Original author: Alex @Foresight Ventures
The decentralized NFT trading protocol is to NFT Market what AMM is to DEX.
The core needs in NFT trading are liquidity and price, so the real moat of NFT exchanges should be built on the liquidity and price advantage of commodities when they are sold.
The aggregator that changes the pattern only solves the problem of scattered NFT pending orders as a front-end traffic portal, and does not fundamentally solve the liquidity problem.
It is not the next exchange or aggregator that is most likely to solve the liquidity monopoly, but a protocol that can support shared pending orders, thereby breaking the boundaries between NFT tool platforms and NFT exchanges, so that every traffic front end can become a trading platform And share its pending orders to form a decentralized NFT trading ecosystem, and solve the problems of dispersion and liquidity of NFT pending orders.
One day in the currency circle, one year in the world, and in the picture circle, it may only be 1 hour after mint. The frenzy and FOMO of NFT is far more crazy than any market, and the NFT exchange, which is an infrastructure, has gone through several spring and autumn rotations, but there are few really left, because most exchanges None of them can meet the needs of all parties (as shown in the figure below) during NFT transactions in the secondary market, but they are obsessed with pseudo-demand to seek to break the game. So I will try to analyze the needs of NFT transactions and changes in trading venues to explore better solutions in the future.
- Market environment and user needs
At present, the mainstream NFT transactions can be divided into blue-chip and non-blue-chip, and the non-blue-chip can be roughly divided into three categories: PFP, functional and other special types. (Individual blue chips also belong to functional or special categories)
For blue-chips, due to their high prices and most blue-chip holders prefer diamonds, the requirements for liquidity are not so high, but rather the price is more important. Functional NFTs with practical application scenarios such as Pass cards and Gamefi do not require much liquidity, so they are more price-oriented. However, more than 90% of NFTs in the market are small pictures without empowerment, which are essentially games of drumming and passing flowers, which requires extremely high liquidity. At this point, users will choose to use OpenSea, the exchange with the best liquidity, and not others. For other special types of NFTs, there is no application scenario and demand for the time being, and the market is still mainly around PFP for the time being, so it is not meaningful for discussion.
From this, we can get that the demand of buyers and sellers finally falls on two points: liquidity & price (as shown below)
- NFT Exchange - Build Your Own Core Competitive Advantage to Meet Demand
We need to explore what kind of exchanges are excellent, and discuss them from the following five dimensions:
Most of the exchanges are seriously homogenized, and the most core barrier is the traffic brought by the first-mover advantage, forming a brand effect and a positive cycle. OpenSea uses it to attract most of the NFT market liquidity, forming a moat.
Number of trading users
In the case that the overall number of users in the NFT market is small (the total daily active users of the top 10 platforms in May 2022 did not exceed 100K), whoever has more users can seize the market and the right to speak.
Users are also divided into high-quality users and non-high-quality users, and the transaction volume contributed by high-quality users may be dozens or even hundreds of times that of ordinary users, so currently giant whales dominate the market.
New users and transaction growth rate
At present, the NFT market is still a market with obvious Matthew effect, so we can directly see the future development of the exchange by paying attention to the growth rate of new users and transaction volume. The future NFT market will be a huge incremental market rather than a stock market.
Through the medium of tokens, all participants and platforms in the two-sided market have become a community of interests, using tokens to motivate holders reasonably, rather than cutting the interests of users and themselves as traditional platforms to earn money Get more benefits, and be able to win the trust and support of users. The platform will gradually evolve into a form that is more beneficial to users, and the speed of evolution will vary according to the industry.
From the analysis of the above five points, we can get: At present, if NFT exchanges want to break the game, they must take two paths: vertical track and wealth effect.
The first-mover advantage of the brand is huge, which also makes the OS enduring, but there are still rising stars who can cut into the market vertically
At the very beginning of SuperRare, the entry point was the artist's NFT, and its strict invitation system created a high-end brand image, while the entry point of NBA Top Shot used a specialized group such as basketball NBA, which made it highly big exposure. But what we need to pay attention to is that if you choose a vertical track, you may only be able to establish your own core advantages on that track, which is not enough to compete with the OS. In addition, the NFT world is still in its early stages, and the number of users is too small. , it is impossible to support the too narrow vertical track, ** this is also the main reason why some of the hot NFT exchanges in 2021 have disappeared.
In addition to cutting into the vertical track, another more feasible way is to use the wealth effect.
One of the features of Web3 is that it can change the distribution of profits, which is also a point of controversy for OS, which is unwilling to share the results with Web3 users. LooksRare launched a "vampire attack" and transaction mining mode, and started a top-down journey with giant whales and KOLs. Although it was criticized for false transactions, it eventually took the food; and X2Y2 also passed the Launched the mode of "vampire attack" and pending order mining, and made bottom-up efforts with the community. Although there were several twists and turns in the code, it finally succeeded in achieving good results, and even surpassed Looks to become the second largest transaction in the world recently. Place.
