A big part of what attracts people to the blockchain is that it’s decentralized. This means that, theoretically, they are free from third-party middlemen who charge fees or use their influence to change how business is done. NFTs are on the blockchain as well, meaning that they’re decentralized.
However, according to nftnow.com, the NFT marketplaces themselves are managed by an outside group of people, meaning that they’re actually centralized. This realization might confuse NFT enthusiasts, and may even make them a bit uncomfortable.
THE NFT MARKETPLACE CENTRALIZATION CONUNDRUM
Minting is usually done on the website of an NFT community project. From there, lots of projects tell people to go to big NFT marketplaces like OpenSea for secondary sales. However, nothing can stop NFT users from being kicked off these major NFT marketplaces.
Despite the blockchain itself being centralized, services like OpenSea, MetaMask, and Coinbase are actually quite centralized. Many NFT projects don’t have their own marketplace. CryptoPunk, Meebits, and Solana Monkey Business are some of the few that do. OpenSea, which has 1.3 million buyers and sellers, is currently the most popular NFT marketplace, with over $22.73 billion in total NFT sales.
Using big-name marketplaces like OpenSea might be the norm right now, but there may be problems with using them down the line. A community-hosted marketplace is a neutral option that should be considered to combat current centralized marketplace issues. Soon, the economics of NFT projects will change so that they will no longer have to host their marketplaces on sites like OpenSea.
Users should be able to trust a new white-labeled marketplace when it comes out. NFT projects will also prefer to host their marketplaces themselves so that they can offer better, more on-brand onboarding experiences for new users. NFT buyers and existing NFT marketplaces will have a lot to think about if this shift happens.
WHY DON’T NFT PROJECTS JUST CREATE THEIR OWN MARKETPLACES?
In the short term, it doesn’t make sense for NFT projects to run their own marketplaces. The startup cost of creating a marketplace from scratch is immense, compared to the ease of putting NFTs on an already established marketplace.
NFT communities can use white-labeled marketplace solutions like Kred, Bitski, and Serotonin right away, but they aren’t as well-known as OpenSea, and they may not be as easy to use either.
There are a lot of teams that choose to build their own marketplaces from the ground up. This is a very expensive thing to do because there are a lot of features they have to create themselves. As a result, many people find it very hard or impossible to match the features of major marketplaces like OpenSea.
NFT projects don’t necessarily want to get the most out of their secondary sales. The royalties from secondary sales aren’t even close to the money made by the initial mint.
For example, if a project starts with 10K NFTs and takes a 5% royalty on each sale after that, what would happen? For royalties to be equal to mint revenue, there must be 100k NFTs sold, or 10 times the total collection size. So few projects rise in enough value for secondary sales to be important.
THE TRUST ISSUE
In addition to economics, some communities may have trouble meeting the trust concerns of their users as well. Users might be less likely to trust a community-built NFT marketplace as much as they do other well-known NFT marketplaces like OpenSea.
According to blog.portion.io, there are many big risks when you combine centralization with an NFT marketplace. These risks include the possible loss of NFTs you’ve made or collected, de-platforming and censorship of your NFTs, data tampering, and not being able to move your NFTs around.
Some NFT marketplaces do have central parts that are like those on a regular “Web 2.0” website. The NFT token itself is stored on the blockchain in a decentralized way, but the art, metadata, or media that the token is linked to is usually stored on an off-chain database. This is because it costs a lot to store large files on the blockchain. In this case, the art, metadata, or media associated with that NFT could be gone for good.
Let’s look at the record-setting Beeple NFT artwork from MakersPlace as an example. The NFT references metadata that can be found through a public database, but the image reference is stored through MakersPlace’s private database. If MakersPlace shut down, the NFT would no longer have access to the media to display it, essentially leaving the owner of Beeple’s $69 million NFT with a blank error.
COMMUNITY-RUN NFT MARKETPLACES – A VIABLE ALTERNATIVE?
The benefits of community-run NFT markets go beyond economics. Community-run NFT marketplaces could offer better onboarding experiences if they host NFT markets. Currently, the NFT buying and onboarding processes don’t work well together. A person might buy an NFT on OpenSea, but it’s not clear what they can do with it or where they can use it.
Community-run NFT markets would also be more in line with the Web3 philosophy of cutting out middlemen. The major NFT marketplaces will not be able to de-platform or censor communities if they don’t agree with them.
As discussed earlier, the current bottlenecks in creating truly decentralized NFT marketplaces are cost and technology. Current blockchain technology has difficulty handling large amounts of data directly on-chain. This results in the prohibitively high costs of having everything on-chain. However, as the technology improves, hopefully the blockchain will be more financially accessible to prospective NFT enthusiasts and be able to handle more data on its own.