As US regulators take aim at centralized exchanges, the crypto markets appear unfazed and determined to continue their upward trend. After slightly loosing ground for the major part of the week, ETH prices consolidated around $1650 on the weekend, rising above pre-FTX-collapse levels.
In this week's edition, we take a look at the renewed interest within the NFT space, driven by the latest developments surrounding the upcoming NFT marketplace and aggregator, Blur, and its direct challenge to industry leader OpenSea. We analyze the effects of the Blur airdrop on OpenSea's market dominance, and assess the sustainability of Blur's user acquisition. We also consider whether Blurs' strategy and focus on pro traders has the potential to cause a paradigm shift for the NFT industry. Furthermore, we evaluate to what degree the renewed interest in NFTs is fostering Ethereum's network activity, and whether it is strong enough to reignite adoption.
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Markets Unimpressed by Regulators
After the downfall of FTX, US regulators have increased their scrutiny of cryptocurrency exchanges. On 8-Feb, the US-based exchange Kraken reached a settlement with the SEC over its staking-as-a-service product. As a result, the exchange immediately suspended staking services for US citizens.
Shortly after, on 13-Feb, stablecoin issuer Paxos declared it would halt minting of BUSD on 21-Feb amid regulatory pressure coming from the New York State Department of Financial Services. BUSD holders responded quickly by migrating over to other stablecoins while having a clear preference for USDT. Since 8-Feb, BUSD has declined by more than 31.2%, seeing over $5.052B in redemptions.
Prior to the Paxos announcement, BUSD had achieved an 11% dominance within the $136 billion stablecoin market. Since then, Tether has gained in relative supply dominance, now holding a 54% market share. DAI has still not gained appreciable market share, nor been able to successfully promote itself as the preferred decentralized and censorship-resistant alternative, despite recent events.
Gas Prices on the Rise Again
Median transaction gas prices have been consistently low over the past nine months, ranging between 10 to 20 Gwei. This translates to an average of $0.50 for a standard transaction and around $2.00 for a smart contract interaction, a fraction of the triple-digit numbers we saw during the past bull cycle. Low gas costs indicate low demand for blockspace and therefore little usage of Ethereum's applications, which is typical during bear markets.
Since the beginning of this year, however, we can observe a gradual but sustained increase in gas costs. Gas prices are currently sitting at 38 Gwei, exceeding the gas cost spikes we saw during this bear market around events such as the FTX collapse and the Binance bank run. The incremental nature of the gas demand suggests an early resurgence of network activity may be underway.
Interest in NFTs Reawakens
Upon closer examination of the gas usage by transaction chart, we can determine that a primary source of this increasing network activity is the NFT market, which is once again showing signs of growth.
After a steep decline in user activity towards the end of 2022, total gas consumption by NFT transactions has risen by 97% for two consecutive months. This suggests that activity around NFTs is approaching levels seen during the NFT Boom.
For an in-depth explanation of why we prefer quantified gas consumption as a measurement tool for network activity refer to: A Short History of the Etherverse
While initially this rise in interest in NFTs is attributed to the launch of new collections by some of the industry’s largest players such as Yuga Labs, Doodles, and Moonbirds, a deeper inspection shows that gas demand during the past two weeks has been mainly driven by the developments surrounding the Blur Airdrop.
Blur comes after OpenSea
Launched in October 2022, Blur, an NFT marketplace and aggregator, quickly gained traction and has since been nipping at the heels of industry leader OpenSea. As of today, Blur has seized a 78% market share of the NFT transfer volume, having overtaken OpenSea following its airdrop on February 14th. Blur aims to be a professional trading platform for NFTs, featuring a zero trading fee model and optional royalty payments.
While the token has lost roughly 13% in value over the past week, the airdrop brought new attention to the upstart rival. As a result, Blur’s market share jumped by 34%, reducing OpenSea's share from 36% to 15%. In an attempt to counter its upstart rival, OpenSea made a bold move in restructuring their fee model and policies, however, was still unable to retain its market share:
The limited impact of OpenSea's countermove can be attributed to the differences in the platform’s user bases. OpenSea has historically attracted creators and collectors, while Blur targets professional traders. With its token rewards, Blur has successfully enhanced market depth on its platform by incentivizing users to post bids, with the ultimate goal of increasing NFT sales frequency and improve the NFT trading and liquidity experience.
Due to the uniqueness of NFTs, quantifying their liquidity solely based on trading volume in relation to the total number of assets may be misleading. Therefore, examining the daily sales frequency per unique user can provide a more accurate measure of the turnover rate. For non-fungible assets, this eventually describes the rate at which individual vendors are finding buyers that are willing to purchase any NFT from the collection, and at what price.
In that regard Blur is clearly leading the race with between 4 or 5 trades per user on a daily base, while OpenSea sees on average of two daily trades per user. A higher sales frequency can create a flywheel effect, since more NFT sellers feel confident listening on Blur’s platform, creating a larger offering, which in turn attracts more buyers.
Although OpenSea's decision to reduce fees and royalties was a response to pressure from its competitors, it could lead to a paradigm shift in the NFT market. As the two main marketplaces shift their focus from creators and collectors, towards traders, value creation for NFTs may also change, potentially turning these collector's items into a new iteration on the asset class.
Since NFTs have historically derived their value from more subjective criteria such as traits, rarity, and community, price discovery has been difficult and often times been affected by market manipulation. Market making and higher frequency for NFT trading may increase market efficiency, and let NFTs be traded closer to their perceived value.
A look at the sale size of both marketplaces indicates that Blur's approach also facilitates a more profitable sales environment, with sale sizes ranging between 0.3 to 1.3 ETH. Sales on OpenSea for comparison have been constant, with an average of around 0.2 ETH for many months. Note that with non-fungible tokens, sale size does not solely represent better profitability for NFT vendors but can also root from a generally higher-priced offerings on Blur's marketplace. This again speaks to the success of the platform's market strategy, and target audience.
Little Effect on Ethereum
The recent attention surrounding Blur has led to a surge in demand for blockspace, resulting in increased fees for validators, and more ETH being burnt via EIP1559. However, this has yet to have an appreciable impact on network adoption. While there has been an expansion in total on-chain activity and growth, the number of new addresses is still 40% lower than this time last year, and the monthly average 🔴 remains below the yearly 🔵, signalling negative momentum.
The latest interest in NFTs appear to primarily appeal to existing users, and are as yet, unable to attract new users to the Ethereum network. This also suggests that both NFT marketplaces discussed above, and indeed most protocols, are fighting over the same preexisting user base of crypto-natives.
Summary and Conclusions
With Blur's user acquisition strategy and focus on incentivizing liquidity, it has achieved a degree of success in attracting traders, beyond the initial airdrop hype. The marketplace is on its potentially way to becoming a serious player in the NFT industry. With the platform recently announcing a second airdrop, this time rewarding users for loyalty, it remains to be seen if it can retain this newly acquired user base.
The increased competition and shift of focus in the NFT market is clearly in favor of NFT traders, who benefit from lower fees, increased liquidity, and better price discovery. Meanwhile, creators may feel disadvantaged due to the cutting down on royalty enforcement throughout the industry.
The renewed interest in NFTs, however, has not yet attracted new users, or triggered significant new capital inflows into the Ethereum ecosystem. Nevertheless, depending on the level of future NFT trading activities, it can still result in net value creation for the Ethereum network, with potentially higher MEV rewards and arbitrage opportunities, and the build out of new infrastructure for the future.
Disclaimer: This report does not provide any investment advice. All data is provided for information and educational purposes only. No investment decision shall be based on the information provided here and you are solely responsible for your own investment decisions.