Author: Peter, IOSG Ventures

TL; DR

1. Vertical NFT trading marketplace is emerging, eating Opensea’s share

2. Game NFT trading market is expected to be one of the first successful verticalized platforms

3. The current game NFT trading market has already taken shape

4. Game NFT trading market will occupy a more critical position in the ecosystem

The NFT market in the past year has been crazy. It seems that since a certain moment, celebrities have purchased NFT, changing their social media avatars such as Twitter’s profile picture to these cartoon animals, coupled with the hype and wealth effect of the bull market most people also began to understand NFT from this time and participate in it. Many companies also use NFT as one of their marketing tools, such as Adidas, Li Ning, McDonald’s, Louis Vuitton, etc..

NFT has become a cultural phenomenon. People buy NFTs (especially avatar PFP NFTs), join a community that matches their personality, and connect with like-minded people through online and offline gatherings. nft becomes the key to a community and fills a psychological need to belong. Stimulated by celebrity and wealth effects, NFT starts to look like luxury and investment items.

The numbers speak for themselves: according to Nonfungible.com, the size of NFT transactions in 2021 is $17 billion, compared with just $82 million in 2020, an increase of more than 200 times. More than 2.5 million addresses hold or have traded NFTs in 2021, compared to 89,000 in 2020. The vast majority of these transactions take place on Opensea, the universal NFT trading marketplace, which at one point held over 98% of the market. With a 2.5% transaction fee, its highest monthly revenue has exceeded $350 million.

However, as the number of NFT users skyrockets, different demands for NFT will also arise and spawn further development of more types and functions of NFT. The NFT trading market that only serves a general purpose will gradually be replaced by some specialized marketplace, provided that the market capitalization of the segment expands. This is not new, we have seen similar things happen in the world of web2, such as eBay’s market share being eaten up by several specialized marketplaces with core categories.

The next cycle is the time for the splitting of the General NFT Marketplace represented by Opensea. We will see more verticalized trading marketplaces start to grab Opensea’s share. In my opinion, thanks to the real utility, the Game NFT Trading Marketplace is expected to be the first batch of successful verticalized platforms.

Time for the breakdown of generic NFT marketplace

The blockchain ecosystem now is like the Internet in 90s. When eBay went public in 1998, it had a GMV of just $105 million, but it already had the largest number of users of any e-commerce site in the world. In the United States, where less than half of adults had ever used the Internet and even fewer used e-commerce platforms, it was hard to imagine a platform surviving by selling just one category of items. But by 2013, eBay’s GMV had reached $83 billion, and almost everyone had learned to shop using online stores.

eBay remains the online store for everything, a place where you can buy clothing, books, electronics, furniture, real estate, hotels and even all sorts of weird and wonderful items. Despite its former dominance of the industry, its GMV growth has slowed dramatically over the past few years. One of the most important reasons is that more and more verticalized platforms are slowly eroding eBay’s market share and disrupting areas where eBay was dominant.

Justine and Olivia Moore describe eBay’s splitting-up trend in 2018. What was once the “to go” place for all kinds of needs, has gradually turned into more specialized platforms. Among these specialized platforms, Etsy, 1stdibs, Airbnb, Chegg, and Zillow have a total market capitalization of more than $130 billion, several times the current $30 billion valuation of eBay. What‘s the take here? In the early days of e-commerce, not so many users were in the space and eBay was already well positioned to meet the demand. With the influx of new users and the expansion of demand for specific categories, verticalized marketplaces can carry this part of the user base and thus create a bigger pie.

Much like eBay, Opensea is a general-purpose trading marketplace that dominates the NFT space. It was established in the last bull market and became the market leader in this round, having held 98% of the market share. If you look back in history you can see that it took almost a decade for verticalized platforms to overtake eBay, but the pace of business change within Web3 is much faster and we expect to see a much faster splitting for NFT General Marketplaces like Open Sea in the Crypto market for the following reasons.

1. Opensea is not an exclusive content provider, and the merchandise recommendation mechanism is falling behind

First of all, all NFT assets listed on Opensea are not exclusive to the platform. Simply put, since all NFT assets are on the chain, there are no NFT assets that are exclusive to Opensea and not available on other platforms. Other platforms can simply read the on-chain contract to display all NFT series.

