Author: Spike @ Contributor of PermaDAO
Reviewer: Kyle @ Contributor of PermaDAO
Preface
The crypto market in Q3 2023 is an arena where all kinds of Layer 2 compete with each other, while the "traditional" DeFi and NFT segments are a little quiet, especially after Azuki's suicidal marketing. The NFT small picture business has reached its bottom, and from a more macro perspective, the Fed's interest rate hike-rate cut cycle is still in a stage of insufficient liquidity, and the funds allocated to the NFT market are declining exponentially.
If we go back to Q2 of 2022, we can find that it was already the downward period in the first bear market. Coupled with the microclimate of Luna-UST's death spiral at the time, the overall market trading volume fell by more than 50%, and the transaction volume of NFTs also dropped significantly.
The current stage is nothing more than a dormant period of this long winter. In particular, the NFT composability innovation that has emerged in the Arweave field has surpassed the image hype of ordinary NFTs and entered the true sense of NFT composability - the category of atomic assets. Atomic assets can not only include PFP, but even FT (homogeneous tokens) or various RWA assets. It is built on the Permaweb, which also means allowing the permanent storage of assets and getting rid of the chronic diseases caused by long-term "pseudo-decentralized" operations.
NFT market segmentation: finding your own position
If we roughly divide the existing NFT market, it can be roughly divided into three types:
1. Exchange extension category: Binance NFT, Coinbase NFT. The main purpose of their NFT market operation is to expand their own market space. The operation mode is closer to the Token market (CEX/DEX) mode.
2. By transaction type: Artwork: SuperRare VS All categories represent OpenSea. The difference between them lies mainly in the difference in transaction types, such as choosing a specific art market or all categories;
3. Public chain ecology: A typical example is Magic Eden on Solona. The value of their existence lies mainly in building their own public chain ecology. It can be understood as NFT for NFT, and ecology for ecology. They are an indispensable component of any public chain.
If the new NFT market wants to enter the market at this time, it needs to recognize its own existence and positioning. What kind of trading market it wants to be is more important than what it achieves. In other words, is it a rival or supplement to industry giants such as OpenSea, exchanges such as Binance, and other public chains?
The most realistic option at present is to stick with the project parties and cross-chain. The project parties do not mind entering more new markets, and the public chain’s desire for ecology is engraved in its bones. In this way, they can temporarily avoid the edge of OpenSea and exchanges and at least survive.
For example, the total transaction volume of Magic Eden based on Solona once exceeded 1 billion US dollars. Its founder is Yin Zhuoxun, a former product manager of Coinbase. The public chain + exchange background allows it to firmly occupy the ecological niche of the single Solona public chain. In this context, OpenSea's support for the Solona network can be regarded as a direct impact of the catfish effect.
After determining our own positioning, we all face an unavoidable dilemma: how should we view OpenSea?
Judging from the trajectory after the issuance of ApeCoin, NFT combined with DeFi is a feasible path, while other models are still waiting for the outbreak period. The NFT Marketplace is still the one that directly captures the greatest value of NFT. As of now, compared with the entertainment model in the real world, NFT is still in a very early stage of development, which is mainly reflected in two points. One is that PFP NFT accounts for too large a proportion, and the other is that OpenSea occupies too high a transaction volume, even as high as more than 90%.
According to the theory of innovation diffusion, the foundations of monopoly giants in the early stages of the market are not solid, and innovators still have room for development. After all, the entertainment content of Generation Z, including music, game props, and even personal social platform content, all have the direct possibility of being NFTed.
It can be said that the world has suffered from OpenSea for a long time. We can even list the seven deadly sins of this evil dragon.
It does not issue coins, but wants to go public. It has high transaction fees, centralized storage, opaque censorship, is not active in cross-chain operations, and most importantly, it has a monopoly.
The first six are causes, and monopoly is the result. First of all, we must admit that OpenSea has also made positive contributions to the industry. In the darkest moment of the long bear market in 2017, OpenSea persevered and survived. Without this persistence, many projects that are familiar to us today, including popular projects such as Sand and BAYC, would have died directly due to lack of liquidity.
However, a project that does not issue coins or even wants to go directly to IPO is really not decentralized at all. Building a more decentralized NFT market is in line with everyone's expectations.
