If you are hearing a lot of buzz around non-fungible tokens (NFTs) and OpenSea, then you may be wondering what they are. Maybe you have heard of CryptoKitties, the first NFT game that crashed the Ethereum network, or the Bored Ape Yacht Club, one of the most popular NFT collections with a floor price of nearly 100 ETH, or thousands of U.S. dollars.
NFTs are non-interchangeable tokens that are transparently recorded on the blockchain. They can be used as tamper-proof representation of ownership for both digital and physical assets.
Anything can be tokenized, from digital art and music to in-game assets and real-world assets like real estate. These digital assets have skyrocketed into popularity as a solution for artists who want to protect their intellectual property.
In order to browse, buy, sell or create your own NFT, you have to visit an NFT marketplace, and the biggest one around is OpenSea. The NFT marketplace had a cumulative trading volume of US$12.5 billion through 2021, nearly 88% of total NFT trading volume that year, according to DappRadar.
This Forkast.News explainer will explore:
- What is OpenSea?
- How OpenSea works
- Other NFT marketplaces
- What does the future hold for OpenSea?
What is OpenSea?
OpenSea is a marketplace similar to eBay, Etsy, and Amazon, except all the listed items are unique digital collectibles in the form of NFTs that users can buy, sell and mint. The platform is a decentralized, peer-to-peer exchange that enables users to transact with one another directly in a trustless manner.
OpenSea was founded in 2017 by software engineers Alex Atallah and Devin Finzer, who became fascinated by the launch of the popular NFT series CryptoKitties and saw potential in NFTs to enable true ownership of digital items for the first time.
Digital artists and content creators can use the platform to mint NFTs, create custom marketplaces and NFT collections, set fees on their tokens, and create auctions to sell them.
How OpenSea works
OpenSea’s marketplace is non-custodial, meaning that no central party has control of the transactions on the platform. Instead, transactions are facilitated by self-executing smart contracts that guarantee fair trade. Transactions on OpenSea either happen as a whole (the buyer gets the NFT and the seller gets paid) or not at all. These are known as atomic transactions.
As OpenSea is a peer-to-peer marketplace, there’s technically no intermediary between buyer and seller. Still, the platform takes a 2.5% cut of every transaction. Competitors’ costs range from none to 15%.
OpenSea’s architecture is powered by the Wyvern Protocol, which is a set of smart contracts on the Ethereum blockchain, designed to facilitate buying and trading unique digital assets. The platform offers cross-blockchain support across Ethereum, Polygon, and Klatyn.
One of the main advantages for creators is that they can mint NFTs for free using Opensea’s Polygon-based gas-free marketplace. Opting for the gas-free marketplace means that creators won’t have to pay the transaction fees, also known as gas fees, on the Ethereum network. Another advantage is that the original creator of an NFT can arrange to receive a royalty payment for every secondary-market sale of the token in perpetuity.
Buyers can easily browse through NFT collections, being able to filter by price, status, native blockchain and rarity of each token. Depending on the type of auction, buyers can place a bid, make an offer or opt to buy immediately and pay the asking price of the NFT. Buyers can also see the purchasing history of each NFT, including how many times it was sold, who bought it, and its prices.
OpenSea supports more than a dozen crypto wallets, with MetaMask and Coinbase Wallet the most popular.
One of the main concerns of OpenSea is that because it uses the Ethereum blockchain there may be high gas fees during peak network congestion. OpenSea is in fact the top gas guzzler on the Ethereum network. To address this problem, OpenSea added cross-chain support for Polygon and created a gas-free marketplace. Ethereum is also trying to solve this issue by transitioning to Ethereum 2.0 — a more cost- and energy-efficient, proof-of-stake-based iteration of the protocol.
Another concern is related to the platform’s performance. As per OpenSea’s status tracker, the website and API often run with degraded performance. OpenSea has also suffered a service provider outage, as well as continued database issues, elevated API errors, and delayed response times. In response to these performance issues, the company began releasing a monthly site reliability report which outlines the past month’s issues and what steps are being taken to resolve them.
Customers have suffered losses from improper use of OpenSea. In Sept. 2021, OpenSea’s head of product was accused of trading NFTs on insider information. The executive was using secret crypto wallets to buy NFT drops before they were listed on the platform’s homepage, to sell them shortly after they were released to the public. OpenSea promptly responded in a blog post that it would “make recommendations on how we can strengthen our existing controls” and accepted the resignation of the unidentified executive.
In Jan. 2022 users noticed a theft on OpenSea of 332 ETH, worth around US$800,000 at the time of the attack. OpenSea said it contacted affected customers directly and reimbursed them, but said the problem is fundamental to blockchain marketplaces and notified all customers how to handle their accounts to avoid this vulnerability.
Blockchain-related technologies often develop a community around its platforms, and OpenSea is no exception. But sometimes communities experience unrest, as OpenSea did in Dec. 2021. The NFT marketplace faced heavy criticism after its CFO began plans to take the company public. Users felt the company should keep its fundraising within the community, through an OpenSea token airdrop. After the backlash the executive said that the firm was “not planning an IPO, and if we ever did, we would look to involve the community.”
Other NFT marketplaces
Binance NFT took off in June 2021 and is one of the most popular curated NFT marketplaces. The platform is built upon the Binance Smart Chain and charges no marketplace fees.
Crypto.com NFT launched in March 2021 on the Crypto.com chain. The platform has collaborated with popular brands like Aston Martin and the UFC. Crypto.com NFT charges no marketplace fees.
LooksRare brands itself as a “community-first” NFT marketplace that debuted in Jan. 2022 with a so-called vampire attack to challenge OpenSea’s dominance. The marketplace built on Ethereum crossed US$1 billion in sales volume within a week from its launch. The platform charges a basic sales fee of 2% for NFT sales.
Nifty Gateway is the first USD-based, centralized NFT marketplace, owned by Gemini. The marketplace was launched in 2018 and acquired by the Winklevoss twins in 2019. The platform charges a 5% marketplace fee.
Rarible is a community-owned NFT marketplace with similar features to OpenSea and likewise built on the Ethereum network — with multi-chain support for Flow and Tezos. The platform was launched at the beginning of 2020. To date, Rarible has over 1.6 million users and charges a 2.5% marketplace fee.
Solanart is the first and largest NFT marketplace built on the Solana blockchain, which aims to promote artists and creators through its trustless marketplace. Solanart was launched in July 2021 and charges a 3% marketplace fee.
SuperRare is one of the first Ethereum-based NFT marketplaces and launched in April 2018. SuperRare is a marketplace exclusively for digital art and charges a 15% fee.
What does the future hold for OpenSea?
In Jan. 2022, OpenSea closed a US$300 million Series C funding round led by Paradigm and Coatue, raising the platform’s valuation to US$13.3 billion. While the company said it isn’t actively planning an IPO, hiring a seasoned CFO in 2021 points to that eventuality. Previously, Brian Roberts served as the CFO of the ride-sharing platform Lyft, where he led the company’s IPO, raising US$7 billion of capital.
As the leading NFT marketplace, OpenSea will always face competition. LooksRare’s vampire attack was a startling and successful example. While similar tactics may take away from OpenSea’s trading volume in the short term, its large market share could help it remain a leader in the long run. OpenSea saw a 646-fold increase in trading volume in 2021, surpassing US$14 billion. As the entire NFT market measured US$25 billion in 2021, OpenSea accounted for 56% of the transaction volume. Investment bank Jefferies expects the NFT market to surpass US$35 billion in 2022 and US$80 billion in 2025. With its size advantage, OpenSea could remain the top NFT marketplace for the foreseeable future.