NFT Secondary Marketplaces | The Pros and Cons for Projects and Collectors

NFT Secondary Marketplaces | The Pros and Cons for Projects and Collectors

NFT marketplaces are a hot topic of debate in the web3 world. Is the industry relying too heavily on the top secondary marketplaces like OpenSea and Magic Eden? What is the appropriate royalty fee structure for these platforms? Should top NFT projects build their own marketplaces?

As the battle for marketplace supremacy shakes out, innovation and competition will shape and reshape the NFT industry. 

Recently, we’ve seen ApeCoin DAO voters reject a proposal (AIP-93) by marketplace giant Magic Eden to build a low-fee platform for Bored Ape Yacht Club NFTs and the rest of the Yuga Labs’ ecosystem. Despite promises to build the platform for Apes, power the platform with ApeCoin, and run the platform on ApeCoin.com, the proposal failed. More than 60 percent of APE holders voted no.

But ApeCoin DAO did approve a marketplace solution created by Snag Solutions, a whitelabel NFT marketplace provider.

Rather than rely on OpenSea or Magic Eden, some NFT projects are opting to build their own marketplaces. Pudgy Penguins and Truth Labs, the company behind Goblintown and Illuminati, both built primary trading platforms in August and September 2022 (the latter also in partnership with Snag Solutions). Other projects have voiced intentions to do the same. But why?

This article breaks down the pros and cons of secondary NFT marketplaces for project creators and collectors.

 

The Pros of Secondary Marketplaces for NFT Projects

Secondary marketplaces, like OpenSea and Magic Eden, account for a bulk of daily NFT trading volume. That’s because most NFT projects rely on external platforms for buying, selling, and trading (and sometimes even minting) due to their simplicity, affordability, and security.

A one-stop shop for all NFT collections is easier to find, use, and frequent. That’s what makes Walmart and Target so popular. When NFT projects are deciding between building their own primary marketplace or allowing the supercenters and department stores to handle their post-mint transactions, it makes the most sense to at least start with the simplest solution – and that’s OpenSea or Magic Eden.

Additionally, and because of their simplicity, secondary NFT marketplaces bring in more web traffic. With that web traffic, they also offer free advertising to top-performing collections through home page features, trending sections, and more. This makes OpenSea and Magic Eden more appealing to less popular, newer NFT projects.

Even if NFT projects wanted to build their own primary marketplace, it costs money to do so. OpenSea and Magic Eden bear the brunt of the development costs and only charge NFT projects a small marketplace fee on all collection sales. Based on recent 2022 estimates, it currently costs around $50,000 to $500,000 to build a place to buy, sell, and trade NFTs. Simply put, most NFT projects can't afford to build their own marketplaces, and even the ones that can afford it might be better off putting funds into a different roadmap item.

Finally, secondary marketplaces are largely responsible for hacks and scams. If OpenSea or Magic Eden experiences a security breach, a random NFT project, like Doodles, is not criticized because a few of its NFTs were stolen. Doodles is safe from scrutiny, the brain-racking decision to offer refunds to those impacted, and possible lawsuits. This makes secondary NFT marketplaces less risky for projects who can’t afford to withstand catastrophic black swan events.

 

The Cons of Secondary Marketplaces for NFT Projects

For all the benefits secondary marketplaces provide for NFT projects, there are shortcomings, too. After all, OpenSea and Magic Eden weren’t built from the goodness of the developers' hearts as benevolent platforms to better the NFT community. They’re profit machines, and as profit machines, they can be costly, indifferent to NFT projects’ needs, and too one-size-fits-all for more complex ecosystems.

It’s no secret that OpenSea and Magic Eden take their cut from all NFT transactions on their platforms. For OpenSea, it’s 2.5 percent. For Magic Eden, it’s slightly less at 2 percent. For some of the most popular NFT projects, this amounts to a significant chunk of change. Bored Ape Yacht Club, for example, has totaled more than 663,000 ETH in volume traded since its inception on OpenSea, which means the platform earned 16,575 ETH, or ~$25.5 million at current prices (as of the time of writing).

The funds earned by OpenSea and Magic Eden are not going directly back into the NFT ecosystem. They’re removed from circulation, and this hurts NFT collections long-term, especially if OpenSea and Magic Eden do not use them to advertise or better their platforms.

If Bored Ape Yacht Club built its own primary marketplace from the start, it would have saved at least $25 million in trading fees. Those fees would’ve gone back to the team where they’re more likely to be used to better the NFT project and further its roadmap items or ecosystem development. But, of course, it would’ve been massively risky for Yuga Labs, the company behind Bored Ape Yacht Club, to eat the development costs before it knew how wildly successful its project would become.

NFT projects also have a lack of control when it comes to customizability on OpenSea and Magic Eden. Perhaps a massive collection like Bored Ape Yacht Club could influence these platforms’ policies, but most cannot. That is challenging for certain gaming ecosystems and other NFT projects with complicated or non-standard metadata. This leads to a lack of innovation, as NFT projects attempt to fit the one-size-fits-all mold that OpenSea and Magic Eden offer.

 

The Pros of Secondary Marketplaces for NFT Collectors

It’s not just NFT projects; secondary marketplaces positively impact collectors and traders, too. From ease-of-use and security to supply and browsability, OpenSea and Magic Eden provide the necessary tools and resources to optimally buy, sell, and trade NFTs.

