Under the hosting turmoil, can Magic Eden maintain its throne in Solana NFT trading?

Written by: Andrew Hayward, Decrypt

Compiled by:Katie, Odaily Planet Daily

In the Solana NFT space, there is no bigger player than Magic Eden. Launched last fall, the marketplace typically accounts for 90% or more of all trading volume on Solana. In the latest round of venture funding in June this year, its valuation reached $1.6 billion.

However, with the rise of Magic Eden, members of the Solana NFT community, including creators and collectors, are increasingly concerned that the platform is becoming too centralized in its development process. They point out that recent updates have restricted access for third-party aggregators and tools, as well as the way Magic Eden hosts user NFTs, which could make users' assets more vulnerable to attacks. Marty, founder of Zion Labs, which creates Solana NFT tools, told Decrypt: "People should be aware that hackers can gain access to Magic Eden's keys and 'rug' every NFT they have. If it were decentralized and the code was open source, this wouldn't happen."

In a response sent to Decrypt, Magic Eden did not specifically mention the risks of a custodial trading model, but stated that it believes alternatives are currently less secure for users. The marketplace plans to adopt a non-custodial system in the future, but "the technology is not secure enough yet."

Magic Eden's Custodial Model Under Scrutiny

The debate over Magic Eden storing user-listed NFT assets in custodial wallets is heating up. Magic Eden holds all listed assets in custody rather than allowing them to remain in users' own wallets, with users' NFTs stored in custodial wallets via the marketplace's smart contracts. This practice was common in the early days of the Solana NFT market, but companies that entered the Solana ecosystem later, such as OpenSea and Hyperspace, have not adopted this approach.

Last Wednesday, OpenSea initiated a Twitter topic "against Solana market custodial NFTs," although it did not directly name Magic Eden, the target was clear. OpenSea wrote on Twitter at the time: "We believe that markets that hold users' NFTs in custody limit choice and utility and jeopardize security."

Metaplex's auction protocol enables NFT trading on Solana without requiring market custody of assets. A Metaplex insider, who wished to remain anonymous, confirmed to Decrypt that Magic Eden's market contract is based on an early version of an auction house, which is a permissionless peer-to-peer trading system. However, Magic Eden has made significant modifications to the contract code and the launch platform contract for the Metaplex-based Candy Machine. Magic Eden has also isolated itself from other community members. The insider stated: "They are closed-source and licensed derivatives of the open-source technology provided by Metaplex."

This approach increases the potential risks for NFT traders. Closed-source software cannot be audited by the community or benefit from vulnerability reward programs. Even Metaplex does not know what is in the code of Magic Eden's market contract. What happens if Magic Eden's custodial wallet is hacked? Or if Magic Eden suddenly goes down, like some other crypto companies have during recent market crashes? The Metaplex insider stated that as of last week, "centralized" custodial wallets held about 180,000 NFTs.

In response to Decrypt's questions, Magic Eden's co-founder and CTO Sidney Zhang stated that the marketplace plans to transition to a non-custodial model at some point, but his team believes the current solution is not secure enough. He wrote: "We are actively exploring a non-custodial model and plan to transition to it, but we believe that the smart contracts currently used by other markets to implement non-custodial models are unsafe. This transition will bring many security issues, and we want to proceed cautiously to ensure our users do not inadvertently lose assets due to outdated listings."

Recent Changes at Magic Eden

In addition to the custodial model, Magic Eden has also seen many new changes: increased scrutiny, examination of how its platform operates, and how third-party applications are built on it.

Last week, due to user "Pland" going viral on Twitter about Magic Eden's custodial model: due to recent smart contract changes, Magic Eden "is no longer a permissionless Dapp," which most users did not notice but has a significant impact on the ecosystem. Smart contracts hold the code that powers Dapps and NFT assets. Developers who spoke with Decrypt indicated that the contract changes require Magic Eden to sign off on every transaction that occurs on its marketplace, which is different from before. As a result, some third-party applications that aggregate multiple market listings and so-called "sniping bot" tools for purchasing specific NFTs have been disrupted.

Magic Eden admitted to Decrypt that the contract changes require two signatures for transactions: one from the end user and another from the API key provided by Magic Eden. The API key is used to verify developers and third-party programs wishing to access applications or services. Ethereum-centric markets like OpenSea also have API systems.

