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Making Sense of the NFT Marketplace

  1. What is an NFT marketplace?
  2. What kinds of marketplaces are out there?
  3. How can I engage with the market?
  4. What will the future hold?

NFT, or non-fungible tokens, have become a major industry. But as with most emerging technologies, there are many competing platforms and approaches to growth, and it’s not always obvious which is the best fit for a given business.

In this piece, the authors first argue that NFT platforms fall on a spectrum from streamlined (lower-cost, more-generic services) to augmented (higher-cost, more-specialized services), and that content creators should focus on those key differences when determining which platform to work with. They offer several examples to provide some inspiration to NFT industry newcomers, illustrating the wide variety of ways in which NFT platforms can add value to both buyers and sellers.

Next, the authors suggest that unlike traditional market platforms such as Amazon, we’re unlikely to see a single victor emerge, both because of the fundamental openness of publicly-accessible blockchain technology, and because of the significant value offered by a variety of custom services. As such, the authors advise that both firms and individual creators should evaluate how the many options currently available and align with their unique business needs, and if a particular platform or strategy seems like a good opportunity, they should go ahead and give it a try.

Non-fungible tokens (NFT) may seem like a passing craze, but with over $10 billion traded in the third quarter of 2021 alone, it’s become clear that this emerging technology — a blockchain-based tool that enables anyone to monetize digital content — is growing into a major industry. In March of this year, musician 3LAU collaborated with crypto startup Origin Protocol to create a specialized platform to sell his new album as an NFT, where it ultimately sold for $11.6 million. Visual artist Beeple famously sold a tokenized digital artwork for $69 million through Christie’s auction house, and the NBA’s Top Shot, which is owned by crypto platform Dapper Labs and enables fans to buy and sell tokenized video clips of basketball game highlights, has generated over $715 million in transaction volume.

In response to this massive growth, both individual creators and firms as wide-ranging as retail, music, entertainment, consumer products, fashion, and more have begun actively exploring ways to engage with the world of NFT. Specifically, while some sellers have opted to build their own NFT marketplaces, most have found that a partnership with a third-party platform is more feasible, as it can reduce upfront costs, offer access to a larger existing customer base, and provide valuable add-on services such as marketing, legal, and technical support.

What is an NFT marketplace?

In contrast to platforms such as Spotify and Netflix, which provide unlimited digital content for a subscription fee, NFT platforms are built around the idea that just like physical content, digital content too can be scarce — that is, limited in quantity — and can therefore be meaningfully owned and traded. These platforms leverage blockchain technology to verify the provenance of digital content, similar to how a traditional auction house might verify that a given work of art is in fact the original and not a replica, and some platforms even offer the ability to “burn” items, further reinforcing the concept of scarcity for these digital products. Blockchain-based transaction logs can also facilitate royalty attribution, automatically sharing a percentage of revenue from second-hand sales with the original creator every time the NFT is traded.

Of course, as with any investment into a new capability, while partnering with the right marketplace can unlock entirely new markets and revenue streams, partnering with the wrong platform can seriously backfire — and when it comes to leveraging a rapidly-evolving new technology like NFT, it’s not always obvious what the right choice is. To avoid making costly mistakes, it’s critical to understand the landscape of platforms that are currently available and determine which will be the best fit for your NFT offerings.

What kinds of marketplaces are out there?

While there are a number of factors to consider, we’ve found that it can be particularly helpful to characterize NFT marketplaces on a spectrum from streamlined to augmented. Streamlined marketplaces support a broader range of NFT and offer more limited, generic services to sellers, while augmented marketplaces are highly specialized and provide a more full-service experience.

Streamlined platforms include services such as OpenSea and Rarible, which host both auctions and fixed-price sales for a wide variety of NFT, and more closely resemble traditional platforms such as eBay, Esty, or Mercari. These marketplaces focus predominantly on enabling efficient transactions, often providing payment infrastructure to accept both credit cards and crypto payments in Bitcoin, Ethereum, and occasionally other specialty tokens. They offer minimal additional services, and because of their breadth, these platforms generally have fairly large and varied user bases.

Augmented marketplaces, on the other hand, tend to focus on narrower niches, and offer numerous value-added services such as minting (creating the NFT itself), marketing, curation, pricing recommendations, portfolio trackers, and even full-blown games built on top of the NFT. For example, the NBA’s Top Shop focuses exclusively on basketball collectibles that the platform packages and markets, SuperRare focuses on visual art and provides extensive curation and recommendation services, and Sorare, which focuses on digital sports cards, hosts fantasy soccer competitions that incorporate the cards users buy on the platform.

