Happy Monday friends 👋,
Despite my better judgment I have decided to start a weekly newsletter, One Big Idea. The premise is Web3 strategy for the crypto curious. In it, we will dive into the forces driving web3 today. You can expect to read about topics like NFTs, digital identity, governance, regulation, entertainment, and the metaverse.
But before we get started I have an admission to make.
I’m not a very good writer.
You see, in college, I decided to drop out of my journalism major to pursue a career in business. While the allure of sports broadcasting had called me as a high schooler, I soon realized the major itself would require writing. Lots of it.
I quickly pivoted to business, where I would trade in my ballpoint pen for VLOOKUPs and consulting cases. I was free. Or so I thought.
Instead, I would graduate and go on to work for Amazon. A company known for outlawing PowerPoint in favor of “six pagers”. Every new initiative, operating plan, and report to the higher-ups required one of these documents. It appeared writing would be pretty integral to this business thing after all.
I’d spend the next five years at the company fumbling my way through crafting these “six pagers” and press releases (PRFAQs) before moving on to Venice Music. While there, I was given a brief reprieve from book writing only to take on drafting product requirement documents. Suddenly, drafting narratives gave way to user stories and acceptance criteria. I learned how to write for both technical (engineers) and non-technical (designers) audiences. While I still was not a good writer, I could draft documents with enough clarity and specificity to guide product development.
In the summer of 2021, I moved across the company to serve as Senior Vice President of Venice Music. In this role, I assumed my best writing days were behind me. No more six pagers to draft. No more products to create requirements for. Turns out I, as I have been at every turn, was wrong.
As SVP I led our Web3 & Community efforts at Venice. A large part of those efforts culminated in creating The Venice Music Collective - the music industry’s first token gated membership. Aligning stakeholders required crystallizing our vision of the Collective through lots of, you guessed it, writing. Strategy, press releases, announcements, and requirement documents. If it required written words there was a good chance I was writing them. Again, while I would not consider myself the best at this craft it was good enough to get the job done.
So that leads up to today. If I hate writing so much why am I subjugating myself (and you) to this torture?
The truth is - this is a selfish exercise. Each week I receive dozens of requests to sit down and “pick my brain” from people interested in the space. While I’m happy to do so on occasion I’m cognizant these types of interactions are low leverage. Instead, I hope that my writing provides the foundation I wish I had when entering Web3.
Web3 is a space I am deeply invested in both professionally and personally. I know by taking the time to write down my thoughts it will force me to go deeper on topics and further my understanding. Most content we ingest is surface level. In the era of non-stop Twitter feeds and sound bytes, long-form writing forces us to sit with our thoughts and articulate our ideas. It is in this process that I hope not only will I become more grounded in my knowledge but that what I share may be of use to others.
So thank you for joining me on this journey. You can expect it to be highly iterative as I find my footing and incorporate your feedback. I will keep it light and informative as best I can.
That is enough preamble for now. Let’s dig in.
Coinbase, the world’s second largest exchange with over 98 million users, was primed to take the NFT industry by storm with the launch of their own platform - Coinbase NFT. For many in the space Coinbase was the on-ramp into crypto. The ability to transact without needing a non-custodial wallet dramatically reduced the learning curve. This “crypto lite” offering provided exposure without the downside risks of holding onto your own assets. Once an individual felt prepared to venture into the world of DeFI and beyond, they could take custody by creating their own wallet and transferring their funds.
Conventional wisdom held that Coinbase’s emphasis on accessibility and security would be a perfect fit for first-time NFT buyers. Purchasing an NFT on Coinbase could be done with their custodial wallet, the same way individuals purchase coins on their exchange today. Further, unlike the Wild West of OpenSea, where any project (real or scam) could be listed with a few mouse clicks, Coinbase NFT would be a walled garden. This meant only projects who met the team’s internal criteria would be granted entry. In that way Coinbase would look more like iOS than Android. Individuals could expect anything that made it onto Coinbase’s NFT platform was safe to interact with.
In the months leading up to launch the waitlist for Coinbase NFT ballooned to 2 million.. This would be a watershed moment with Coinbase NFT bringing this nascent community into the mainstream.
…Or so we were led to believe.
Instead, 2 months after their May 4th launch, Coinbase NFT is a ghost town. Volume on the platform for the last 7 days was 318 ETH. Compare this to the 20.5k OpenSea did in volume yesterday and you can start to get a clearer picture. Further, the recently launched GameStop NFT marketplace has done more volume in 48 hours than Coinbase NFT has done all time.
OpenSea, while entrenched, is not untouchable. In fact, in the past year, we have seen multiple marketplaces like Looksrare, x2y2, and GameStop enter the race and hold their own.
So what happened?
Volume and the Cold Start Problem
Andrew Chen, author of The Cold Start Problem, describes how networked products (e.g marketplaces) become more useful the more users are connected to the product. Conversely, a networked product without a network is, well, useless. A two sided marketplace necessitates willing buyers and sellers in equilibrium. Too many buyers and inventory dries up. Too many sellers and prices for goods will crater (causing sellers to leave).
What we saw with the launch of Coinbase NFT was too few sellers. The result was artificially inflated floor pricing with minimal inventory. While sellers may have felt good seeing these high floor prices, buyers knew better and ultimately looked elsewhere to secure the lowest price.
So how to attract sellers to list at globally competitive prices?
Financial incentives. Specifically - both low trading fees and rewards. Low trading fees alone are not an incentive for a marketplace without volume. So while Coinbase offered 0% trading fees at launch, they failed to incentivize sellers to list when there was no volume. After all, trading fees do not matter if no one is buying.
Trading & Staking Rewards
In addition to introducing platform fees lower than OpensSea, both Looksrare and x2y2 implemented rewards to incentivize sellers to list on their platform. For Looksrare, listings below the global collection floor multiplier threshold receive $LOOKS in accordance with the tier of product and multiplier.
Furthermore, Looksrare encourages users to hold on to their $LOOKS to earn staking rewards. At the time of publishing this post staking $LOOKS earned 60.51% APY.
A common rebuttal to this approach is as a publicly traded company Coinbase is not in a position to create its own token to reward holders. While this may be true I believe it’s a response that lacks imagination. Many publicly traded companies offer reward programs. From cash back to airline miles, loyalty incentive programs do not need to take the form of a coin to be viable. One alternative would be to rebate buyers and sellers a percentage of the sales price in USDC. This “creator fund” would be for a limited time (say 6 months) or until the platform had achieved sufficient network effects.
The promise of building NFTs on a shared protocol is their interoperability across the protocol. Mint one place. Share everywhere.
However, the NFT is still typically only minted in one location. Marketplaces like Foundation and Nifty Gateway have leveraged mints and auctions to create exclusive experiences you can not get anywhere else. It’s a web2 playbook (think: podcasts, streaming services) that still has potency in web3.
Coinbase has started to experiment with exclusive content. Bill Murray recently sold out the first 81 NFTs in his new 1k collection. The mint, which sold for 1.35 ETH a piece, was hosted on Coinbase NFT and has done 206 ETH in volume the past 7 days. That is 2/3rds of the volume on the entire platform over that span.
Coinbase NFT did not save the space. But, if they can build better incentives to achieve network effects, Coinbase can still deliver on its promise to be a mainstream funnel for NFTs. Combining financial reward systems to encourage trading with must-see exclusive content can put Coinbase on the path to recovery.
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