Introduction

Ethereum-based NFTs experienced a frenzy in the 2021 bull market, with the floor price of the popular Bored Ape Yacht Club collection (BAYC) reaching an all-time high of $420k per NFT. Skeptics were left baffled at the apparent lack of utility and inherent value in these unique digital tokens, which went for prices that could buy houses despite the ability of others to “right-click save” the same image. It wasn’t just newly monied crypto natives paying outrageous prices for profile pictures; buyers ranged from soccer superstar Neymar Jr. to popstars Justin Bieber and Post Malone.

Digital Status Symbols

What was the appeal that led to what could be considered crypto’s first mainstream breakthrough? Nonfungible tokens (NFTs) are unique digital tokens registered on a blockchain. These tokens are irreplaceable, non-duplicable, and can only be traded and sold by the person who holds them in their wallet. Unlike common cryptocurrencies or traditional currencies, these unique assets are not interchangeable due to their unique value derived from their specific characteristics and qualities. While profile pictures have emerged as the most common use case, NFT tokens can represent any type of data with unique attributes and ownership rights verified on-chain, including art, collectibles, assets, or any other media type. Ownership and originality of a limited ‘blockchain official’ copy are confirmed by the native chain the NFTs are issued on.

Skeptics failed to understand that these celebrities and crypto investors were seeking the same thing buyers of Rolex and six-figure Patek Philipp watches do – to flex their status. NFTs represented what could possibly be the first medium to accomplish this digitally. Others could ‘right-click save’ the same image, but the blockchain only points to one authentic copy bought for over $400k. That copy indisputably belongs to the wallet’s owner (for better or worse). What the owners are communicating beyond the fact that they like the art is that they can afford it, or at least afford not to sell it.

At a certain point, once an NFT’s price has appreciated to a certain level, it becomes a Veblen good, a type of product for which demand increases as the price increases, contrary to the typical law of demand in economics. Named after economist Thorstein Veblen, these goods are often luxury items and are sought after for their status symbol and exclusivity, with their high price being a key part of their appeal.

The first NFT cycle revolved around profile picture collections (PFPs). Compared to luxury watches, PFPs communicate status more effectively, showcasing wealth to the entire internet instead of just people who see your wrist. While BAYC and many top collections have lost substantial value in both USD and ETH, many remain at relatively elevated price levels, with BAYC sitting at a USD floor price of ~$56k at writing.

Figure: BAYC Price History

Source: CoinGecko

As we enter the next bull cycle, there may be an opportunity to take a contrarian bet that NFTs could make a resurgence to prior levels. Beyond the typical status-focused PFP collections, we see green shoots emerge with early signs of traction in relatively untapped NFT verticals – consumer brands, social media, and gaming. Picking the next individual collection to take off (like BAYC) is a losing exercise for most market participants. In this piece, we explore whether NFT marketplaces, specifically their tokens, could be potential avenues for exposure to the growth of the NFT space.

State of the Market

Despite many fungible tokens and cryptocurrency sectors beginning to look like they have potentially bottomed, the NFT market remains anemic by most measures.

Volume

According to Token Terminal, September’s $399m volume marked the worst monthly for NFT sales in nearly three years. Almost every major collection has seen declines in the floor (lowest price) values for their pieces.

Source: Token Terminal, Fundstrat

While longer-term trends paint the picture of a dead market, daily volume has shown positive momentum in the last three months:

Source: Dune, @hildobby

Weekly traders on NFT marketplaces have been in a steep downtrend since peaking in early 2022, but there has been a notable flattening over the last few months as the market seems to be reaching an equilibrium of longer-term users. 

Source: Dune, @hildobby

NFT Marketplaces

Overview

NFT marketplaces create user-friendly platforms for interacting with smart contract functionality used to purchase, trade, or generate non-fungible tokens. Marketplaces provide a venue for creators to launch new collections and collectors to trade on secondary markets. Revenue accrues to the marketplace from a percentage of initial sales or subsequent resales. In addition to aggregating buys and sells of collections in one dedicated market, here are a few of the key benefits NFT marketplaces provide:

• Unrestricted global trading of unique blockchain-based assets 
• Any asset can be tokenized and bought on chain
• Digital creators can launch and monetize assets, earning on both primary and secondary sales
• NFT collectors have immutable ownership of distinct decentralized assets

Three main types of NFT marketplaces exist: art-focused, niche-specific, and universal. Art-oriented platforms like SuperRare and Nifty Gateway focus more on digital art, working with curated artists to create unique NFTs. These platforms suit artists wanting to monetize their digital work and collectors of digital art. Niche marketplaces, such as NBA Top Shot and Axie Infinity, cater to specific interests like sports and gaming. Others specialize in virtual real estate or digitized tweets, appealing to those with particular interests within the NFT community.

