit’s marketplace is non-custodial. Meaning that any NFTs you buy on Reddit are bought on a wallet managed by Reddit. They call this the ‘Vault’.
- They refrain from using the term “NFTs” for the most part. They refer to them as collectible avatars and only bring up “NFT” in a few discreet places.
The goals of the avatar marketplace are:
- To extend avatars beyond just Reddit. Because they are on the blockchain, they can be traded anywhere.
- To drive revenue for creators. Creators of the avatars will earn revenue on the initial sale and royalties on future sales.
The avatar marketplace seems like a discreet, small feature. My gut tells me otherwise. Through the course of the year, Reddit has been experimenting with different Web3 features.
Reddit has always had the concept of “coins” where users get rewarded for posting, replying to posts and moderating. Earlier this year, they announced that they were exploring using tokens on the blockchain, instead of coins.
These tokens are also stored on the “Vault”. The tokens are currently on a test version of Ethereum. I’d expect these to be moved to a full fledged blockchain (likely Polygon) in the near future. This could be a real unlock for Reddit because users suddenly have the ability to earn from the contributions to Reddit.
If nothing else, the avatar marketplace will serve as an additional revenue stream. In 2021, Reddit made $17.21 million from its premium subscribers. Opensea can make that on a good day.
The avatar marketplace will serve as an additional source of revenue. It may also be Reddit testing the waters for tokenisation more broadly.
Do we need NFTs?
Despite a brutal decline in the NFT market, companies are betting on NFT marketplaces. The primary reason for this is their revenue potential.
It’s reasonable to ask if we need the blockchain and NFTs for any of this. The truth is you can achieve the above without the blockchain. With two big caveats:
- You don’t get the open system. The system is open only if the developer or the company decides to follow that path.
- It’s not trustless. At some point, the developer or the company might choose to pull their product and you lose your NFT.
Finally, NFTs offer have momentum. Why not use them?