Why do we dislike OpenSea but cannot abandon it? Why are there so many dragon slayers but no one is truly successful?
To answer the question by combining them, the biggest advantage of OpenSea is path dependence - we are already used to doing transactions on it. For example, if Alipay wants to change the user group of WeChat, it will involve the usage habits of the entire social circle. If you are willing and I am not, then this matter cannot be promoted. The user stickiness of OpenSea has actually been formed.
Facts have proved that the Token+ brushing represented by LooksRare is effective in seizing the market, but the brushing is still far from the actual number of users. X2Y2 and Magic Eden may face this problem:
In this case, how to beat OpenSea will definitely be a long battle, but we can be sure that there are several things we can do:
1. Unite more projects and public chains to avoid exchanges and OpenSea;
2. More decentralization, reducing the amount of centralization a little bit every day;
3. It takes a long time to change user habits. Changing user habits cannot be accomplished overnight.
If we compare existing mature products, such as WeChat for social networking, PayPal for payment, Sotheby's for art, Google for search, and bureaucracy for organization, we will find a more suffocating path entanglement. All of the above forms can be involved in Web 3.0. Please note that it is involvement, not inclusion. In a decentralized world, there is no concept of absolute control.
For example, Friend.Tech is to social networking in the Web3 era; Arweave is to information storage in the Web3 era, which is the first step in building information retrieval; PermaDAO is to organizations in the Web3 era; not to mention that any everPay product already has payment functions and is seamlessly connected to Web3.
In this case, it is believed that OpenSea will be an example of Web3's centralization. On the surface, it makes sense. First, OpenSea occupies more than 95% of the NFT trading market, and its dominance even exceeds Binance's 60% share in the cryptocurrency exchange field. It is an absolute industry benchmark. Second, OpenSea is not actually that encrypted. This is an industry consensus.
However, from the perspective of internal mechanisms, Web3 cannot be represented by OpenSea. This is just like the 8848 e-commerce platform was earlier than Alibaba, and Yahoo was earlier than Google. The first comers occupy the position earlier and naturally have a higher market share, but over time, only products that truly conform to the logic of this track can win.
This is not a debate logic, just like what V God said that centralization is the only way to achieve decentralization, but because the total market size in the early stage is small, just like a crab in a small pond. This is not a real ocean hegemony.
OpenSea is not the only art platform in the Web3.0 era
Even if OpenSea occupies the vast majority of the market share and even if the monthly transaction volume exceeds 3 billion US dollars, we can still believe that the current NFT market is still in its very early stages, and can even be compared to Bitcoin before 2011. The important reason is that our current mainstream spiritual product consumption is still not in the NFF market.
Compared with the entire luxury goods market of $1.29 trillion, the gaming market of $180 billion, and the art market of $50 billion, the entire crypto art market is only a few billion dollars. Even if other NFT categories are added, it cannot shake the size of the entire human consumer goods market.
Optimal efficiency: the attack of pure transaction model
Time is money, and tradability is always synonymous with liquidity, but NFT is slightly more complicated. Different from the unified pricing mechanism and quantity model of FT (homogeneous tokens), even in a single NFT series, the floor price and the maximum price may be very different and cannot be compared.
The market-making efficiency has been seriously affected, and there are three solutions to this problem:
1. Fragmentation. Starting from imitating homogeneous tokens to deconstructing the high threshold of blue chips, it is hoped that sufficient liquidity can be created by increasing the number of retail investors, thereby changing the current NFT market landscape;
2. DeFi. The first is to imitate the market-making model of homogeneous tokens, hoping to create sufficient liquidity by introducing various AMM models into the NFT market; the second is the lending mentality, using blue-chip NFTs as collateral, and then guiding liquidity on them, introducing retail investors into the pressure pool, and supporting token prices;
3. Traderization. Strictly speaking, this is a summary of Blur’s market thinking. Its core is to serve NFT traders, taking meeting their special and professional needs as the first principle, thereby enhancing the value of its own platform.
It can be understood that the cause of NFT fragmentation is that its own value is not stable enough. If it is a series of NFTs, such as Crypto Punk, the value of the token is often unevenly distributed among each member, resulting in the turnover rate of the project being mostly contributed by popular members. But on a larger scale, the global liquidity of the project is likely to have problems until it enters a death spiral.
