NFT Marketplace CEO Explains Why The Industry Is Moving Beyond Ideological Purists

NFT Marketplace CEO Explains Why The Industry Is Moving Beyond Ideological Purists

Devin Finzer is the CEO of OpenSea, one of the very first non-fungible token (NFT) marketplaces. A veteran entrepreneur and software developer, his previous experience includes Google and Pinterest. He also sold a previous company, Claimdog, a search engine for unclaimed money to Credit Karma in 2017. He studied mathematics and computer science at Brown University, graduating in 2013.

In this interview we discuss the evolution of NFTs and associated market structure, specific problems that blockchains solve for content creators, token economics for NFT platforms and expectations for the rest of the year. He also breaks down why all of this development has laid the foundation for mainstream NFT adoption.

This interview first appeared in Forbes CryptoAsset and Blockchain Advisor. Subscribe here.

Forbes: To kick things off, what would you say is the elevator pitch for non-fungible tokens?

Devin Finzer: NFTs are digital items that can exist on the internet without being tied to a specific application. You can think of them as a very basic primitive way for owning something online in a similar way to how you might own something in the physical world. When you own a physical item, you have the freedom to do whatever you want with it. You could give it to a friend, sell it on a marketplace or throw it in the trash. This is a digital asset that has the same sort of property rights baked into it, which allows you to freely trade it, exchange it and use it in lots of different applications on the internet. So it's sort of a brand new digital permanence.

Forbes: What are the types of entities that a person can get? Why do people need an NFT of a video or a digital picture that can just be copied.

Finzer: There are lots of different types of NFTs, and I think a good starting place that's a little more understandable is thinking about NFTs that represent items inside of games. For example, if you play a video game like Fortnite, you could imagine the special clothing that your avatar wears as an NFT. Now, Fortnite currently doesn't use NFTs. The game has its own sort of digital asset system. But there are games out there where the things you use inside of the game are freely tradable as NFTs. So that's one kind of simple type of NFT on which a lot of people already spend billions of dollars, even without NFTs.

Earlier, you were sort of mentioning this idea of a digital work of art or a digital piece of content that's an entity. And there, I think the analog is closer to the physical art world where you own a physical piece of art, but technically, someone could go and create an exact replica of that piece of physical art. But there's some very special significance in the art world to owning the original “Mona Lisa.” If you tried to sell a replica of the “Mona Lisa,” for 10s of millions of dollars, an art person wouldn't be interested in that. But they would be interested in the original piece. The similar phenomenon of this idea of provenance and real property rights and uniqueness is proving to be quite interesting in the digital art world.

Forbes: Let’s turn to the builders. Who are typically creating NFTs?

Finzer: So sort of back to the idea that NFTs are very broad technology used in many different applications. The game developers are creating NFTs and using them inside of games. People are experimenting with using NFTs for event ticketing. And then of course, there's also the very simple use case where you can go on some website like ours, upload an image, and create an NFT. Here there are a lot of influencers and celebrities, artists and musicians getting interested in this idea of releasing their content, as a sort of one of a kind piece of art. For example, the football player Rob Gronkowski released a number of—I think 100—exclusive digital trading cards. That was a way for his fans to sort of own a little piece of his story. And it's an interesting idea, because it's a new way for creators to monetize. They can sell these pieces of digital work; maybe the pieces have some utility—maybe their ticket to a concert or a ticket to a sports game or something like that.

Forbes: What problems do blockchains and NFTs specifically solve for creators? Because someone can say that's all great, but why can't we do this on a marketplace built on Amazon Web Services (AWS)? How do blockchains provide the missing piece?

Finzer: It’s a really interesting question and I would actually frame it more as blockchains provide a foundation for new sorts of applications as opposed to solving one specific problem. Blockchains provide a layer of interoperability. If you release a trading card on, say, Nifty Gateway, one of the NFT issuers, you can go and you can send that NFT to any wallet, trading on any marketplace. Now imagine that not only can you do that, but you can bring it into some virtual world or show it on some other mobile application that also integrates with NFTs. If this was on AWS, there would be some company that would create some API or some service that everyone else has to work with, and that service might shut down or might be completely unpredictable. That service instead is the blockchain. I think it's really interesting, because in isolation, it does absolutely nothing. You're totally right, you could host it on AWS, but the sort of emergent behavior from the interoperability that the blockchain provides is that this thing works across hundreds of different applications.

Forbes: How would you assess the level of interoperability for NFTs right now? I know this is a problem that everyone is working on in the broader crypto/ blockchain universe.

