Is the bull market coming? What changes have occurred in the competitive landscape of NFT exchanges?

Wu Says Author | defioasis

Editor of this issue | Colin Wu

In the past month, as the overall Crypto market has warmed up, mainstream NFT trading markets have experienced their first consecutive 4 weeks of positive trading volume growth in the second half of this year (the last occurrence was from late January to mid-February this year), with trading volume nearly doubling. This growth is significantly higher than the rise in ETH value, indicating an increase in ETH trading volume. On the other hand, blue-chip prices have also rebounded, with BAYC briefly returning above 30 ETH and Azuki rising over 17% in the past month, among others. (Note: Unless otherwise specified, the trading volumes mentioned below do not include wash-trade)

Data source: https://x.com/punk9059/status/1720431770804371564?s=20

In the current market where ETH's rise cannot compete with BTC's, ETH holders are reluctant to swap their holdings for BTC. Without adding explicit leverage, investing in the NFT market has become a better choice. This not only allows investors to expect dual growth in both coin and ETH value but also gives the NFT trading market a glimpse of the dawn of a bull market.

It is remarkable that the NFT trading market has shown resilience; despite the tough market conditions, no major trading platforms have collapsed. The commitment to NFTs as an emerging asset, when viewed from a longer-term perspective, may yield returns comparable to today's CEX.

The author previously analyzed the competitive landscape and strategies of the NFT trading market in April this year. Looking back now, the landscape has not fundamentally changed. Blur still demonstrates strong dominance, but more new forces have emerged, such as the OKX NFT Marketplace and Flooring Protocol. Additionally, some mainstream trading platforms have made interesting adjustments to their strategies in response to market changes.

Rebuilding from Scratch: The Failure of OpenSea's Empiricism & Blur's Composure

At the beginning of November, OpenSea announced a 50% layoff to adjust its team and reduce middle management, aiming to rebuild its operational culture, products, and technology, creating OpenSea 2.0. OpenSea CEO Devin Finzer stated that OpenSea 2.0 will be reshaped in terms of underlying technology, reliability, speed, quality, and user experience, and there will be a team that directly connects with users.

This layoff by OpenSea is essentially a strategic adjustment made in response to the continuous decline in market share and revenue. The rebuilding of OpenSea 2.0 seems like a last-ditch effort to regain market share.

The criticisms of OpenSea can mainly be divided into two categories: the product is difficult to use and updates are slow; centralized operations disregard community voices. However, these points of concern from outsiders may not have been truly recognized internally. Based on OpenSea's current layoffs, it can be inferred that since its survival since 2017, OpenSea has developed a set of empirical strategies for survival, which tend to be conservative and wait for opportunities. This experience is closely related to the long quiet period between 2017-2020 and the sudden explosion of NFT trading in 2021. While it cannot be said that there were mistakes, it has led to a continuous erosion of market share by Blur. Particularly during the recovery phase of the entire Crypto market, it is evident that Blur's rebound momentum is much stronger than OpenSea's, and the gap that was once twice as large between traders is rapidly narrowing, which is a direct blow to OpenSea's past empiricism. OpenSea has realized and doubts that past experiences are no longer applicable.

Data source: https://dune.com/hildobby/NFTs

Although OpenSea has made some product responses and community feedback to counter Blur's impact, such as launching a simpler Offer Wall imitating Blur Bid Pool and introducing OpenSea Pro aggregator based on Gem, and airdropping NFTs to historical Gem users, unfortunately, these products and community strategies seem more like independent passive responses, lacking continuity and connection. This method of using NFT Drops to launch projects and give back to the community has only been used once by OpenSea.

In contrast, despite the team maintaining a long period of silence on social media to focus on development, the Blur product continues to operate steadily. Here, we must mention Blur's core moat: individual market makers, which is also the fundamental reason for the failure of OpenSea's empiricism. After the introduction of Blur Bid Pool, the inclusion of individual market makers brought strong liquidity, and points and potential airdrops continuously incentivized this behavior. Blur's individual market makers are mainly composed of NFT OG players, top holders of NFT blue chips, and NFT KOLs. They not only possess strong asset strength but also significant community influence. Their on-chain activities and social media subtly influence NFT players, such as Machi Big Brother, hanwe.eth, and the former BAYC whale Franklin. They provide liquidity and profit from the price differences around the true value of assets, making NFT trading more efficient and bringing more revenue to creators. Products can be imitated, but the cost of winning people's hearts will become increasingly expensive.

It is precisely because of the existence of individual market makers that Blur appears very composed when facing challenges from the newly emerging Flooring Protocol. Flooring Protocol is a liquidity solution that fragments NFTs into ERC-20 μTokens, launched by NFT OG player FreeLunchCapital. With the incentives of FLC, Flooring's daily trading volume is around $4 million to $6 million (excluding FLC, only including μTokens after NFT fragmentation).

Data source: https://dune.com/queries/3151047/5268010

Due to its not fully applicable nature to long-tail assets, Flooring implements a whitelist-like permission access system. Comparing with the highest trading volume BYAC, it can be seen that the liquidity and trading volume driven by Blur's Bid Pool and individual market makers are not inferior to μTokens applied in AMM Pools. However, the Safebox model introduced by Flooring significantly enhances the price discovery capability for rare NFT assets, which Blur has yet to effectively achieve.