Universal platforms such as OpenSea and Rarible offer a diverse range of NFTs, including digital art and virtual real estate, making them ideal for newcomers to the NFT world. OpenSea, established in 2017, is a well-known NFT marketplace with historically high trading volumes. In contrast, Blur, another universal platform, targets active traders with features like “sweeping the floor” to buy multiple NFTs concurrently. While Opensea dominated NFT volume in the last bull market, Blur has surpassed OpenSea in trading volume over the last year, partly due to its token incentives.

Source: Dune, @hildobby

Looking at the chart above, it’s clear that OpenSea dominated the market as a first mover until Q4 2022. As a dual-sided platform without risk specific to any one collection, OpenSea profited from the volatility and general expansion that came with the first boom cycle of NFTs. Most crypto investors could not get broad exposure to the growth of the NFT market since OpenSea operated as a private company. Early investors in OpenSea generated substantial returns, with OpenSea securing a $300 million Series C raise valued at $13.3 billion post-money in the last few months of the bull market. In the same month of the raise (Jan 2022), OpenSea was estimated to have ~$387m in revenue. This compares to current monthly revenue, likely in the single-digit millions using the latest data from Nansen.

Marketplace Tokens

Besides a brutal bear market where many tokens had over 80% drawdowns from bull market peaks, a few market structure shifts in the NFT market affected OpenSea’s profitability. In the market share data above, it’s clear OpenSea’s dominance waned as more competitors came to market. Competitors that used marketplace tokens to acquire customers and incentivize activity were able to gain market share for brief periods. Until Blur, none of these token-based competitors gained a majority market share over OpenSea.

Most of these competitor tokens have performed poorly throughout the bear market as they were competing for a shrinking pie of NFT activity. Given signs of a potential bottom forming in NFT market activity, our team was compelled to look at token models of some of the most popular marketplaces.

LooksRare

Second-mover LooksRare ($LOOKS) was the first competitor to steal notable market share from OpenSea, gaining up to ~11% after its launch in Jan. 2022. LooksRare simultaneously launched their token and platform, airdropping 120 million $LOOKS, 12% of their total supply, to qualifying OpenSea users. The platform introduced various incentives like liquidity provisioning, staking, and trading rewards in $LOOKS based on user trading volume.

Their approach focused on generating high emissions to maintain demand for the token and encourage platform use. This led to a surge in users participating in staking and trading on the platform to be rewarded $LOOKS for generating volume, resulting in significant wash trading. However, as $LOOKS tokens were primarily for governance and had limited utility, they were often sold immediately after acquisition. According to LookRare’s overview documents, the token utility has not evolved much, and the team has yet to launch the governance DAO.

LooksRare’s product likely did not differentiate itself enough to retain users and carve out a substantial market share over a few months. As token incentives went down, trading volume followed.

Source: Token Terminal, Fundstrat

At its peak, LooksRare stood as the sole competitor to OpenSea, uniquely implementing a vampire attack targeting OpenSea’s user base. However, its dominance waned following the launch of competitor X2Y2 in April 2022, which employed a comparable approach but offered lower trading fees.

X2Y2

By the start of Q3 2022, NFT platform X2Y2 had secured an 11% market share, not counting wash trades. Several factors contributed to X2Y2’s early success. The rising use of NFT aggregators like Gem and Genie, which let users buy from various marketplaces in one transaction, played a significant role. The primary factor for users became price, particularly sale fees, making users less tied to any specific marketplace. X2Y2 emerged as the most affordable option on Ethereum, charging only a 0.5% sale fee compared to OpenSea’s 2.5% and MagicEden and LooksRare’s 2%. Enhanced features, such as rarity rankings and reduced gas costs, also made its product appealing.

In August 2022, X2Y2 controversially chose to make royalty fees optional for collections, prompted by the debut of Sudoswap in July. Sudoswap is a decentralized protocol that facilitates NFT trading through an Automated Market Maker (AMM), enabling users to avoid royalties. By the latter half of 2022, X2Y2’s market share fluctuated between 7% and 11%, but it has dropped to ~1% at writing.

The $X2Y2 token had a similar life cycle to $LOOKS. OpenSea users received 12% of the total supply once again. All profits from the platform are distributed among those who stake X2Y2 tokens. As of writing, X2Y2 still needs to establish a DAO to manage its governance. Therefore, the primary use of the X2Y2 token is for incentivization of volume on the platform, leading to a one-sided supply flow with little outside demand. Relative to LookRare, the X2Y2 platform seems stickier, consistently retaining between 1-2% of weekly volume over the last few months. Besides its NFT trading capabilities, X2Y2 also provides NFT lending services. Users on the X2Y2 platform can either secure a loan in ETH using their NFT as collateral or use their ETH to borrow an NFT.

