Arkstream Capital: The Cliff Race Between Blur and OpenSea
Moc
The Current State of the NFT Market
The second half of 2022 was a winter for NFTs. With the issuance of Otherdeed for Otherside taking away the last bit of liquidity from the market, the NFT market declared the collapse of the speculative boom.
Blur, as an excellent NFT Marketplace, brought some incremental growth to the market with its expected token issuance. When Blur issued its token $BLUR, the massive airdrop gains brought even more growth to the market.
From the trading data of NFT Marketplaces, we can draw several clear conclusions:
- Art-based NFT Marketplaces have fallen completely behind comprehensive NFT Marketplaces (mainly PFPs).
- Blur’s trading volume surpassed OpenSea even before the February 15 airdrop.
- The NFT market, after experiencing the hype and disillusionment of 2022, has returned to a healthy market in the first quarter of 2023.
Arkstream has been keeping an eye on NFTfi, believing that NFTs have long-term value as a certificate of ownership, and this value will not be obscured by the downturn in the overall NFT market.
Before we officially start our article, we’d like to discuss some fragmented NFT value topics.
NFT Value Discussion
Consistency and Inconsistency of NFTs
As the name suggests, NFT stands for Non-Fungible Token, which refers to non-homogeneous tokens. In comparison to the simple consistency of FT (Fungible Token), NFTs encompass both consistency and non-consistency attributes.
Based on the current market trading activity, NFTs mainly fall into two categories: NFT art and NFT PFP (Profile Picture). As humans become increasingly entwined with the internet, PFPs are more suitable as online avatars. This explains why PFPs are more important in the NFT space than NFT art.
NFT art only has non-consistency. However, NFT PFPs are typically part of a series, including both consistency and non-consistency. NFT PFPs are the Web3 expression of pop art, with a common logic of repetitive subjects + random variables.
Repetition in the industry forms commonality, which fosters community and represents consistency. The scarcity of variables creates inequality, signifying social status. For humans who inherently pursue “inequality,” the hierarchy of disdain is a fundamental need. The author believes that consistency takes precedence over non-consistency; only consistency can create the value foundation for NFT PFPs and give rise to non- consistency’s social discrimination value. PFP value is directly proportional to community energy.
The combination of consistency and non-consistency in NFTs becomes the most significant issue that every NFTfi has to face. This results in a split in handling liquidity between two major directions: P2P (CLOB) and P2Pool (AMM). Each direction is only adept at handling one type of contradiction, which becomes the underlying hindrance to NFTfi development.
NFT Royalties
The issue of royalties, a hotly debated topic in the industry, can be better understood within the framework of consistency and non-consistency.
NFT art carries an artist’s artistic value and unique expression, so it does not require high turnover and is more about its collectible value. Throughout the life cycle of NFT art, its value appreciates over time. Van Gogh, who lived a poor and miserable life, only gained recognition after his death. High NFT royalties can prevent such tragedies from happening, allowing the time value of NFT art to benefit the artist earlier. Therefore, high royalties are well-suited to NFT art.
However, NFT PFPs initially adopted the high royalties of NFT art. The author believes that this industry inertia is problematic. As previously discussed, the consistency of PFPs precedes non-consistency, and the value of PFPs relies heavily on community energy. Thus, high circulation is more conducive to the growth of PFP value.
PFPs need better liquidity and lower friction to capture greater community value. The author initially thought that the royalties of PFPs would be settled through competition among PFPs. Surprisingly, the liquidity war between Blur and OpenSea eventually resolved this issue.
According to data from Proof Research Director NFTstatistics.eth, Blur’s overall average royalty rate is only 0.65%, which has driven down the overall NFT market’s royalties.
Many NFT project parties complained about this. What the author wants to say is that these project parties took the profits of the market bonus period for granted. Take Phantabear, a project the author is familiar with, as an example. With a cumulative sales volume of 35,735 ETH and a 7.5% royalty rate, the cumulative royalty income is 2,680 ETH. With ETH valued at $1,700, this amounts to $4.5 million. These fees were not reinvested into the project itself but were divided among the founders. Not to mention the minting fees. Phantabear is just one of many NFT projects that don’t make any real contributions.
Phantabear was a money-making project started by founders Mark and Will using the fame of Jay Chou. Later, Jay Chou’s personal reputation was affected by Phantabear, and he was willing to take over the project. However, he could not reach an agreement with the two founders on redefining responsibilities, leading to the project’s factual failure.