In addition, Opensea does not have a perfect mechanism for discovering and recommending NFTs. Currently, it tends to take the form of “recommendations after the fact”, such as displaying transaction rankings and recent hot projects. It is difficult for creators to rely on Opensea’s recommendations to increase their sales, and users are not informed of interesting and suitable projects from the recommendation mechanism, but only of what projects are hot. The reason behind this is that it is difficult to make recommendation judgments for pure investment financial products, and only content-rich games and music NFTs are more suitable for the recommendation mechanism.

1. Less friction for user migration in Web3

Since all assets are on the chain, it is easy for trading platforms to read on-chain data and list NFT series. For NFTs, the core of liquidity comes from the seller’s pending orders, as many users search for low priced NFTs through aggregation platforms such as Gem. That is to say, the core to capturing Opensea’s liquidity is incentivizing sellers to list their orders. Currently, the cost for sellers to migrate to other trading platforms is to open an account and authorize the NFT gas fee. Compared to Web2 platform, which requires a lot of information, qualification audit and even deposit payment, Web3 has very little friction for migration. For buyers, connecting their wallets will allow them to buy on different platforms.

• Opensea’s liquidity barriers are not insurmountable

The lack of user incentives in Opensea has led to the gradual loss of liquidity business barriers established earlier. At the beginning of this year, OpenDAO, LooksRare and other projects emerged to launch vampire attacks on Opensea, using platform tokens to reward Opensea loyal users. LooksRare once surpassed Opensea in transaction volume. The emerging NFT trading market X2Y2 is grabbing Opensea’s market share with fast functional iteration, better UI/UX experience and extremely low transaction rates (X2Y2: 0.5%, Opensea: 2.5%). In order to avoid the misleading of transaction volume (calculated by transaction volume, Opensea’s market share is less than 20%), we can also see that Opensea’s share has a downward trend from the proportion of active people.

In addition, unlike Defi, one NFT can be listed on multiple exchanges at the same time, which means that the liquidity of NFT is easier to be transfered and decentralized. Professional traders often list NFTs on multiple exchanges at the same time.

• Poor management of Opensea, the brand value has not opened a significant gap

The mismanagement of Opensea has been criticized by users for a long time. Its security is also constantly being questioned, and the platform’s reputation is constantly damaged by vicious incidents such as theft, fraud, and contract bugs. Opensea has a large number of fake and counterfeit NFT series, the platform takes a long time to accept complaints, and the rights and interests of developers and users cannot be guaranteed. In May of this year, its homepage incorrectly recommended a series of NFTs counterfeiting PXN, and the transaction volume had reached as high as 3,600 ETH before the delisting. There was also a bug in Opensea’s contract, which caused many boring ape NFTs to be sold at a low price, causing losses to collectors. In terms of safety and credibility, Opensea does not lead the competition too much, and has not yet built a brand moat.

Vertical ecology of NFT trading market

We have observed the NFT trading market track for a long time, and have also found direct competitors such as Rarible, LooksRare, X2Y2 with similar positioning to Opensea (some of them also have good transaction volume), but we believe that in the future, those who can make a bigger cake and surpass Opensea is not necessarily or likely not a direct competitor of Opensea, but a package of vertical NFT trading platforms focusing on a certain segment.

NFTs aren’t just JPEGs. In terms of format, NFT is divided into JPEG, MP3, MP4, SVG, iframe, array, matrix, etc. In terms of categories, NFTs are divided into collectibles (PFP), pure art, virtual worlds, games, music, sports, equity and finance.

Tasha Kim summarizes the verticalization of the NFT trading market as follows. In the main categories, we can already see that the vertical ecology has been initially established, such as games (Fractal, Lootex, DMarket), music (Catalog, Glass, Roya), art (SuperRare, Sloika, Foundation) Wait. Some platforms have already achieved good results, and emerging platforms have also received a lot of financing.

So what are the motivations for users to migrate to vertical platforms rather than stay on generic platforms? Let’s go back and look at the reasons why eBay ended up lagging behind the vertical market under the vertical evolution path of the traditional Web2 platform:

1. Certification service: For some products, people have a strong demand for certification, reducing the risk of buying fake products. Items listed on eBay are not guaranteed to be genuine.

2. Quality control: eBay does not conduct quality control on the products on the platform, resulting in a large number of defective products and garbage flooding the platform, making it difficult to distinguish good from bad.

3. Price guidance: eBay does not classify the same kind of goods, and gives the lowest price reference, it is difficult for users to find a reasonable price in the tens of thousands of returned results.

4. Lack of community: eBay lacks a sense of intimate community, making it difficult to motivate users to repeat purchases and actively participate in both sides of the marketplace.

