How Does OpenSea Make Money?

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TL;DR- OpenSea charges a 2.5% fee on the sale of all assets on the platform. If you go to OpenSea->Stats and take a look at the trading volume happening on the platform, it’s obvious they’re making serious bank.

Note: if OpenSea was available to public investors as a stock, I would buy it. They’re absolutely crushing it right now.


About OpenSea


A brief history


OpenSea owes its origins to serial entrepreneurs Devin Finzer and Alex Atallah, who founded the operation in 2017.
Alex and Devin went live with the platform in 2018.


Not much was happening on the platform until something extraordinary came along. That something was CryptoKitties. At its height, CryptoKitties was doing millions in trading volume per day. This may not sound like much to us now. NFT are a small, burgeoning space right now- but in 2018, they were a micro movement.

OpenSea founders Alex Atallah and Devin Finzer


OpenSea today


Fast forward to now, after OpenSea has gone through the Y Combinator and received hundreds of millions in funding from names like Andreessen Horowitz.


Today OpenSea is the platform for NFT buying and selling. If NFT trading platforms were like cryptocurrencies, OpenSea would be Bitcoin. OpenSea hosts NFTs on Ethereum (95%+ of trading activity), Polygon, and Klaytn.


How OpenSea operates


If you’re familiar with crypto, you’re no stranger to the term ‘smart contracts’. These are nothing more than computer programs that execute when certain criteria check out. NFTs cannot exist without smart contracts. Smart contracts are used to transfer NFTs from one owner to another. This immutable information resides on the Ethereum blockchain.


Because of Ethereum’s astronomical gas fees (fees paid to the computers processing transactions), other blockchains popped up on OpenSea. The Klaytn chain has made it debut on OpenSea, which was originally powered by Ethereum smart contracts. OpenSea also now employs the Ethereum layer-2 protocol Polygon (MATIC) to reduce trade expenses while speeding up execution.


You can buy NFTs with Ether, Ethereum’s native token (ETH). Furthermore, over 150 other currencies, including DAI and UNI, are used on the OpenSea platform.


How traders use OpenSea


Users connect their crypto wallets (such as MetaMask) to buy NFTs. If you create an account on OpenSea, you’ll need to have a crypto wallet to do so. Users directly buy NFTs by accepting the seller’s predetermined price or by bidding on them (leaving the seller to either accept or decline the offer).

OpenSea users log in by using their browser wallets

If you want to sell something on the platform, all you have to do is link your wallet, upload the NFT you want to sell, and select a price. As the seller, you’re able to entertain offers that are less than your asking price.
Given that blockchain is an immutable ledger, OpenSea lists all a specific NFT’s previous transactions (such as sales, transfers, bids, and more). This allows potential buyers to watch the asset’s value and interest over time.


More than 50 million NFTs list on OpenSea, and the platform has grown to several million users. How much more will it grow?


What’s OpenSea’s business model?


Service fees are how OpenSea makes money. When a digital asset sells through the platform, buyers and sellers pay fees.


How big is the fee? 2.5%. In other words, if an NFT sells for $100, OpenSea will keep $2.50. The charge structure is comparable to those of other NFT marketplaces like Rarible.


As more trading platforms enter the space and competition increases, I’d expect these fees to shrink. The same is true of Coinbase’s stratospheric fees.


OpenSea makes its marketplace infrastructure available for free. As a result, listing an NFT is completely free.
OpenSea owes much of its success to its ease of use. With only a few clicks, you can add new projects to your account. The OpenSea portal also provides a wide range of categories to choose from, ranging from trading cards to domain domains.


OpenSea makes some solid moves working with big names and influencers to push NFT collections. The creators “did a terrific job living in Discord to uncover fresh NFT initiatives,” according to Richard Chen, a General Partner at 1confirmation (one of OpenSea’s earliest investors). These days, everyone from Steph Curry to Snoop Dogg to Elon Musk to Jay-Z are holding NFTs.


Weaknesses


What OpenSea is doing is not rocket science. The platform simply monitors the Ethereum blockchain, allows users to have accounts, and creates a digital medium which users can view and analyze NFTs.
OpenSea’s first weakness isn’t even its own fault- the high Ethereum gas fees. Would you pay $100 in gas fees to buy a $5 NFT? Probably not. I conclude here that there are scores of cheaper NFTs that exist in an inefficient market due to this high transaction friction.

Ethereum gas fees have reached the point of insanity


Second, it won’t take too much for another platform to come along that’s easier to use than OpenSea, provides better analytics, and gets more clout. When you’re at the top, everyone’s gunning for you!


Summary


Between buyers and sellers, OpenSea operates as a (usually) secure and dependable mediator. OpenSea has some great features, like the ability to get verified and hide/unhide your NFTs from public view.


Why do people buy NFTs? The same reason people buy art or trade baseball cards. Buyers gain from knowing that the things they receive are genuine. Meanwhile, suppliers can tap into a ready market of customers, increasing their selling price. As a result, the fees they pay will almost certainly be covered by the higher price they can get. This is the value proposition OpenSea brings to its sellers


Let’s hope the space stays competitive, NFT transaction fees get lower, gas fees get lower, and OpenSea doesn’t start taking advantage of sellers the same way Amazon does.

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