Allowing NFT projects to work hard and earn money through community management is the greatest respect users can give to a healthy NFT market.
NFT Marketplace Competitive Landscape
Strictly speaking, the NFT Marketplace can be further subdivided into three categories: CLOB Marketplace, AMM Protocol, and Aggregator.
The earliest players in the Aggregator space were Gem and Genie, which were acquired by OpenSea and Uniswap, respectively. Rather than being aggregators, they could be considered as OpenSea’s bulk operation tools.
The aggregator concept began with Genie, and after Genie opened the market, Gem entered with a more user-friendly and convenient product. It also had better marketing, customer friendliness, and capital support. Due to all these factors, Gem won the initial competition in the NFT aggregation platform. However, Gem did not enjoy its success for long. As OpenSea’s challengers emerged, the stronger aggregator Blur appeared, which seemed more focused on driving traffic to its own marketplace. A good aggregator is not one that doesn’t want to be a marketplace.
By: X2Y2 also has aggregator functionality, but X2Y2’s aggregator is more like a bulk trading feature for LooksRare and OpenSea than a true aggregator.
At present, strictly speaking, Resevior is the only one that appears to be focused on aggregation. However, under the pressure of the two dominant players, Blur and OpenSea, its presence seems somewhat lonely. The aggregator race may have to wait until the market becomes more chaotic and fragmented before it finds its space.
Trading Experience and Liquidity War
One competitive dimension of the NFT Marketplace lies in the convenience of trading. From the trading interface, it is clear that Blur’s trading experience is geared towards professional traders and the wholesale market, while OpenSea’s trading experience is aimed at ordinary users and the retail market. Most other marketplaces use OpenSea’s design as a reference.
Blur’s excellent trading experience is the reason it was able to attract early users, as well as why many Airdrop Hunters were willing to invest resources and time on Blur before a token was issued.
However, in the discussion of COLB Marketplace, the author would like to focus this topic on liquidity. As a market, the greatest value lies in providing the best liquidity to users. In DeFi, Uni’s original LP design and GMX’s zero-slippage betting and GLP design on Arbitrum are all making efforts in terms of liquidity.
As the earliest NFT Marketplace, OpenSea provides a buy order function called “Offer” in addition to listing NFT sell orders. However, the ease and bulk of Offer’s buy order functionality are not very good, limiting the liquidity of buy orders. When the author holds a large number of single-series NFTs, selling them becomes a headache. The author once doubted whether OpenSea deliberately maintained the overall market price performance of NFTs because a better order book functionality is not theoretically difficult.
When LooksRare was launched, we discussed its token economy model. It initially adopted the logic of transaction mining. The history of transaction mining can be traced back to 2018, and it wasn’t until the DeFi craze that the market generally adopted liquidity mining.
In our observation of the liquidity mining initiated by Compound in 2020, we analyzed the differences between it and the 2019 Dapp craze, as well as earlier transaction mining of Fcoin and Dragon Coin.
The problem with transaction mining is that it creates idling, no matter how trading wash is done, it generates garbage transactions for token incentives. These garbage transactions do not create retained value and are not conducive to the growth of liquidity. For players who do not have enough technology to mine at low cost and can only take the initiative to eat orders to mine, their transactions are transient and lack “inertia.” When token incentives begin to halve, liquidity will quickly decay. This means high cost and low efficiency of mining subsidies.
The advantages of liquidity mining are, first, it provides real liquidity, and LPs bear the risk. Second, it has inertia; most LPs do not frequently switch their LPs. In DeFi, we have even seen some dead projects with hundreds of thousands of dollars in farm funds remaining. In addition to mining rewards, LPs also share transaction fee dividends, which further increases their retention.
In Arkstream’s token economy considerations, we believe that a good token economy design must meet:
- The project team must deeply understand that token incentives are a form of debt behavior and carefully design emissions.
- Token incentives must encourage behavior that positively drives the long-term value of the protocol.
- Token incentives must be applied to protocols with network effects.
All three elements are indispensable.
The subsequent price performance and trading volume of LooksRare proved the failure of transaction mining.
Later, LooksRare added listing rewards. X2Y2 started with listing rewards from the beginning. After March 30, 2022, they updated the token economy 2.0 and switched to transaction mining, which is actually a step backward.