From the perspective of value discovery, NFT is different from FT in that its value calculation formula is cumulative. Its calculation formula is as follows: Formula 1, while FT is the product of the number of tokens and the price, as shown in Formula 2.
In view of this, value discovery must be the prerequisite for value transfer. NFT must first solve the problem of pricing mechanism, and then use liquidity to solve the problem of transaction scale. The trading enthusiasm of NFT works is driven by the participants' maximum psychological expectations.
The representative of DeFi is sudoAMM, which is not very successful. According to Dune data, the approximate transaction volume is only around US$100 million, and the number of transactions is around 100,000. In the final analysis, the market-making efficiency of NFT cannot be compared with that of homogeneous tokens. With the overall market size being small, it is difficult to create sufficient liquidity. A good cook cannot cook without rice.
Finally, Blur's success, in terms of satisfying the professionalism of traders, is a strong counterattack against OpenSea in terms of platform market share. Although the Blur token has fallen from US$5 a year ago to around 0.2, it has at least made a strong counterattack against OpenSea in the name of decentralization.
In terms of transaction volume, Blur far exceeds OpenSea, but in terms of the number of transactions, OpenSea is an order of magnitude ahead of Blur in terms of both buyers and sellers. This indirectly verifies that Blur is more suitable for professional traders, which is highly similar to the difference between Curve and Uniswap.
BazAR NFT: Native Composability
Arweave recently launched BazAR, an NFT market built on the Permaweb. First of all, this NFT market is more of an experimental platform for verifying atomic asset transactions and some major recent updates of Arweave such as UCM/UDL/STAMP/$U, and is not intended to challenge Blur or OpenSea. This is the biggest difference from the aforementioned NFT platforms.
According to Arweave founder Sam, atomic assets on Arweave can be understood as “asset data, metadata, and smart contracts all bundled into one Arweave ID.”
In this way, through smart contracts, atomic assets can be fundamentally given infinite divisibility and tradability, and NFT data will be permanently preserved, and transaction records will be updated synchronously. On BazAR, there are also some new changes:
1. You can use $U to purchase NFTs, which is equivalent to obtaining a discount on the storage fee on the chain, and you can also obtain PIXL tokens, which will be automatically issued to users who purchase assets on the BazAR market every day;
2. Any NFT uploaded to BazAR can add UDL (Universal Content License) to ensure that creators can track changes in NFTs and obtain sustainable income from them to cope with the current royalty status and ensure the rights of creators;
3. The BazAR platform meets the Universal Content Market (UCM) standard. When using it, users can directly eliminate any intermediaries and commissions in the transaction process and interact with Permaweb natively;
4. In the NFT display list, users can use STAMP to rate different NFTs. STAMP is an evaluation system based on Arweave, and its tokens can be circulated, which means that users can share in the evaluation system.
It can be found that BazAR's technical structure focuses on the composability of NFT, rather than being obsessed with NFT products or liquidity. It is more about exploring future NFT application scenarios. In the current NFT market, both zero royalties and centralized storage are seriously damaging the intrinsic value of NFT.
Conclusion
If we believe that the process of human virtualization will deepen further, then how should we evaluate the market value in the Web 3.0 era?
If this kind of value is ultimately proven to be unable to escape the control of centralized organizations, it will eventually collapse. At that time, people will wake up from their dreams.
These questions are not groundless worries, but problems that must be solved for the future development of Web3, just like the invention of Bitcoin. Digital gold is the value anchor for mankind entering the information age, which is a historical necessity, and Bitcoin's assumption of this value is actually a coincidence.
Let's go back to the question about BazAR. The current development trend is that NFT itself has many problems. We need to replace it with better products instead of focusing on the immediate economic benefits. As Sam, the founder of Arweave, said, Arweave's UCM standard can also be used to exchange homogeneous assets. If Uniswap X hopes to become a better aggregation trader, then Arweave and Permaweb are trying to create a New York Stock Exchange and Sotheby's that never stop.
So the question here is what kind of response measures to take in the face of developing problems. Of course, we can choose to look at a group of people "entertaining themselves" from a negative and sarcastic perspective, while we stand on the dry shore and think about our own "cleverness". But from another perspective, we can solve it in the way of the crypto industry itself.