Magic Eden co-founder and Chief Engineer Zhuojie Zhou told Decrypt: "The rollout of this change is to maintain the reliability of the core site and reduce the potential for bot behavior that could jeopardize user listings and transactions. We welcome ecosystem participation in our API program." Solana Labs has recently made some changes to try to improve network stability.

Zhou stated that Magic Eden has provided over 300 API keys to developers, including aggregators like Tensor and NFT Soloist, as well as wallet app developers like Exodus and Slope. He also noted that the developers of the Solana wallet Phantom requested Magic Eden to have an API to verify whether transactions come from its servers. "We believe in supporting a formal developer ecosystem to achieve a secure and reliable marketplace," Zhou added, "We maintain an open attitude to develop the API based on the needs of collaborating developers."

Magic Eden's Mandatory "Anti-Competition Action"

However, some developers in the Solana space believe this shift rejects the principles of decentralization. A representative from the NFT market aggregator Hyperspace told Decrypt: "We were surprised they did this because it is completely centralized and offers no benefits to end users. It increases reliance on their servers, leading to higher transaction failure rates."

The anonymous source stated that before the contract changes, Magic Eden contacted Hyperspace and threatened to "shut down Hyperspace if it did not change its platform to serve them." Allegedly, Magic Eden wanted Hyperspace to provide "exclusive listing information to Magic Eden and operate only through their API."

A representative from Magic Eden denied threatening them during the discussions: "We encourage our partners to integrate as deeply as possible with Magic Eden to provide comprehensive technical and operational support. Unfortunately, Hyperspace is not interested in such collaboration and has remained hostile."

Hyperspace stated that it found a solution to the Magic Eden API and continues to provide aggregated listings, but other aggregators like CoralCube have clearly lost functionality as a result. "Since then, they have been trying and actively researching how to block us," a representative from Hyperspace claimed.

"CoralCube used to have a migration list button, but Magic Eden has recently turned to a centralized Web2 platform. Without Magic Eden's centralized signature, projects cannot be removed. That’s why we removed the migration button, and now NFTs are stuck in Magic Eden's custody."

Some builders in Solana told Decrypt that they believe Magic Eden's actions are intentional, aimed at excluding NFT aggregators that have gained attention in recent months. It ultimately allows Magic Eden to control who can enter its listing and benefit from its liquidity. Hyperspace has been publicly opposing this strict anti-competitive behavior as it violates the principles of an open network.

Magic Eden's New Features Face Intense Criticism

Additionally, Magic Eden seems to have drawn inspiration from external Solana applications when implementing new features, leading to backlash. Last week, Magic Eden's listing feature allowed projects to create user allowlists before NFT removals, which faced resistance due to its similarity to Blocksmith Labs' Mercurytool.

Anonymous NFT collector Topo Gigio told Decrypt about Magic Eden's new feature: "This seems like an arbitrary attempt to exclude anyone who can do it better." Meanwhile, Zion Labs' Marty claimed: "Magic Eden is 'weaponizing venture capital' to rapidly expand into an integrated Solana NFT resource."

Magic Eden's Zhou responded that Magic Eden is a "user-first company," primarily adding features based on user requests. He claimed that the platform's extended features serve NFT collectors and rejected the debate about centralization. Zhou stated: "This conversation has never been about centralization and decentralization. Since our inception, there have been collaborative tools based on the evolving market experience of Magic Eden, and we do not intend to change that."

For some participants in the Web3 space, the overall dialogue surrounding Magic Eden is primarily about centralization versus decentralization, including how major players in the space should handle issues such as asset custody, open-source code, and the composability of blockchain assets and protocols. Magic Eden's recent decisions between continuing to use third-party custody and API-centric changes have not suited everyone. But Magic Eden remains the best choice for Solana collectors to buy and sell NFTs.

Criticism of Magic Eden is growing, but it remains to be seen whether many NFT projects will choose to issue elsewhere and whether well-known collectors will choose to take a public stance and exit the Magic Eden marketplace. Topo Gigio is one of them. This NFT collector stated on Twitter that he would withdraw liquidity and claimed he would no longer use the marketplace, pointing out that Magic Eden's custodial policy and contracts have changed. "All the liquidity is in Magic Eden, and my exit doesn't matter to them," he told Decrypt, "I am happy to move my high-value assets elsewhere, even if the trading volume is smaller."