Secondary marketplaces offer thousands of NFT collections to search through and typically allow users to purchase assets in bulk, which saves on gas fees and time commitments. Again, this is why Walmart and Target are preferable to shoppers versus six different trips to speciality stores.

Due to their popularity within the industry, secondary marketplaces also typically have a bigger supply of NFTs, more available listings, and firmer floor prices. From finding the right NFT collection to picking out a good floor price purchase to buying multiple NFTs at once, OpenSea and Magic Eden offer seamless experiences for collectors.

Secondary marketplaces are also harder to hack and scams are easier to spot. Remembering OpenSea.io, or bookmarking the secondary marketplace you use most frequently, is more streamlined than remembering multiple NFT projects’ primary marketplace addresses, or bookmarking them all. And while OpenSea and Magic Eden are more likely to garner the attention of hackers and scammers, they have massive budgets to prevent these attacks from happening.

 

The Cons of Secondary Marketplaces for NFT Collectors

Secondary marketplaces also have their pitfalls for NFT collectors. When OpenSea and Magic Eden skim funds off the top via royalty fees, it hurts both NFT projects and their holders. Additionally, these external platforms aren’t specifically designed for the projects they host and sometimes exert a worrying level of control over “suspiciously-traded” or “stolen” assets.

Collectors and holders are part of a growing NFT ecosystem akin to a high-upside, rapid-growth tech startup. And tech startups need as much capital as possible to effectively complete roadmap goals, come up with innovative ideas, and launch industry-defining products. When collectors and holders buy, sell, and trade on secondary NFT marketplaces, they’re sending a portion of funds that should, in an ideal world, go directly to the NFT ecosystem to OpenSea or Magic Eden. This sputters growth in some capacity. 

Industry-leading marketplaces like OpenSea and Magic Eden also aren’t specifically designed for individual NFT projects. The ability to offer hundreds or thousands of different NFT collections in one spot hinders the marketplaces’ capacity to provide individualized support for non-traditional projects and ecosystems, like NFT games or collections with complex, tech-heavy meta data. NFT projects could create a better user experience, in these cases, by building their own marketplaces.

Relying too heavily on one or two giant secondary NFT marketplaces puts a disproportionate amount of power in their hands. OpenSea already has a history of incorrectly or unjustifiably marking certain NFT purchases as “suspicious” or “fraudulent.” 

“There are 138 apes currently marked as suspicious on OpenSea,” NFT Daily reported on Sep. 22, 2022. “This is [a] huge amount of money, [about] 10,583 ETH. OpenSea must do something to solve this problem.”

“[OpenSea], your policy of flagging an NFT as suspicious after it has already been legitimately purchased by another party is awful,” said another Twitter user. “How does this help the person who got scammed?”

OpenSea can block the purchasers of these NFTs from selling or trading their legally acquired assets. Regardless of marketplace intention, this creates an uneven distribution of power in the NFT industry and can create a negative user experience for certain collectors and holders. 

 

When Are NFT Secondary Marketplaces Necessary?

As shown above, secondary marketplaces can have a huge positive impact on certain NFT projects. But in some cases, they’re predatory and likely unnecessary.

When is it necessary to succumb to OpenSea and Magic Eden’s authority and royalty fees? Here is a step-by-step guide (this is not applicable to every NFT project ever created, but is helpful in determining when secondary marketplaces are doing more harm than good):

  • Does the NFT project have the resources, development support, and funding to build their own marketplace? If not, secondary marketplaces offer a cheaper, faster alternative.
  • Is the NFT project relatively unknown, massively popular, or somewhere inbetween? It’s likely that massively popular projects will not benefit from the minor amount of advertising secondary marketplaces offer through website features, Twitter mentions, etc. Relatively unknown projects, however, can benefit here.
  • How long has the NFT project been around? Newer NFT projects are likely better off relying on secondary marketplaces until they withstand the test of time. Once they’re sure they’ll be around for a long time, putting resources into their own marketplace makes more sense, as there are startup costs and costs to maintain the platform.
  • Does the NFT project have the resources to properly secure a primary marketplace and the legal infrastructure to deal with potential hacks and scams? If not, OpenSea and Magic Eden remove this burden by handling security and legal concerns.

 

The Future of NFT Secondary Marketplaces

The future of NFT secondary marketplaces is unclear. Major players like GameStop NFT, Coinbase NFT, LooksRare, X2Y2, and, to a certain extent, Meta (Facebook) have joined the battle for royalty fee supremacy. Will we see other technology giants like Amazon and Apple enter the space (Apple recently announced it will charge 30 percent for all NFT sales in its App Store)? And how does this impact user experience?

As the NFT and cryptocurrency spaces continue to grow, it is almost certain that all major technology companies will attempt to capitalize on the gold rush. But collectors and holders are not forever doomed to sacrifice their freedom to predatory corporations. There is another path forward.

Similar to popular website builders like WordPress, Squarespace, Wix, and others, software companies have an opportunity to provide templated, drag-and-drop solutions for NFT projects to quickly and cost-effectively build their own marketplaces. This removes power from the industry giants like OpenSea and Magic Eden, puts the power back into the projects’ hands, lessens royalty fees removed from the ecosystem (or completely removes with a monthly subscription service similar to WordPress Premium, etc.), and allows projects to customize over time as development funds become more readily available.

Will this future come to fruition? Perhaps, perhaps not. But the NFT space will definitely continue to innovate and build positive user experiences. Because in web3, we truly own our assets and can take our ball and go to another playground.

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