how-does-opensea-make-money-opensea-business-model

How Does OpenSea Make Money? The OpenSea Business Model In A Nutshell

OpenSea is a peer-to-peer marketplace backed by a blockchain where goods such as gaming items, trading cards, domain names, and digital art can be purchased. The company was founded by Devin Finzer and Alex Atallah after Finzer noted the popularity of the NFT CrypoKitties phenomenon. OpenSea makes the bulk of its revenue through a 2.5% service fee. The fee is collected whenever a NFT is sold on the platform. OpenSea charges gas fees to buyers and sellers to cover the cost of applicable blockchain transactions. There are also account registration and contract approval fees when a new account is opened and a new cryptocurrency is used, respectively. 

History of OpenSea

OpenSea is a peer-to-peer marketplace backed by a blockchain where goods such as gaming items, trading cards, domain names, and digital art can be purchased.

The company was founded in 2017 by Devin Finzer and Alex Atallah at a time when non-fungible token (NFT) projects were just starting to attract interest.

Finzer became interested in NFTs after witnessing the CryptoKitties project, a tech culture phenomenon where people were paying hundreds of thousands of dollars for collectible video game cats.

More broadly speaking, Finzer also wondered if there was more to crypto than simply finance and currencies.

A few months later, he teamed up with software developer Atallah, a Stanford graduate who also had a burgeoning interest in cryptocurrency.

They presented a rough idea to a Techcrunch Hackathon in September and were then accepted into the Y Combinator program to take the project further. After an initial pivot, Finzer and Atallah returned to CrypoKitties and its underlying infrastructure.

Using something similar, they decided to build a digital marketplace where users could buy or sell NFTs in multiple categories. The OpenSea platform launched in February 2018, describing itself as “eBay for cryptogoods.

Initially, the OpenSea marketplace relied on game developers to drive business – though new categories were continuously added.

The company managed to secure a $2 million round of funding early and acquired competitor marketplace Atomic Bazaar in December.

By the end of 2019, OpenSea was considered to be the leading NFT marketplace. 

This position was solidified after the COVID-19 pandemic forced people to stay at home, with the NFT market itself experiencing rapid growth.

In fact, NFT sales for 2020 were $94.8 million, equivalent to 30,000% year-on-year growth.

During this time, the company had just seven employees and struggled to scale its operations to meet demand.

OpenSea is on track to surpass $27.5 billion in sales volume for 2021 with average daily fee revenue amounting to $4.2 million.

OpenSea revenue generation

OpenSea has a rather simple revenue generation strategy.

The company makes most of its money by charging service fees whenever a digital asset is sold on its platform. 

The service fee is 2.5%, which means an NFT selling for $200 earns OpenSea $5. 

Gas fees

OpenSea also charges gas fees which cover the cost of the computing energy required to process and validate Ethereum blockchain transactions. 

Buyers pay the gas fee when purchasing fixed-price items, while sellers pay the same fee when accepting offers. 

Gas fees are also payable when canceling a listed NFT, canceling a bid, converting WETH to ETH (and vice versa), and freezing metadata.

Account registration fees

New sellers to the OpenSea platform must pay an account initialization fee before they can list. 

Ostensibly, these fees are charged to enable trading between the seller’s wallet and OpenSea.

The fee also allows the company to access transfer items after a sale occurs.

Contract approval fees

Users wishing to sell an item minted through a custom NFT contract will also need to pay a one-time approval fee for authorizing transactions.

This fee is also payable whenever a new cryptocurrency is used for the first time and includes currencies such as DAI and USDC.

Is OpenSea a blockchain business model?

While OpenSea offers users the ability to interact with the blockchain by purchasing NFT by itself, the tech platform is not a blockchain business model.

In fact, OpenSea works mostly as a centralized platform business model/marketplace. As a digital business, it leverages network effects dynamics to grow its user base.

Therefore, there are two sides to the platform.

On the one hand, the underlying platform is a marketplace enabling users to list their NFTs. On the other hand, for users to list, purchase or exchange NFTs, they have to connect their crypto wallets.

Therefore, OpenSea interacts with the blockchain through the crypto wallet, which is a sort of browser for crypto businesses.

For instance, some popular wallets comprise MetaMask, which enable users to connect their accounts, and therefore interact with the blockchain at various level (from purchasing, exchange to accessing various services).

At the same time, OpenSea enables creators to mint their NFTs (thus saving their ownership into the blockchain) when closing the sales.

Read Next: Blockchain Business Models Framework Decentralized FinanceBlockchain EconomicsBitcoin.

Read Also: Proof-of-stakeProof-of-workBlockchainERC-20DAONFT.

Related Blockchain Business Frameworks

Web3

web3
Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.

Blockchain Protocol

blockchain-protocol
A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.

Hard Fork

hard-fork
In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.

Merkle Tree

merkle-tree
A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.

Nothing-at-stake

nothing-at-stake-problem
The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.

51% Attack

51%-attack
A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.

Proof of Work

proof-of-work
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.

Application Binary Interface

application-binary-interface
An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.

Proof of Stake

proof-of-stake
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.

Proof of Work vs. Proof of Stake

proof-of-work-vs-proof-of-stake

Proof of Activity

proof-of-activity
Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.

Blockchain Economics

blockchain-economics
According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).

Blockchain Business Model Framework

blockchain-business-models
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Sharding

sharding
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).

DAO

decentralized-autonomous-organization
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

Smart Contracts

smart-contracts
Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.

Non-Fungible Tokens

non-fungible-tokens
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.

Decentralized Finance

decentralized-finance-defi
Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.

History of Bitcoin

history-of-bitcoin
The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.

Altcoins

altcoin
An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.

Ethereum

ethereum-blockchain
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.

Ethereum Flywheel

blockchain-flywheel
An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.

Solana

solana-blockchain
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.

Polkadot

polkadot-token
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.

Filecoin

filecoin
Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.

Brave

bat-token
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.

Decentralized Exchange

decentralized-exchange-platforms
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.

Read Also:  Proof-of-stakeProof-of-workBitcoinDogecoinEthereumSolanaBlockchainBATMoneroRippleLitecoinStellarDogecoinBitcoin CashFilecoin.

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