Defensible NFT Bazaars: How NFT Marketplaces Capture Value
Some thoughts on how NFT marketplaces will build defensibility
Some thoughts on how NFT marketplaces will build defensibility and capture value.
The magic of NFTs as an asset class is that the underlying assets are composable. But, this effortlessly destroys the moat of secondary trading liquidity that marketplaces have historically relied on to succeed.
NFT marketplaces must find proprietary liquidity that lives on their platforms, that drives users, and is unique.
Fluid secondary liquidity means NFT marketplaces must compete in the streets of the bazaar where trading occurs and not behind their castle moats.
NFT marketplaces will build their defensibility in several ways:
Proprietary liquidity: primary mints, financial products, retail liquidity
Enhanced NFT discovery & experiences: surfacing unique purchasing criteria or amplify an NFT’s utility
Brand - trust, convenience, security
Proprietary Liquidity: Primary Mints
Primary Minting - owning the initial minting process is perhaps one of the best ways to control demand and generate proprietary liquidity. Primary mints draw user attention which in turn also attracts creators who want distribution to users.
“He who controls the primary mints controls the market” - Anonymous Gromflomites, Rick and Morty
Proprietary Liquidity: Financial Products
Marketplaces that control demand will have the ability to reinforce their demand-side moat by integrating with partners to give yield on assets, offer additional products (e.g. Robinhood offers margin), or build their own products.
Proprietary Liquidity: Retail Users
Retail liquidity in NFTs is much stickier than professional traders. Retail users aren’t as price sensitive and will go to the platform that provides them the most convenience or utility.
Over the long term, owning retail order flow opens up opportunities for MEV which can either become a revenue line or get passed back to users which creates an additional incentive to use the marketplace.
Defensibility: Better Discoverability
Verticalized platforms that have enhanced discoverability for an NFT asset class can capture significant demand. Every ENS name is unique which favors a platform like ENS Vision. Also, they offer unique ENS functions like bulk registration.
Defensibility: Platform NFT Utility & Experiences
Audio NFTs (podcast/music NFTs) come with a unique consumption experience compared to other NFTs which makes consumption on a horizontal marketplace more challenging and necessitates a vertical approach.
There's additional ways to add unique experiences and utility including:
Membership NFTs and loyalty programs
Compete on offering unique experiences (e.g. OwnTheMoment and fantasy games)
Customized experiences for consuming an NFT content (e.g. streaming)
Defensibility: Brand, Trust, Safety
Brand is incredibly powerful in marketplaces and often comes from lindy, status, creating trust, or providing safety features. Blockchains are adversarial environments and one wrong move can cost users everything. Magic Eden and OpenSea are trusted brands but also try to safeguard users from buying a stolen NFTs.
Moreover, NFT marketplaces in verticals that require some type of verification (e.g. physical collectibles) or who’s brand comes with an element of lindy (e.g. OpenSea) will have the ability to generate additional user lock-in from retail users.
Where to start when building marketplace defensibility?
NFT marketplaces should first aim to build defensibility via proprietary liquidity by focusing on 1) primary mints 2) retail traders/owning the majority of users and 3) building additional products or mechanisms (e.g. phygital verification) that lock in liquidity.
Additionally, marketplaces can initially compete by serving NFT consumption experiences or by targeting underserve (but growing) verticals that necessitate better discovery.
If you’re building a crypto marketplace in a new vertical or building unique consumer experiences, I’d love to chat!