Liquidity is bidirectional, and for the NFT market, the biggest problem is not the lack of sellers listing, but the lack of counterparties to absorb the selling pressure of NFTs when trying to sell. In terms of liquidity considerations, Blur has thought one step further than both LooksRare and X2Y2.
Blur adopted listing mining in Airdrop2 and then added BID mining in Airdrop3, corresponding to both ends of liquidity.
Before the official issuance of $BLUR, this bidirectional liquidity scheme had already generated a massive positive stimulus for Blur’s trading volume. It is evident that this is a successful airdrop plan.
This is also the reason why the author has paid significant attention to Blur. Blur is the first NFT Marketplace player to adopt an aggressive strategy (including BID product design and token incentives) to address NFT liquidity issues.
Flaws in Blur’s Liquidity Scheme
However, the author believes that Blur’s liquidity scheme is still not the best solution. Compared to Uniswap’s LP liquidity design, Blur’s BID seems to lack inertia. Currently, for BID, intuitively, more than half of the top 20 leaderboards are Chinese, including well-known individuals, scientists, and studios, which the author has heard of several. The majority of the funds in BID have no loyalty.
The BID walls of BAYC and MAYC illustrate this point well.
For BAYC, due to MACHI’s hefty holdings, no one dares to place large funds in BID tiers 1/2/3 for fear of MACHI’s market dumping. However, there is a considerable amount of funds in MAYC’s tiers 2/3. These apparent buy walls are clearly in place for BID points, and aside from these obvious buy walls, there aren’t many real liquidity market makers.
The total amount of ETH in Blur’s BID pool saw many withdrawals on the day of the Silicon Valley Bank crisis. On that day, in addition to the market’s sharp decline, NFT prices also faced immense pressure, with the BID funds for most collections dropping from 30,000 ETH to 10,000 ETH.
Moreover, since Blur currently operates on a zero-fee mechanism, it cannot provide incentives to LPs through transaction fees like Uni does, apart from the token incentives themselves. A well-functioning system should still have incentives for LP providers to offer liquidity even without token incentives. When $BLUR was listed on Uniswap, many players were willing to become LPs to earn transaction fees. Some friends who entered early were able to recover 50% of their costs from fees on the first day.
Once Blur’s liquidity incentives are removed, one can imagine that these BID walls will collapse immediately.
The Massive NFT Crash Caused by Liquidity
As we discuss the liquidity that Blur’s liquidity mining injects into the NFT market, we also face a problem: Blur accelerates the collapse of the NFT market. Previously, due to liquidity issues, large NFT holders couldn’t quickly cash out. Now, with Blur’s BID walls, whales can easily sell their assets.
Many small NFT projects will take advantage of Blur’s mechanism for dumping. In the early stages when Blur’s mechanism was not perfect, project teams would first brush up on trading volume on OpenSea. After establishing a floor price on OpenSea, they would slowly raise their BID listings on Blur and earn points. During this process, some projects would choose to list part of their NFTs simultaneously, so even if their own BIDs were accepted, they could still recoup some losses by selling their NFTs. Other projects hold most of the NFTs
If there were no competitors in BID, project parties might be content with accumulating Blur points. However, if retail investors or bots also participate in BID, they would quickly withdraw their own BIDs after accumulating enough depth and then sell their NFTs to these bidding retail investors and bots.
In this frenzy, NFT project parties and whales gained valuable liquidity, while liquidity market makers obtained “precious” $BLUR.
Therefore, the author believes that Blur’s token economy needs to be upgraded to increase the costs for these arbitrageurs. Arbitrageurs cause harm to the system.
Although this liquidity has become a double-edged sword for the NFT market in the short term, in the long run, liquidity remains a good thing. If we recognize the long-term value of NFTs, the collapse under rich liquidity only helps with rapid price discovery.
Future Outlook
The author believes that since the current design of Blur’s token economy does not consider the non-uniformity of NFTs, it can adopt Uni’s LP pairing method for mining to enhance the inertia and attrition of liquidity market makers.
This approach is fundamentally based on the concept of AMM, further aggregating rare and floor-priced transactions through the front end. Blur has implemented a similar approach before; when Seaport’s contract blocked them, they used the frontend method to bypass OpenSea’s blockade.