Data source: https://dune.com/queries/3172383/5295405

The Gradual End of Trading Mining for LooksRare & X2Y2

At the end of September this year, LooksRare was the first to adjust its token economics, ending a trading mining model that lasted more than a year. Starting from October 1, 50% of the fees generated from LooksRare Game: YOLO and Raffles, as well as other upcoming games, will be used to buy back LOOKS on the secondary market, 10% will be added to the LooksRare protocol rewards for earning, and 40% will be sent to the treasury. This also means that although trading mining has ended, LOOKS stakers can continue to enjoy platform trading fees and receive 10% fee rewards from LooksRare Game. As of the announcement of the token economics modification on September 29, 1.8 million LOOKS had been repurchased into the treasury.

From the results, the end of LooksRare's trading mining has caused the platform's false trading volume (as shown in the left chart) to plummet to nearly zero, while the impact on real trading volume (as shown in the right chart) is relatively limited. On the other hand, from the change in the number of traders, LooksRare traders saw a significant decline in early August, but after the end of trading mining, the number of traders remained fluctuating within the same range. This seems to indicate that during the late stage of trading mining, from August to the end of September, users engaged in trading mining still remained after the end of trading mining (in October). Such changes may reflect that LooksRare has a group of loyal users or that there is a possibility of team trading.

Data source: https://dune.com/hildobby/NFTs?Wash+Trading+Filter_e106ea=

Although it is impossible to fully confirm the facts, the innovative operational methods based on LooksRare Game have created conditions for user retention, such as Yolo incorporating gambling elements, and Raffles being a lottery with NFTs as rewards. LooksRare provides tasks for users to participate in these mini-games to meet task conditions and earn gems, which can be exchanged for LOOKS. In this process, there will be some tasks related to NFT trading to stimulate platform trading volume. The larger the trading volume or the more funds involved in the games, the more gems can be obtained. However, currently, users seem reluctant to invest large amounts of funds for this.

Another platform, X2Y2, although still retaining trading mining, announced on the first day of November that it would reduce the daily token emission by 50% starting November 7. In April, I pointed out that LooksRare was more focused on internal expansion of platform functions, while X2Y2 was taking an external approach based on a full financial ecosystem for NFTs. This remains true. Along with the token reduction announcement, a cross-chain aggregator is set to launch, and it is claimed that the incubated NFT trading market Dew has captured 30% of the Polygon NFT market share. Based on the broader NFT ecosystem it aims to build, X2Y2's token economics will likely see more adjustments in the future. As the complete output date for X2Y2 tokens (April 3, 2024) approaches, the era of NFT trading mining will also come to an end.

An interesting subplot for X2Y2 is that at the end of September, when Yuga Labs' Otherside game Legends Of The Mara launched, X2Y2 was blacklisted by other NFT trading markets for not providing mandatory royalty transactions, thus being chosen by Yuga Labs as the official preferred trading market for Mara NFTs. This subplot inadvertently gave X2Y2 a unique advantage, while also laying the groundwork for Yuga Labs to create a contract-bound mandatory royalty market.

Multi-Chain and Aggregation

Avoiding direct competition on Ethereum, platforms that take a multi-chain or aggregation route have generally achieved some development, among which the standout is OKX NFT Marketplace, which combines multi-chain and aggregation. Leading the multi-chain route are also platforms like Magic Eden. Additionally, smaller platforms like Element and Zonic have also received good traffic support on emerging public chains.

The traffic dividend brought by the built-in Web3 wallet in exchanges has finally exploded in the second half of this year, with OKX NFT Marketplace experiencing explosive growth in trading volume and users. Currently, OKX NFT Marketplace supports 17 public chains and aggregates liquidity from 6 major trading markets. The daily aggregated trading volume of OKX NFT Marketplace is around $7 million to $15 million, but its own market trading volume is still relatively low, indicating that OKX's conversion of CEX traffic into on-chain user traffic also benefits the liquidity markets it aggregates.

Data source: https://dappradar.com/dapp/okx-nft-marketplace?range-ha=30d

After experiencing the collapse of the Solana ecosystem, Magic Eden's efforts in the multi-chain market should not be underestimated. At the end of June, it launched a multi-chain NFT presale platform in collaboration with Helio, and in August, it introduced a $1 million creator fund on Polygon. In September, it launched Solana cNFT, and in November, it announced a partnership with Yuga Labs to launch an Ethereum NFT trading market protected by contract-bound royalties for creators. There have been major multi-chain layout moves almost every month. However, looking back now, Magic Eden's announcement to suspend BRC-20 trading in October does not seem to be a wise choice, as its market share in Ordinals has dropped from over 50% to less than 5%, replaced by OKX.

Data source: https://dune.com/domo/ordinals-marketplaces

The multi-chain markets Element and Zonic share a similar approach, catering to the development of emerging L2s with the shortest launch time in the context of one-click chain deployment, competing for users looking to take advantage of opportunities. They have active addresses ranking high on L2s like zkSync Era, Base, Linea, and Scroll, but the development of L2 NFT communities is still in its infancy, contributing very limited trading volume, and their activity is easily influenced by potential airdrop-related events.