The rise and fall of OpenSea

🌈 Abstract

The article discusses the rise and fall of the NFT (Non-Fungible Token) market, with a focus on the challenges faced by the leading NFT marketplace, OpenSea. It explores how OpenSea, a startup inspired by cat JPEGs, transformed into a complex company dealing with regulatory scrutiny, internal conflicts, and competition from emerging platforms like Blur.

🙋 Q&A

[01] The NFT Market and OpenSea

1. What was the state of the NFT market and OpenSea's position in it?

• The NFT market experienced a boom in 2021, with OpenSea becoming the largest marketplace for NFTs. OpenSea's revenue skyrocketed from $9 million in Q2 2021 to $167 million in Q3 and $186 million in Q4.
• However, by 2022, the NFT market started to decline, with total sales volume dropping from $6 billion in January 2022 to just above $1 billion in June. OpenSea's quarterly revenue also decreased, dropping to $171 million in Q2 2022.

2. How did OpenSea respond to the market changes?

• OpenSea tried to adapt by hiring employees with backgrounds in Big Tech companies, but this led to internal conflicts and a shift in the company's culture.
• OpenSea also considered launching its own cryptocurrency, but this was risky due to regulatory concerns around cryptocurrencies.
• The company eventually decided to cater more to speculators and traders, abandoning its initial mission of bringing NFTs to the masses.

3. What were some of the challenges and controversies faced by OpenSea?

• OpenSea faced issues such as website outages, fraudulent NFT collections, and stolen NFTs, leading to user frustration.
• The company also faced a scandal involving its head of product, Nate Chastain, who was caught trading NFTs using insider information.
• OpenSea's decision to stop enforcing creator royalties led to internal dissent and further challenges.

[02] Regulatory Scrutiny and OpenSea's Future

1. What regulatory issues did OpenSea face?

• OpenSea was subject to inquiries and document requests from the SEC, FTC, and various tax authorities, both domestically and internationally.
• The SEC issued subpoenas to OpenSea and was engaged in "custodial document production" with the company, indicating a potential investigation.
• OpenSea also faced potential tax liabilities, with the Australian Taxation Office potentially seeking $130 million from the company.

2. How did OpenSea respond to the regulatory challenges?

• OpenSea's legal team instructed employees on appropriate terminology to use when discussing the company's operations, avoiding words like "exchange," "broker," and "trading" to distance itself from securities-related language.
• The company announced a major restructuring, dubbed "OpenSea 2.0," which aimed to reposition the company as a "portal to Web3" and better compete with platforms like Blur.

3. What is the outlook for OpenSea's future?

• OpenSea's valuation has dropped significantly, from a high of $13.3 billion to only $1.4 billion as of Q2 2023.
• The company has undergone significant layoffs and executive departures, but current employees report improved morale and a focus on the new product vision.
• The article suggests that OpenSea's future success will depend on its ability to navigate the regulatory landscape and adapt to the changing dynamics of the NFT market.