The NFT gold rush made OpenSea into a $13 billion company — but can it stay on top?

On a cold day in January, NFTs started disappearing. Major services like MetaMask and Twitter were suddenly unable to display images associated with newly uploaded tokens, even though the users had clear records of ownership. Something in the distributed, decentralized technology stack had gone terribly wrong.

The problem was the NFT marketplace OpenSea, which was suffering a database outage. The outage brought down OpenSea’s image-loading API, jamming up any service that relied on it to upload tokens. In a scene full of militant decentralizers, a single company had found its way to the center of nearly every product. Reporting on the chaos, Vice spotted one user who had photoshopped the company’s logo to read “ClosedSea.”

It was an awkward moment but a revealing one. A year into the NFT boom, it’s hard to mint a collection or list a token for sale without somehow interacting with OpenSea. The company has become the central broker and the de facto enforcer of community rules. When an ape gets stolen, the rightful owner calls on OpenSea for help — and the platform has become the single most important chokepoint for blocking a sale. It’s also the largest single market any time a token is listed. Even tokens that aren’t minted on OpenSea eventually find their way there by simple gravity. And as the outage showed, even Web3 projects with no explicit connection to OpenSea are often deeply dependent on the company’s infrastructure.

It’s a strange situation for a company in the NFT business. At its heart, OpenSea is providing a simple, centralized service (the ability to view and trade tokens on the blockchain) that’s built on top of a decentralized blockchain that is far more chaotic. The cryptocurrency service Coinbase (another prominent Andreessen Crypto investment) followed a similar playbook to an $85 billion IPO — but it’s not clear the same tricks will work in the wilderness of Web3.

OpenSea declined to make executives available for interview for this piece, but when reached for comment, company representative Abram Smith emphasized the company’s lofty ambitions. “It’s possible that one day, nearly everything we own will be accounted for on the blockchain,” Smith said, “and OpenSea’s opportunity is to become a core destination for these new economies to thrive.”

Still, many investors and analysts see the company’s position as more precarious than you might think. It’s easily the most successful company to emerge from the NFT boom of the past year, processing hundreds of millions of dollars in transactions on a daily basis. At a technical level, it’s inescapable, as the outage dramatically showed. But it’s remarkably distant from the scrappy token-drop culture that has fueled the recent digital art boom — and many aren’t sure that Web3’s decentralized future will have room for an intermediary platform like OpenSea.

“I think the question is, is OpenSea like an AOL or a Netscape, or are they going to be able to maintain their hold on the market,” said Brian Krogsgard, who hosts a crypto podcast called UpOnly. “And I think that’s a very open question.”

Like nearly every tokenized blockchain project, OpenSea began with a game about cats. Launched in 2017, CryptoKitties were the first major NFTs — a set of traceable, breedable cat pictures inscribed on the Ethereum blockchain. Arriving amid growing blockchain hype, the project set off more than $10 million in sales in a matter of months. There was a string of follow-up projects from third-party developers: KittyHats let you accessorize your kitties, while KittyExplorer (from the same developer) let you analyze the overall ecosystem. It was easy to laugh at — but for true believers, the potential was electrifying.

OpenSea launched in December 2017 with an eye towards capturing that potential. CryptoKitties charged a 3.5 percent commission on all sales, so OpenSea lowered the number to 2.5 percent and set to work building a broader platform. The two co-founders were young but already well-seasoned: CTO Alex Atallah was working for a millennial-focused polling firm, while CEO Devin Finzer had already founded a claim-searching company acquired by Credit Karma.

But the real draw was their timing. The Ethereum blockchain — long praised for its ability to code smart contracts onto the blockchain — was launching a new standard that would form the basis for NFTs. Called ERP-721, the standard allowed for a new kind of object on the blockchain — something that could be traded and exchanged like Bitcoin but kept each individual token unique. ERP-721 was just months away from exiting beta, and CryptoKitties showed it could be built into an actual marketplace. Finzer and Atallah wanted to build tools for that new market — a platform for buying and selling these tokens at scale. The idea was good enough to get them into Y Combinator’s accelerator program for winter 2018, where they were described as “like Ebay for crypto assets.”

