OpenSea is the largest and most important platform in the entire space, it doesn’t matter which metric you look at. OpenSea dominating any way you slice it. With all that good stuff going on, why am I predicting their demise in the next few years that they’ll be the AOL or Myspace of the NFT space? To really understand my thesis, we have to rewind a bit and start at the beginning of their story.
OpenSea was founded by Alex Attala and Devin Finzer. They were actually working on a completely different crypto project when they first started, but when they saw CryptoKitties took off, everything changed. They were instantly hooked and saw the massive potential of NFTs, so they scrapped their previous project, and started to build tools for the NFT space. They launched the first version of OpenSea in December of 2017, and that was great timing because the ERC-721 token standard was just about to go live. That’s the token standard that powers all NFTs on the Ethereum blockchain.
But even with the vision and the timing it wasn’t always rainbows and butterflies for them, they actually struggled quite a bit in the beginning. The NFT space was a ghost town back then, and Devin tried every day to convince people to create NFTs and trade them on its platform. Even though it was a grind they had a long-term vision and took the time to build slow and steady.
When a tsunami of NFT demand hit in 2021, they were perfectly situated to take the advantage. they went from doing a few thousand dollars’ worth of revenue to hundreds of millions in a span of a few months. In that same time, they pulled off three rounds of venture funding, increasing their valuation to 13 billion dollars per their latest round.
OpenSea’s story so far has been one of resilience, grinding through the difficult times to now being one of the hottest rocket ships in the entire world. But even with this feel-good story it’s my thesis that they’ll lose their position of dominance within the next few years. To understand why there’s really three key arguments to dissect.
First, they just don’t have a strong moat or something that locks users in. This isn’t their fault it’s just the nature of NFTs and the blockchain. This isn’t like YouTube where everyone’s content is in one place, and you can’t easily port that over to a new platform. As for NFTs they live on the blockchain so multiple different marketplaces or platforms can display your NFTs.
You may need to go to each site to list your NFT for sale but honestly that’s pretty easy to do so it’s not a high barrier to entry. My whole point is that OpenSea has an impressive early lead, but his lead is much more fragile than a YouTube type platform that has much stronger lock-in.
Think about it, YouTube has this gigantic library of videos with thousands of hours’ worth of content being uploaded daily. For YouTube competitors what can they even do? They all start off with very few videos so why would anyone want to go there to watch? and if there’s little viewer demand why would creators spend the time to upload content there? You see the dilemma? and that is YouTube’s moat or lock-in per se.
OpenSea doesn’t have anything like that, that’s why they are extremely vulnerable to something called a vampire attack. This is where a new company picks an industry leader, such as OpenSea, builds something similar and then offers a great incentive for existing users to switch. SushiSwap famously did this to Uniswap back in the day. But for an even better example we can look at LooksRare because they just did this to OpenSea.
LooksRare is a decentralized community first NFT marketplace. They launched in January of this year by some anonymous founders, but they executed a vampire attack that would have made Conde Drácula proud. Their incentive came in the form of LOOKS tokens which they gave out as rewards to anyone who buys or sells on their platform. They even airdropped it to all OpenSea users who did a certain amount of volume in prior months. But there was a catch, to claim your airdrop you had to go to their platform and list an NFT for sale. That way they could bootstrap early activity on their platform.
Long story short, their plan worked to perfection as NFT traders flocked their marketplace. LooksRare pulled in 9 billion dollars’ worth of volume in their first month and generated over 300 million in protocol revenue. Those numbers are 3x greater than what OpenSea did in that same period. Granted a lot of that may have been wash trading from whales that wanted to farm their tokens, but regardless their ability to grow so fast and eat into OpenSea market share was handsomely rewarded by the market.
We saw their market cap rocket to over one billion dollars in the first couple of weeks, their ability to put such a large dent in OpenSea market share in such a short amount of time, just reinforces my view of how fragile OpenSea’s lead is.
One could argue that even without a strong moat, they could still stay on top if they had a happy and loyal community. Unfortunately, that is not the case. They had a string of unfortunate incidents that has largely tarnished their reputation. This started off with a whole insider training saga, where the head of product Nate Chastain was caught front running their customers. He had insider knowledge of which NFTs would get featured on their front page so he would buy them up beforehand, and then turn around and sell them to newbies. The sad and ironic part is that he only made around five figures from his scheme, but he was pushed to resign, and he gave up tens of millions in OpenSea equity as a result.
This just might be the biggest and dumbest mistake of his lifetime. Now that was just the first big stain on their reputation, another one came in January of this year. This was when a bug was discovered that let hackers buy rare NFTs for pennies on the dollar. Here’s how it all went down. Some users listed their NFTs for sale a long time ago but instead of canceling their listings the proper way, they did a shortcut where they sent their NFT to another address they controlled. And then sent that back to their original wallet. The reason they did this was to save money because gas fees were very expensive. And by using this shortcut they could get OpenSea to no longer display that their NFTs were for sale.
The problem is that those listings were still live on the blockchain, so the hackers figured that out and bought those NFTs for prices that were set months ago. Now there is a question of who’s really to blame here, but either way over a million dollars’ worth of NFTs were stolen this way, and the community was pissed as a result. But even in light of all these issues, the community was willing to look past them as long as OpenSea would give them the one thing they desired most, an airdrop.
We were all spoiled by the ENS airdrop where we got thousands of dollars and that made us hungry for other airdrops from big names like OpenSea and MetaMask. But the team kept on being vague and non-committal about it, and people speculated that they wanted to be more like a web 2 company than a web 3 one. This was exacerbated when they hired a new CFO who hinted that they were going to IPO instead of launch a token.
As you can imagine, everyone was super disappointed, and it made people feel like the team didn’t care about them at all. But even besides moat and reputations, I think there’s one reason that stands above all else as to why OpenSea will fail. That is history, many times in history we’ve seen general marketplaces or platforms get unbundled by their competitors, so the theory is that this will also happen to OpenSea, and they’ll face pressure from a thousand different angles.
This thesis was actually first introduced by Tasha Kim. Basically, the prediction is that niche marketplaces will sprout up, and eat into OpenSeas market share. To understand why and how this may happen, we can look at eBay, arguably the closest analog to OpenSea in the web 3 space. They were an absolute rocket ship in the early 2000s and they had a similarly meteoric rise like OpenSea. eBay’s peer-to-peer marketplace had so many different categories, ranging from art to books to cars, you name it. But eventually their growth stalled as niche
competitors sprouted up in each of their categories, some notable examples include Carvana for cars, Poshmark for clothes, and Zillow for real estate, and the list goes on. Currently if you add up their combined valuations of the top specialized marketplaces, they collectively dwarf eBay’s valuation.
The takeaway here is that unbundling can generate great value and that will likely happen to OpenSea as well. You can easily imagine specialized marketplaces for gaming, music, and sports NFTs. In fact, a lot of them have already launched in recent months and they’re putting pressure on OpenSea by offering filtering specific to their niche, lower fees, more focused marketing, etc.
One angle where OpenSea is really feeling the heat is decentralization, because it is a spectrum after all. We have LooksRare on the decentralized side, CoinBase and FTX on the centralized side while OpenSea sits somewhere in between. But their competitors on either side can offer certain features that OpenSea can never offer unless they pick one side. For example, FTX can custody people’s NFTs and LooksRare can offer token rewards.
So, my point is OpenSea will die at death by a thousand papercuts, and I just don’t see how they can maintain their king of the hill status much longer. My prediction is that they’ll drop to one third or less market share in the next two years. I don’t think we need to get too specific here because I’m essentially predicting that they’re going to fall a lot, no matter which metric we look at.