These specialty services can add a lot of value, but of course, they come at a cost. To account for the resources required to build out, integrate, and support an array of customized tools and experiences, augmented platforms generally have a higher “take rate,” or transaction fee, as well as higher upfront setup costs. Streamlined marketplaces typically have lower initial and ongoing costs, but may require sellers to invest their own resources or hire external experts to design, mint, and market their NFT.

How can I engage with the market?

So, how can you determine which type of platform is the best fit for your business? Companies with a large pool of intellectual property and a target audience within a specific domain may find it beneficial to partner with an augmented platform. A larger quantity of monetizable content generally means a larger upfront investment is more likely to pay off, and these specialized platforms can draw on their niche experience to ensure a successful launch and drive additional value through secondary tools and services.

If you’re not sure what kinds of specialized services might be a good fit for your business, it’s worth looking to other creators’ NFT experiments for inspiration. For example, artists may leverage these platforms to offer exclusive video content, or sports teams might include a free meet-and-greet or VIP upgrade with NFT purchases. McLaren Racing recently launched a program where fans can collect various components of a Formula 1 race car in digital form, and the first fan to collect all 22 of the NFT required to assemble a complete digital version of the car will win an all-expenses-paid trip to a Formula 1 race.

In addition, some augmented platforms offer detailed data analytics around when other NFT on the market were minted, how many NFT competitors are minting, average prices, sales numbers, and more. Firms can then use this data to make informed choices about how they mint and price their own digital offerings. For example, NBA Top Shot offers a detailed analytics page for each NFT that includes a breakdown of related market activity, ownership history, and other information about the video highlight. Similarly, electronic music marketplace RCRDSHP presents users with extensive analytics on both individual NFT and on the overall state of the market. Although these industry-specific platforms may have narrower reach, they can be extremely effective within a given market — Sorare, for example, generated nearly $20 million in transaction volume last month and over $100 million in the past year.

For products with broader appeal, however, companies and creators may be better off partnering with a streamlined marketplace. For example, Coca-Cola partnered with OpenSea to auction off a “Loot Box” NFT that included digital versions of a vintage Coca-Cola cooler, jacket, and logo, as well as a real, fully-stocked Coca-Cola refrigerator delivered to the winner’s home. It was a simple enough offering that didn’t require much in the way of custom, industry-specific specialization, and so OpenSea’s streamlined platform was a good fit. (The NFT collection ultimately sold for over $575,000, which Coca-Cola donated to Special Olympics International.)

What will the future hold?

At this point, you may be asking yourself which of these many platforms is likely to emerge as the Amazon-like industry standard. Traditional marketplaces tend to exhibit winner-takes-all dynamics, meaning that once a single platform achieves scale, it becomes nearly impossible for competitors to overtake it — and so, it’s only natural to be concerned about investing in a platform that won’t be made obsolete. However, in contrast to traditional markets, we believe that no single NFT platform is likely to assume such a dominant position. There are two key reasons for this:

First, NFT markets are inherently more open than their traditional counterparts. Since NFT are built on fully public blockchain infrastructure, most transaction data is publicly available, limiting the extent to which these platforms can build the kinds of data moats that lead to monopolies.

In addition, the success of augmented platforms suggests that differentiation is highly valuable to both buyers and sellers. We’re already seeing that there’s strong demand for multiple coexisting NFT marketplaces, each focused on a different domain and offering specialized tools to help their partners succeed. Even within industries, multiple platforms can coexist, as long as they differentiate in the tools and experiences that they provide. For example, one NFT art platform might specialize in minting functionality, while another might focus on gaming experiences built on top of art NFT.

While winner-take-all dynamics may be more likely among streamlined platforms, where the marketplace that provides the lowest cost transactions will likely attract a majority of both buyers and sellers, these platforms will never offer the degree of customization and industry-specific support made possible by a wide array of augmented platforms. And investors seem to agree: While streamlined platforms have certainly done well, augmented platforms have also had no trouble attracting funding, with Dapper Labs securing a $7.6 billion valuation and Sorare raising a record-breaking $680 million at a $4.3 billion valuation.

So, if you’re a creator, don’t feel like you have to wait for the “Amazon of NFT” to emerge. Evaluate the marketplaces that are currently available based on how well they fit with your unique offerings and business needs, and if you find one that seems well-suited for you, go ahead and dip in a toe.

While NFT are still a burgeoning industry, they have demonstrated the potential to be highly lucrative, creating real value for both buyers and sellers. They may have started out as a science project driven largely by crypto enthusiasts and risk-loving, tech-savvy artists, but NFTs are now rapidly entering the mainstream. Whether you’re a major brand like the NBA or an up-and-coming independent artist, partnering with the right platform is the critical first step to drive customer engagement and secure your position in this new digital economy.

Source: Harvard Business Review

Published on February 18, 2022

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