Blur: A Fundamental Analysis of NFT Marketplaces

NFT Markets Will Recover… At Some Point

Is the NFT market gasping its last breath? A quick glance at the plummeting prices of the so-called “blue-chip” NFTs might lead you to believe so. Indeed, since the start of the year, the market has only been on a downward trajectory, with most of these collections losing 30-60% of their value in ETH terms.

The overall volume of NFT marketplaces has been stagnating despite attempts by platforms like Blur and LooksRare to stimulate trading through token mining incentives. This slump can be attributed to a myriad of factors, including waning interest in NFTs, a dearth of fresh capital inflows, a lack of compelling new narratives, and a correction of the “overvaluation” from the previous bull run.

From a builder’s perspective, however, the future of NFTs is far from bleak. Immersed in the space, conversing with startups and founders daily, one can feel the excitement about NFTs as a technology tool. NFTs represent more than just digital assets; they are emblematic of cultural value in games, entertainment, luxury goods, music, art, and more.

It’s imperative to step back and see the bigger picture. One simple reason why we believe the markets will recover: With an estimated market cap of around 8.9M ETH ($16B), NFTs constitute a mere 1.3% of the total crypto market cap. Given the vast potential of the technology, it’s easy to envision a future where this number expands manyfold. It’s not too far-fetched for NFTs to reach 5-10% of crypto’s market cap in the next cycle.

We firmly believe that NFTs will bounce back despite the current gloomy outlook. Speculation is inherent to the crypto market, and we look forward to another NFT bull run at some point. This cycle of boom and bust is a recurring theme in the crypto world. Just consider the alt cycle of 2017-2018: After a two-year lull, altcoins made a dramatic comeback.

Even if you view NFTs as merely “altcoins with pictures” (a sentiment expressed by Cobie, which we partially disagree with), remember that altcoins always make a comeback. They’re the proverbial phoenix that never dies.

So, we have been thinking a lot about what the next NFT cycle could look like. A few key points:

1. The next NFT bull run could be even bigger than the last. Financial products related to NFTs, such as lending, buy now, pay later (BNPL), and derivatives (perps/options), were largely absent in the 2021-2022 cycle. However, substantial progress has been made this year, with many products already live. These will undoubtedly fan the flames of the next NFT bull market.

2. The winners of the next cycle will likely be different. Just as new tokens rose to prominence in the alt booms of 2017-2018 and 2021-2022 while older ones (ADA, EOS, XLM) languished, we expect a similar pattern with NFTs. Only a few existing NFT collections will succeed, while most will fail and new ones will emerge. This “shiny new object” syndrome implies that picking NFT collection winners will be challenging and somewhat dependent on luck.

3. Timing-wise, no one knows for sure. But here are some thoughts:

   1. If we consider the Otherside mint (May 2022) as the peak of the previous cycle, we’re about 1 year and 3 months into the current bear market. If we adhere to the 4-year cycle theory (1 year bull, 3 years bear), we could start to see improvements in the next 9-12 months, with a peak in 2025.

   2. Major DeFi blue-chips (MKR, COMP, UNI) are showing signs of a revival after being in a bear market for the past 3 years. In the last cycle, the NFT bull run followed after DeFi summer, especially because people got rich and had money to splurge on NFTs for flex value.

   3. The macro environment and overall crypto environment seem to be improving. Many expect BTC to perform well in 2024, especially given the halving.

   4. NFTs could surge later in a bull cycle when BTC/ETH and altcoin valuations are high, making NFTs (which are difficult to value because they capture intangibles) seem reasonable again.

So, if you’re bullish, like us, on NFTs as a growing asset class that will stage a recovery in the coming months, what should you be looking at? We believe that NFT marketplaces will be the best and fastest horses:

• Marketplaces are fantastic businesses and become absolute cash cows in a bull market.

• It’s an easy narrative to understand.

• It’s easier to see which marketplaces are doing well because network effects are significant, and on-chain data is very telling.

• Value can be captured through fungible marketplace tokens. This enables broad participation, not just in the NFT community but also in DeFi and other crypto folks.

This month, our NFT research report focuses on NFT marketplaces. We cover:

• An overview of NFT marketplaces on Ethereum.

• A comparison of NFT marketplace tokens, looking at revenue and competitiveness.

• A comprehensive analysis of Blur, including potential cash flows and valuations that can be tied to the BLUR token.

• Risk factors and upcoming catalysts for BLUR.

What’s up With NFT Marketplaces?

“The marketplace that wins is the marketplace that figures out how to make their buyers and sellers meaningfully happier than any substitute.” – Sarah Tavel

This insightful quote found its way into our Year Ahead report for 2023, highlighting NFT marketplaces as one of our five core themes. We frequently revisit this wisdom as we assess which marketplaces are poised to thrive in the next bull run. Our previous discourse on marketplace business models remains very relevant today and is worth reviewing.

One expected trend from the Year Ahead that hasn’t yet materialized is the rise of vertical marketplaces targeting specific niches. Take SuperRare, a high-end digital art marketplace which has a mere $11M annualized trading volume and $1.2M annualized revenue. This pales in comparison to generalized marketplaces with broader audiences. The maturation of vertical marketplaces seems to be on the horizon but will need time.

Focusing on Ethereum-based NFT marketplaces, where over 60% of the total trading volume resides (and over 80% excluding Bitcoin Ordinals/BRC-20s), we evaluate two key metrics: gross merc