For specialized marketplaces to compete for Opensea’s market share, they also need to offer things that generic NFT marketplaces cannot, such as

1. Audit system to improve the quality of content: For subdivisions, it is necessary to appropriately increase the entry threshold, select high-quality projects for users, and reduce user losses.

2. Targeted design for subdivisions: the platform can optimize UI/UX for specific categories. For example, the art category can provide 3D immersive galleries, and for example, the music category can introduce player settings.

3. NFT pricing service: for some NFTs, such as equity, finance and games, they have the ability to generate interest and can be priced using the DCF model.

4. Building a community: NFTs targeting subdivisions are more likely to build a more cohesive community. For example, the game trading market guides players to exchange game experiences, and even facilitates the exchange of assets between different games.

The Rise of the gaming NFT Trading Market

What kind of platform might be the first winner before the upcoming explosion of the NFT verticalized platform? The gaming NFT trading marketplace is the most promising seed player.

Gaming NFT has always been the second largest NFT category in terms of transaction volume, except for collectibles. With the advent of the NFT bear market, trading figures of collectible NFT, where the hype value is greater than the actual utility, are likely to continue to decline. NFT is evolving towards a greater focus on intrinsic value. According to Nonfungible.com, in 2021, gaming NFT transactions reached $5.17 billion, and $5.68 billion plus virtual world NFT $510 million which can be attributed to the large category of games. Based on the 5% royalty, the profit generated by gaming NFTs is $284 million. According to Nansen’s estimation, by 2023, the total profit of the gaming industry will be about $200 billion, while the profit of the blockchain game can reach $5 billion, accounting for about 2.5% of the TAM (total addressable market).

Gaming NFTs are the most intuitive use case for NFTs. Gaming NFTs are nothing new. CryptoKitties was one of the first games to be deployed on Ethereum back in 2017. Although PFP NFT now occupies the main share, gaming NFTs have always been able to dismiss questions with practical utility when faced with hype.

For collectibles or artwork NFTs, the stories and collections behind them give them value. However, in addition to the value of telling storing and collection, gaming NFT also provides value of usability, and users can really participate and immerse in it. Usability is a sustainable development that expands the addressable market for NFTs.

Blue-chip PFP NFTs are also stepping into the narrative of gamification to provide them with more value support. The BAYC series launched the game brand Otherside, and BAYC holders can use NFT avatars in the game in the near future. In addition, series such as Cool Cat, Doodle, Pudgy Penguins, Azuki, etc. have plans to launch games.

While large game developers are more likely to establish an in-game NFT trading market, users might prefer to trade in the game rather than jump to other platforms to buy and sell. However, an open platform can also bring several advantages to games:

1. Game community: Platforms can provide a larger community than a game, on which can be seen gamers’ appreciation and rate of the game. The community leaderboard and achievement system make the platform a more immersive place than a single game.

2. Cross-selling opportunities: Platform-based data recommendations can also facilitate cross-selling of games and game assets. When different game assets are aggregated on one platform, with the interoperability of NFT, asset swapping across games and cross-game migration of assets can be achieved.

3. Asset pricing and comparison: Since Yield is the motivation driving users to play blockchain games in the short term, the open platform can make use of the rich attributes of game assets, and give price suggestions with reference to the prices of other interest-earning assets, which is convenient for users to compare.

4. Targeted improvement: The official market often has many disadvantages, such as restricted currency types, price caps, high rates, and no aggregate transactions and batch transactions. An open platform can make targeted improvements.

Even in the relatively closed ecosystem of Web2, there are dozens of third-party trading platforms built around CS:GO, such as CSGORoll, Skinchshier, CSmoney, SkinMonkey, DMarket, etc. In the Web3 world a trading market can cover multiple (theoretically unlimited) gaming NFT assets, the GMV of the game NFT trading market will be quite significant.

Gaming NFT trading marketplace ecological case

Eden Games: Gaming segment within a general NFT trading marketplace

Maigic Eden is a general NFT trading platform similar to Opensea, focusing on the Solana public chain. Eden Games is a one-stop platform launched by Magic Eden specifically for game developers and gamers.

Eden Games now has the following features:

1. Dedicated game listings: Each game introduction page contains a game trailer, and content showcase page displays the game’s social content and description, as well as the NFTs that game contains.

2. Content Center: The game content recommendation mechanism helps players quickly find the content they need.

3. Competition Channel: Regularly host game tournaments, invite community members to participate and offering rewards.

The platform provides developers with: NFT consulting, custom casting, promotion and marketing, user security and other support services.