Source: Token Terminal, Fundstrat

Blur

Debuting in October 2022, the Ethereum-based NFT marketplace quickly dominated the NFT trading scene, usurping OpenSea within two months of its debut. Blur has continued to dominate NFT volumes since then, capturing over 80% of the weekly trading volume market share at writing.

Beyond improving on the token incentive structures of its predecessors, Blur stands out from other marketplaces by catering specifically to professional traders. It offers a range of features that appeal to this group, including low transaction fees, high-speed transactions, collection sweeping, NFT analytics, and more. In addition to its marketplace, Blur provides users with aggregator services to buy from other NFT marketplaces and an NFT lending protocol.

Blur operates a no-fee model, allowing NFT traders to transact on its platform without incurring transaction fees. Although Blur suggests a 0.5% royalty rate on NFT sales, this is not mandatory. Users have the freedom to set their royalty rates as they see fit. This flexibility is particularly beneficial for professional traders handling large trades, making it a cost-effective option.

Blur refined and enhanced the strategy originally used by LooksRare, focusing on boosting liquidity on its platform. Rather than directly mint tokens to traders that would immediately sell, they introduced a retroactive airdrop known as Care Packages, aimed at incentivizing liquidity. This system rewarded riskier positions with more points, increasing the likelihood of getting airdroped $BLUR tokens. A key aspect of this design was the loyalty factor, which favored users who exclusively listed on Blur with a higher chance of a larger airdrop allocation.

This approach was part of Blur’s well-crafted marketing strategy, which improved many of its predecessors’ downfalls while improving retention on its platform. The team discouraged wash traders through delayed rewards and reduced benefits. Traders were engaged through undisclosed token amounts in Care Packages, which added an element of surprise while creating gamified addictive points farming. The loyalty criteria increased chances in the Care Packages, thus encouraging users to prioritize Blur’s platform.

For Season 2 of Blur’s airdrop, the mechanics remained largely the same as in Season 1, with the primary change being the introduction of lending points instead of listing points, prioritizing NFTs available on Blur’s loan product, Blend.

Source: Token Terminal, Fundstrat

Unlike its predecessors, Blur has continued adding utility to the platform’s governance token ($BLUR). While no revenue share has been established for token holders, Blur’s team has found other ways to incentivize long-term holders. Blur’s founder (known as Pacman) recently announced the development of a Layer 2 Optimistic rollup called Blast, backed by $20 million in funding from Paradigm. The core concept behind Blast is to generate yield on user assets automatically. When users deposit assets like USDT, USDC, ETH, or stETH into the mainnet contract, Blast will automatically transform these assets into derivatives that earn yield. This is accomplished through a bridge contract that deposits into a Liquid staking protocol, passing yield to holders of the assets.

Users who stake BLUR tokens will also be eligible for the Blast token airdrop. This airdrop is part of Blur’s new Season 3, where rewards will be evenly distributed between NFT traders and BLUR stakers. In contrast to ETH and USDC depositors, those who stake BLUR tokens can withdraw their tokens whenever they wish without losing any of the points they have accumulated. Pacman has also teased additional benefits for BLUR holders:

Blur recently concluded its Season 2 airdrop, featuring 300 million $BLUR tokens for claiming. Data from @sankin’s Dune dashboard shows that, as of January 11th, over 279 million $BLUR tokens (more than 90% minted) have been claimed by 53,442 addresses, averaging approximately 5,223 $BLUR per wallet. The launch of the Blast platform played a critical role in reducing the selling pressure from the airdrop and even positively influenced the price of $BLUR. This launch was strategically timed with Blur’s Season 2 airdrop, likely to offset the increase in $BLUR supply from the airdrop. Initially, $BLUR’s price dipped from $0.35 to $0.30, but this decline was quickly reversed, with $BLUR breaking through the $0.35 resistance level that it had failed to surpass in the week before the airdrop. As of January 11th, the price of $BLUR has been fluctuating in a range from $0.39 to $0.58 since the start of December.

Conclusion

The bullish outlook for NFTs is that 2021 was akin to the altcoin cycle of 2017. If a similar cycle plays out, expectations of a tenfold increase in volume and users compared to the previous peak are not out of the question. While only a few collections are likely to endure, those that do could experience significant gains. The uncertain aspect of this outlook is the unpredictability of the future NFT landscape and which collections will emerge as leaders. However, NFT platforms are well-positioned to reap the benefits of these developments if a similar cycle repeats.