In addition, the competitive direction of CLOB Marketplace should be towards increasing specialization, as demonstrated by Tensor. Trade.
Tensor includes Tensor Trade (Aggregator) and Tensor Swap (AMM Protocol). In terms of user experience, its direction is similar to Blur, striving to provide users with more comprehensive information (NFT floor price candlestick charts) and additional trading experiences (richer order functionality).
The author also expects more advanced BID features on Blur, such as adding stop loss and take profit functions, as well as batch order management with Offer features.
Blur vs. OpenSea: Cliff Racing
Under competitive pressure from Blur, OpenSea launched a zero-fee initiative on February 22nd to counter Blur. However, this didn’t significantly increase OpenSea’s trading volume and seemed more like a passive defensive move.
In terms of traffic, OpenSea has been greatly affected by Blur’s token issuance.
On the other hand, Blur is also under considerable pressure. After the 2022 layoffs, the media disclosed that OpenSea had around 230 employees and secured $300 million in the last funding round, indicating a relatively healthy financial position. Meanwhile, Blur has disclosed a funding amount of $14 million, and although their expenses are lower, their resources are more limited. With zero fees, Blur can’t increase its revenue by charging fees, either legally (due to SEC regulations) or in the market, nor can it empower $BLUR. It can be said that Blur has dragged both itself and OpenSea into a cliff race, engaging in a game where death marks the end.
This battle is bound to end with one party outlasting the other. However, during this process, second-tier NFT Marketplaces such as X2Y2 and LooksRare are under even greater pressure and may collapse sooner.
Current State of AMM Protocol
In the field of AMM, there are not only Sudoswap but also early initiatives such as NFT20/Unicly. However, early solutions usually involved fragmentation or ERC20 conversion.
This process didn’t help much with the liquidity of NFTs themselves. The author believes that Sudoswap’s approach is more back-to-basics in comparison.
Standard AMMs can only handle the consistency of NFTs. Sudoswap’s approach to non-consistency is through a multi-pool model, allowing users and the market to self-adjust to different rarity tiers matching different pricing pools. The front end then integrates these pools. Although this design has some ingenuity, it does not effectively address the complexity of rarity, and the problem remains unsolved.
The author initially had high hopes for Sudoswap and paid particular attention to its airdrop progress. In the face of strong competitors like OpenSea, the entire NFTfi landscape is not like DeFi in its heyday. Uniswap’s growth benefited significantly from the 2018–2019 bear market, allowing it time to accumulate users.
However, time doesn’t wait for Sudoswap, and no incentive equals death. Web3, to some extent, is an enhanced version of Web2, especially regarding the Matthew effect. Long-term DeFi observers will notice that since 2022, ETH-based DEXs have mainly captured long-tail tokens through Uni, with the exception of 1inch and Curve, which have their own positioning. Other DEXs have experienced significant pressure in both market value and trading volume.
However, Sudoswap’s airdrop plan has left wool collectors and both 1-pool and 2-pool players disheartened. The author even suspects that the project team may not have intended to properly manage the project. Sudoswap’s airdrop appears to be a way to benefit Xmon holders or the project team itself, given that most Xmon tokens are in their hands. There was no consideration for the long-term positive incentive of Sudoswap.
In stark contrast to Blur, Sudoswap’s airdrop has doomed it. After the airdrop, there was no coherent token incentive plan to support its AMM liquidity.
However, as mentioned earlier, we still believe that with the current CLOB Marketplace’s handling of floor-priced assets, AMM has massive potential. Due to the contradiction between the consistency and non-consistency of NFTs, neither P2P (CLOB) nor P2Pool (AMM) models can adequately solve the liquidity problem of NFTs. Thus, the author thinks that a fusion of the two, with one as the primary focus, might be a good direction.
Conclusion
Despite many flaws in Blur and the consistently weak price of $BLUR since its launch, the community has been critical of the empowerment issue of $BLUR. The author believes that Blur’s commitment to improving NFT market liquidity puts it in an essential ecological position at the current time. Adequate liquidity will pave the way for the second chapter of NFTfi. Just as with Uniswap and AAVe, the growth of T2 DeFi projects like YFI and 1inch followed the T1 DeFi projects.
The cliff race between Blur and OpenSea is only the first chapter of the prologue to the infinite war of NFTfi. Let’s continue to pay close attention to NFTfi.
Website: https://blockark.io
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