Thinking: Magic Eden itself is the dominant NFT trading marketplace on the Solana chain (with higher trading volume in Solana than Opensea), the platform has 1.5 million daily active visitors and 10 million monthly active visitors. Eden Games is preparing to leverage the huge traffic that Magic Eden comes with to become a discovery layer and distribution platform for games and game NFTs. The giant itself has a natural traffic and liquidity advantage by coming down to be a game NFT trading marketplace.

Fractal: a verticalized game NFT trading marketplace

This platform was built by Justin Khan, co-founder of Twitch, and focuses on blockchain games and gaming NFT. It aims to create a more secure marketplace for trading NFT games, and provide marketing and distribution services for them.

Fractal’s value comes from:

1. High-quality game NFT Launchpad: Fractal adopts a strict vetting system and currently accepts only 5% of applicants, with over 20 projects in the pipeline of waitlist.

2. Fractal provides NFT-fi related services with game characteristics, such as lending, staking, fragmentation, etc.

3. Fractal will act as a management and discovery layer for the best games, empowering game developers to reach consumers.

Idea: Fractal itself does not develop games and is not backed by already established NFT giants (such as Magic Eden). Looking at Web2’s successful gaming platforms such as Steam, Epic and even TapTap, all have seed users brought in by the parent company’s own game bundles. Fractal’s desire to position itself as a management and discovery layer for games will require more resistance to overcome.

DMarket： Platform aggregating Web2 & Web3 gaming assets

DMarket aims to create a multi-billion dollar digital asset trading platform for game developers, players, anchors, and eSports clubs. Unusually, DMarket uses blockchain technology to access tradable game assets (not just NFT) such as skins in web2 games (e.g. CS:GO and Dota2) and web3 games (e.g. Decentraland).

Idea: In traditional games, the most profitable games are often the big DAU free-to-play games with a “skin economy” and billions of digital assets circulating in the secondary market every year. In fact, before 2016, there were platforms that traded game assets in bitcoin such as OPSkins, a third-party platform that uses Steam’s API to access other payment systems and bypasses many of the restrictions set by Steam (e.g., no more than $1,800 per weapon). These platforms contain a large number of traditional players and are an important entry point for converting web2 players to web3.

Looking Forward

After reaching a profit peak on August.6 last year ($17.5M in daily revenue), Axie Infinity is now earning less than $10K a day. The blockchain gaming narrative is shifting and the play-to-earn model is being questioned, and with Axie Infinity’s “failure” it’s even becoming an industry “consensus”.

But let’s also look at the bright side: Axie Infinity has total profits of $1.3 billion and its token $AXS FDV topped out at $43 billion. It’s also now at $3 billion after the market’s downfall. Without the cryptocurrency economy, Axie Infinity, which uses the Web2 development model, could never have achieved what it has today.

Despite the explosion of the NFT industry in the last two years, we are still in the early stages of the industry. According to Hootie Rashidifard’s research, data from June 2021 shows that only 13% of the US citizens have ever purchased cryptocurrency, a figure that is only 3% globally. The top-ranked Axie Infinity currently has about 300K DAUs, and that number only gets smaller after removing multi-wallet accounts. And Roblox, the highest DAU game on Web2, has 8.6M. This shows that there is still a lot of room in blockchain gaming.

NFT is the underlying element of the metaverse, the blockchain gaming, and the NFT trading marketplace is the cornerstone of the digital asset economic system. Focusing on games, the NFT trading marketplace is expected to be one of the first successful verticalized platforms in the future. But in addition to the basic trading function, we can see that the game NFT trading marketplace is expected to become more of a discovery layer in the game ecosystem. How to acquire users for Web3’s games has been a hotly debated topic.

Web2 game customer acquisition method and profit calculation is clear: advertising → user acquisition → user retention → compare LTV and CAC to calculate ROI. However, Web3 games are squeezed by regulatory compliance on the side of ad buying, low conversion rate on the side of user acquisition, and difficult to predict LTV on the side of profit, etc. It will encounter many challenges. Using the current web2 promotion method to push web3 games will encounter sky-high CAC, and it is difficult to recover the cost (unless free-to-play and blockchain is built in the bottom not to be discovered by users). The current mainstream promotion method and profit source of web3 is: community seed user accumulation → airdrop proliferation → Crypto traffic promotion → INO/IDO financing → NFT secondary transaction fee + token value (LTV).

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