Finzer: I'd say maybe, I don't know, 40% to 50%. I think there's a lot of really awesome sort of interoperability effects and network effects happening on each individual blockchain. But certainly, there's sort of this messy world of many different blockchains, and applications having to kind of abstract over them. Ethereum is where this has played out the most. Here you have 10 to 20 different wallets that you can use. You can bring your own wallet, and that's because so many different wallet providers have integrated with Ethereum marketplaces. There are marketplaces that are just for art. There are marketplaces like OpenSea that are completely broad and allow you to trade anything. There are now three to four different, maybe more, virtual world projects where you can take your assets inside of a virtual world and display them. There are also all sorts of games. So there's a really rich ecosystem on Ethereum. So that's sort of where it's played out the fullest and where the most interoperability is. There's obviously still unsolved challenges on Ethereum, such as metadata standards and new programmability standards for NFTs. But you can really see that rich ecosystem evolving. But the challenge with Ethereum is that there's still some scalability issues with the underlying chain, right? And so people are still solving that. And some folks have said, okay, we're gonna go and just kind of rebuild things from scratch, and then try to create our own ecosystem. That has certainly led to some fragmentation in the space.

Forbes: Let's switch gears a bit. Briefly, what is OpenSea? And why did you think there was a need for an NFT marketplace?

Finzer: OpenSea is a marketplace for NFTs. It is a place where you can take your NFTs and list them for sale, and where you can also buy NFTs. We started OpenSea in late 2017. At that time was really when the first NFT project had come to life, which was CryptoKitties, and we were excited by it as the first use case for blockchain that went directly to a sort of more fun, mainstream, consumer use case. And we thought non-fungible assets are an interesting idea as opposed to most of the activity on blockchains that centered around currencies and fungible assets. We thought there would be more people developing these things. And sure enough, gradually, slowly and steadily, more game developers started getting interested, more artists and creators started getting interested, and a lot of those projects needed a marketplace for people to buy and sell stuff. That’s where OpenSea found its fit.

Forbes: What blockchains do you support?

Finzer: You can trade any NFT on Ethereum. We also just added support for Polygon. It’s an Ethereum Layer 2 network.

Forbes: Who is typically minting NFTs on your marketplace and what are your biggest client segments?

Finzer: It's a mix. As I mentioned before, a lot of the activity in the NFT space is in gaming. So there's game developers. For example, there’s a game called “ZED RUN,” which is a horse racing game. OpenSea provides a marketplace for people to trade the horses in that game. But there's also, of course, artists who are just creating digital art and selling it to people who want to support them and have a piece of their work. So I would say right now, it's sort of a mix of people: gamers, crypto enthusiasts, technologists, artists and collectors.

Forbes: And as far as the buy side, who uses the service to purchase these items?

Finzer: Because the technology is so early, I do think that a lot of the people who are using NFTs today are in the early adopter camp; people who maybe bought crypto a while back and are excited about the future of the tech. But we’re also starting to see more mainstream users come in—people who are just fans of a particular athlete or sports team and want to collect a piece of what they have to offer. We recently did a launch with the Golden State Warriors. And that brought in people who were fans of the team.

Forbes: Unlike some other NFT platforms you decided to not offer a token. Can you walk me through that decision, and also explain how OpenSea makes money?

Finzer: We currently don't offer a token but it's not something we're opposed to. I think we wanted to be thoughtful about the decision. We witnessed a lot of people rushing into tokens, and not really having a plan for how the token actually interfaces with the application. We want to make sure we did that. We also, frankly, wanted to focus on building out the best product possible, as opposed to things that could potentially be deemed a distraction. In terms of how we make money, we have a pretty simple business model: we take a fee on successful transactions.

Forbes: Can you expand on the considerations that would go into whether you may issue a token?

Finzer: Many of the projects that have issued tokens, such as DeFi projects Uniswap and Compound Finance, are very early. They’re very innovative, but I don't know, it depends on your metrics of success when you're evaluating, like, did these things work? If your metric of success is just the market cap of the token, then I think these things are successful. But if your metrics of success are, did these lead to sustainable user growth, and is the protocol durable over time? I think it is too early to evaluate that. Like, I think there's maybe a couple 100,000 people using Uniswap. To me it seems very early to evaluate what effect the token has had and whether the governance ideas around it are going to accrue value to the token. So I think that’s one of the things you have to consider when you’re thinking about making a token—are you able to have good answers to those questions? I think, in some cases, it can be better to just focus on one product and one customer at a time, versus complicating things.

Forbes: You have a lot of high profile investors, with Andreessen Horowitz first among them. They’ve invested in Uniswap, Maker and some other protocols that issue tokens, and obviously, you guys have not. Are they hands off where they let you choose the best way to run your company and build value for the long term?

Finzer: That's right.

Forbes: Do you also take portions of royalties as well or is it just the initial transaction?

Finzer: Any sale that happens on OpenSea, we take a fee.

Forbes: What do you see as your main competitive advantages against your top competitors such as Nifty Gateway, Rarible, etc? What makes OpenSea stand out?

Finzer: We've always been this place where you could reliably go and discover all sorts of NFTs. So I think there's a trust and brand that has been built up by our product over time as folks have gotten used to it. I would also note that I don't think it's a winner takes all market. There’s going to be lots of different players, lots of different marketplaces. And ultimately, it's just going to be a very large market that leads to tons of opportunity and tons of applications across lots of different verticals. But I also think that for us, the most important thing is really focusing on providing value to the customer. And really listening to our customers and understanding what they want from the marketplace and using that to craft the best product at the end of the day. So we’re less focused on what our competitor is doing and more focused on how we can serve our customers in the best way. I think that's kind of our strategy going forward.