From the successful cases of the two challenger rookies, it can be seen that the incentive for C-end users is essential in the initial stage, either by attracting KOLs and whales at the upper level to make a platform, or attracting the people at the bottom to use the community for publicity. These models eventually formed a certain influence in their respective fields, not just limited to a certain group and small circle, and finally made them gain a lot of transaction volume and new users, and then slowly the entire NFT market was cake bigger. In this process, they are willing to hand over their cakes to supporters and participants in the ecosystem, and link everyone through web3 tokens, so that they can attract supporters in the end. Human nature is profit-seeking. If there is no reasonable incentive mechanism, no one is willing to try a new exchange, which is one of the key factors why they can challenge successfully.
- NFT tools - an inflection point that changes the competitive landscape
With the emergence of more NFT exchanges, NFT pending orders are scattered in various exchanges. The core demand of users is to buy the cheapest NFT. At this time, aggregators were born and became one of the most important NFT exchanges The unexpected winner of the war changed the market pattern.
It may not be another desktop computer that beats a desktop computer, but more convenient and fast laptops and mobile phones.
The launch of Genie and Gem meets the needs of players for multi-market shopping, facilitates users to find the cheapest NFT faster, and forms a positive cycle with small platforms (as shown in the figure below). At this point, the exchange becomes the back-end for providing orders, the aggregator is the front-end for interaction, and both parties add users. Users buy cheaper NFTs on the aggregator, and more users will come to the aggregator; users of small platforms will be more willing to use small platforms because of the increased liquidity of NFTs to save money. As the number of platform users increases, the liquidity advantage brought by OS as a leading monopoly is gradually broken, which will further accelerate the development of other platforms and aggregators. That's why 4 platforms, X2Y2 and Looks, and Gem and Genie, are able to deliver results.
But other established platforms, such as Rarible and Foundation, were not so lucky. Because the timing of birth was wrong, there was no aggregator platform that could occupy the market at that time, so most trading platforms were short-lived or even born prematurely, and there was no way to gather the power of everyone to fight against OS; With the development of all categories, the speed of product change is too slow to retain users. In the end, it will only gradually lose market share due to liquidity problems and fall into the "flywheel effect" of OS.
(As shown below)
Therefore, the aggregator, a tool platform for NFT trading, has become the new favorite of NFT users, breaking the liquidity monopoly and reshaping the competitive landscape. Under the positive cycle of the aggregator, the top 3 exchanges and 2 aggregators have occupied the With a market share of 99.7% (assuming the top 10 transaction volume is the total market), OS only accounts for 63.5% of the market, breaking the myth of invincibility. (Note: The influence of the brush trading in Looks and X2Y2 is not excluded)
Resource: 2022/5/31 https://dappradar.com/rankings/protocol/ethereum/category/marketplaces
(Note: The above data lists the data of Gem and Genie separately, not included in the data of the exchange)
- Imagine the future - possible solutions for NFT transactions: a true decentralized NFT transaction protocol
After analyzing the real pain point in NFT transactions is the brand effect brought about by liquidity monopoly, we might as well imagine what solutions may subvert the future competition pattern? One of the thoughts I give here is: instead of doing upstream traffic ports, it is more feasible to do low-level protocols.
First of all, it can be seen that the market has already trended in this regard. The Seaport Protocol, a decentralized protocol officially launched by OpenSea in May 2022, wants to make the NFT trading market more decentralized. Its main features are shown in the following figure:
In essence, Seaport only lowers the threshold of NFT exchanges, so that most platforms can easily establish NFT exchanges and are not coerced by original exchanges such as OpenSea, but it does not solve the problem of NFT transaction liquidity, so Core needs remain.
Its function of bartering will not make NFTs, which are inherently illiquid, more liquid, but only gives users one more choice. In fact, there are platforms that have implemented this function for a long time: NFT Protocol (https://app.nft.org/ethereum) (as shown in the figure below), but its usage rate is extremely low and there is almost no market share, which proves that this demand is just a good thing Pseudo demand.
Using ERC-20 tokens instead of just ETH payment, there are quite a few supporters in the market, which is closer to the shopping habits of traditional users, which is good for NFT newcomers. I think this is indeed an innovation, but in terms of technology, the threshold is not high and it does not have core competitiveness. Existing NFT exchanges can be iteratively updated quickly, and the reason for not changing is more because this demand has not been verified by the market. (NFT Protocol also has this function, but the performance is still not good) and this also explains why the traditional currency exchange has not entered the chart circle smoothly - the people in the chart circle are ETH currency standard thinking, and the currency circle standard is large Most of them are stable coins such as USDT, which is also one of the moats of the NFT exchange itself. However, we look at NFT as an incremental market from a changing perspective. Assuming that a large number of people in the currency circle will enter the circle, then exchanges without such a step of converting ETH will definitely be more favored by the market; plus At present, ETH is in a bear market falling state, so NFT will also fall along with it, and the demand for using stable currency for settlement is getting higher and higher, so I have a positive attitude towards this function.