Forbes: NFTs obviously became very popular earlier this year. To what do you ascribe that growth? And now that it's cooled off a little bit, what stage of evolution or maturation do you see the industry at right now?

Finzer: In terms of what to attribute the growth to, I think it was a combination of a lot of things and a lot of build up over time of the technology, the use cases and the people involved. So much happened from late 2017 to 2021, that when you sort of wake up in 2021, there's just a ton more that you can do with NFTs right now. As I mentioned before, you can use them inside of virtual worlds or display them in a variety of different applications. I do think that there were a few events that fueled the wave of excitement and mania around them. For example, there was the NBA Top Shot launch and the $69 million Beeple art sale.

In terms of where we're at now, I definitely do think, my rough sense, is that things are cooling down. Crypto in general is always very cyclical. We saw this with Ethereum and Bitcoin where these waves of excitement make the price go up, and that gets people curious and brings some people into the space to build new things. And then things kind of cool down, but at a higher level than they were before. People build more stuff, and then suddenly people are like, whoa, this is really coming along. And then there's the next wave, right? I think a similar phenomenon is the case with NFTs. But perhaps arguably less technical because NFTs are less focused on price and speculation and they're more focused around fundamentals, in my opinion.

Forbes: So that creates a really interesting question, the idea of price discovery and liquidity when it comes to NFTs. By their very definition, no two NFTs are alike. When people hold NFTs, it's hard to know exactly what they're worth until it comes time to sell. What do you think are the best practices for creating price discovery?

Finzer: We have a variety of auction metrics to help with price discovery. You can create an English auction, which is sort of an eBay style auction where you sell to the highest bidder. We have something called a Dutch auction, which is setting up a starting price and ending price and you can buy it at any point as it declines from the start to the end. I think a lot of it comes down to being creative with your tactics, because to your point, if there’s only one of the assets then just having a sale for a fixed price without allowing bidding doesn't allow for rich price discovery. So bidding I think is a huge thing—allowing buyers to actually indicate what they'd be willing to pay for an asset. And then I think also providing better tools for analyzing similar assets. Maybe items that have the same traits that sold recently to get a sense of what the market for a thing might be.

Forbes: On OpenSea how do you address questions along the lines of somebody trying to create an NFT for an asset that they don't own the rights for? Or how do you prevent people from creating NFTs of illicit images and things that are illegal?

Finzer: It is true that anyone can go and create any NFT. That means you can create an NFT of copyrighted content. And when you create it, it sort of exists on the blockchain. But that doesn't mean that necessarily, marketplaces are going to display it. So if we do find content that's copyrighted or illegal, and we have a flagging system, we take it down from our marketplace. On OpenSea we want to be a marketplace that's trustworthy, respects the law and can be relied on, so we don't display those sorts of things or allow trading of them.

Forbes: Another big question that's become much more prominent is taxation. The IRS is doing a lot to try to track down people that have bought and sold crypto and perhaps didn't pay the appropriate capital gains tax, etc. Tax treatment of NFTs is an emerging field of practice. Do you provide any support to clients who buy if you integrate with any sort of any of those, like third party providers that automate tax reporting etc.

Finzer: We have not yet integrated with a third party provider, but it's definitely something we're excited about down the road.

Forbes: How do you see the market structure for NFTs evolving in the future? And I know, you talked about moving on to Polygon, but are there any other ways to scale NFTs that you're excited about?

Finzer: We just launched our Polygon integration so that’s been really exciting, because we've been able to see NFTs that are a lot cheaper. That expands the economy of what an NFT project can support to everything from a 50 cent asset to a $100 asset. We're also really excited about other layer one blockchains like Flow, which powers NBA Top Shot. There are also a number of other blockchains that are really promising. And I think it's just going to be people firing on all different cylinders to solve scalability. Some people will be more integrated with Ethereum and other folks will be more in their own ecosystems.

Forbes: How does offering more cost certainty and just cheaper assets facilitate adoption?

Finzer: You can have more people participate in lower cost items and lower transaction costs. If you're paying, say, $20 to $30 in gas on Ethereum, it just doesn't make sense to buy an asset if it's only worth $2. But if you can have very low transaction costs, then you can buy something for $1. So, and I think the reason that's exciting is because if you have people who don't necessarily want to spend tons of money on an NFT, but want to dip their toes, they can buy an NFT from people they admire, like an influencer on YouTube for 50 cents just to contribute a little bit and get something in return. And then if that influencer becomes really famous, they have this piece of work that maybe has some resale value. So, I think it just expands the economy, especially in game economies; it's not all just really high value assets. There's a spectrum of things. So I think that's another area where it's really important to have lower transaction costs.

Forbes: Thank you.

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