Inspired by Seaport, I personally believe that only a true decentralized NFT protocol (Decentralized NFT Protocol) can fundamentally solve the liquidity problem. It enables the front-end traffic in each market, whether it is an exchange, a tool platform or even a project party, to become an exchange by itself, and then share the pending orders of each subject, so that they together form the front-end of this decentralized trading ecosystem, making Every order has an equal opportunity to be seen and bought.
Its main core is as follows:
Order sharing mode
The order sharing ecology enables each pending order to appear on multiple platforms at the same time. OpenSea took advantage of the first mover advantage to monopolize most of the orders, while other platforms did not form their own ecosystems to combine vertical, horizontal and horizontal confrontation. Instead, they each occupy the land separately, and users' pending orders are not shared, which greatly weakens NFT. The liquidity of pending orders is not what users want to see. Therefore, if the NFT order itself can be shared on multiple platforms from a technical level, such as from the protocol layer, then I believe that users will be more willing to try these small platforms, because the accumulation can also form enough liquidity. sex.
A real example is the emergence of Gem and Genie, which has changed the competitive landscape. People prefer to use such aggregators instead of a single platform, because the pending orders of multiple platforms have value, but the platforms are not interoperable, so there are many needs to be able to view NFT pending orders on different platforms at the same time. Gem and Genie have come up with solutions for this point, solved the pain points, and gained users. However, Gem and Genie's solutions still rely on traditional NFT trading platforms such as OpenSea. The API interface may be coerced by the platform, and the refresh rate of orders will also be controlled by people, making it difficult to achieve real real-time updates.
In order to further improve the model of the aggregator, it is better to be the upstream of the exchange than to be the underlying protocol of the exchange. When placing an order, multiple platforms can be shared, so that users do not have to switch back and forth, any platform is the same order, the flow of NFT Sex will also improve. And it solves the risk of being coerced by the big platform, and can unite with the small platform to jointly resist the big platform; at the same time, it also solves the liquidity problem of a considerable part of the long-tail assets hanging on the small platform, which has the possibility of Uniswap back then.
Building Ecological Composability - Breaking Boundaries
The current NFT transaction is still limited to NFT exchanges. There are many excellent NFT tool platforms. Due to the lack of a path to monetization and the number of users, when customers find a certain NFT Alpha through the tool, in most cases, they can only jump to a certain trading platform to trade with one click. The tool platform can only be used as a free traffic import interface to make wedding dresses for others. However, if the NFT tool platform can also directly trade NFT and share profits from it, the efficiency of NFT trading will be greatly improved. The NFT tool platform itself no longer needs to find a new monetization model. It can realize the flow through transaction fees, so that the ecology forms a complete closed loop, which is conducive to the healthy development of the tool platform.
Combined with the first point of "order sharing model", because the users of most tool platforms are also NFT users, then the liquidity of these traffic orders will also be greatly increased, thereby enriching the ecology. Instead of splitting the exchange and the tool platform, this is unfair to the tool platform. They should get a revenue after diverting the exchange, but at present, the exchange does not reward the tool platform for the credit for this part of the traffic. So this also addresses the need for a tool platform. It can also be seen from Uniswap's acquisition of Genie that when the traffic platform enters the NFT world in the future, the traffic + transaction protocol model may be a better combination.
There is still room for a reduction in fees. OpenSea's handling fee is 2.5%, and it can be seen from the path of rising stars that lower handling fees will be sought after by the market. For example, X2Y2 currently only has a handling fee of 0.5%, which is also a firm choice for many PFP short-term hype players. One of the reasons for the platform. Therefore, the future solution is more likely to be cut in with a lower handling fee, giving players more profits, so that people will be motivated to try new solutions.
At present, the right to set royalties is delegated to the platform layer, so if the project party wants to collect full royalties, they need to set their own royalties on each platform, which is obviously very troublesome. However, through the model of sharing pending orders, the royalties set by the project party will be directly synchronized to multiple platforms, and there is no need to worry about the leakage of royalties. This is a huge benefit for the project party, and it will also urge them to switch from the original platform to a new type of platform. The platform sets up and encourages its own users to place pending orders.
It is believed that after accomplishing the above points, there will be new players that subvert the existing competitive landscape. We will wait and see.
For NFT exchanges, people are always envious of its vast market and the market share of a single exchange, so countless people rise up, one after another, using the shell of pseudo-demand to draw one big cake after another. At last the tide receded, and we knew who was swimming naked. If 2021 is the first year of the NFT market, then 2022 will be the year when the competition in the NFT market is turbulent. Only by grasping the core needs in the current environment can we go upstream in the bear market and wait for the bull market to bloom. . What makes OpenSea afraid is not the next trading platform, but the aggregator Gem that solves the liquidity needs; and the next subversion of Gem and trading platform may not be the next aggregator or trading platform, but may be a deeper level at the protocol layer The solution to the liquidity problem is a decentralized NFT transaction protocol.