“The idea for OpenSea stemmed from our interest in CryptoKitties,” Finzer said in an interview years later. “While marketplaces for digital goods have existed for quite some time, they tend to be self-contained ecosystems: individual marketplaces for specific games, marketplaces for domain names, marketplaces for tickets, etc. … With the introduction of ERC721, it felt like such an idea was possible for the first time.”

It would be three years before the Beeple and Bored Ape sales that would kick off the contemporary NFT boom — and they were long, cold years for OpenSea. The internal mantra was to become “the Amazon of Web3,” which meant building out tools like buying, selling, and making offers for this new breed of blockchain tokens. But for a long time after the CryptoKitties boom subsided, NFT boosters were left scrambling for ways the tech might actually be used. Finzer was a regular presence in NFT groups on Reddit, promoting OpenSea as a way to trade cards in Gods Unchained (one of the early NFT-based card games) or how it could revolutionize software licenses — but for a long time, there were few people willing to take him up on it.

In hindsight, those years gave OpenSea a crucial head start on competing NFT markets. Basic online marketplace systems had been around for decades, but OpenSea was implementing the familiar features in a new format. It’s simple for eBay to offer something for sale to a high bidder, but doing the same transaction with an NFT requires an intricate chain of smart contracts handling offers, proof of ownership, and secure exchange. OpenSea isn’t the only group implementing those contracts (and crucially, most of the systems are open source), but they still have the best system for it.

At the same time, venture capital firms were showing new interest in blockchain startups — particularly Andreessen Horowitz, which operates Y Combinator. In February 2018, Andreessen was one of the leaders in a $12.9 million Series A round for Dapper Labs, a new company from the CryptoKitties founders. That June, the VC group announced a new fund focused entirely on cryptocurrency. Former Silk Road task force prosecutor Katie Haun, already a board member at Coinbase, joined the firm to build out its expertise in the space. While OpenSea was building tools, the rest of the market was growing.

In 2021, that market broke open, and OpenSea was perfectly placed to take advantage of it. Haun joined the company’s board in February 2021, and OpenSea’s fundraising went into overdrive. In less than a year, they raised $423 million from three subsequent rounds of funding. The Series A round closed just a month after Haun joined the board, led by Andreessen Horowitz and drawing in major names like Tim Ferriss and Mark Cuban. The Series B came three months later, valuing the company at $1.5 billion. By January 2022, the valuation had grown to $13.3 billion, driven by a massive influx of revenue.

Richard Chen, a general partner at 1confirmation who invested as part of the seed round, says the cash was much needed to build out the team, growing from a barebones development team into a full company that could handle the challenges of all their new users. “When the platform was exploding, they were just fighting fires, a lot of technical debt,” Chen told The Verge. “They needed to fundraise to grow the team really fast.”

The open blockchain makes it easy to track the company’s growth — and one chart assembled by Chen paints a particularly startling picture. In January 2020, OpenSea brought in just over $65,000 in total fees (a combination of OpenSea’s 2.5 percent commission and any commission charged by third-party sellers). A year later, as NFT fever began to crest, it was just shy of $615,000. By January 2022, that same number had jumped to $386 million.

With that much momentum, wild predictions have become hard to resist. Right now, NFTs are mostly used for collectible art — think of the apes that have become so inescapable — but unlike curated platforms like Rarible or Foundation, OpenSea has no particular attachment to the digital art world. The same blockchain system could be used just as easily for concert tickets, real estate, or post-graduate diplomas. In the high-flown rhetoric of venture capital, the company’s CEO imagines a world where everything becomes an NFT, with no limits to where OpenSea’s 2.5 percent commission can reach.

“Ultimately, what we’re talking about is the tokenization of everything,” Finzer said in an Andreessen podcast with Haun in May 2021. “There’s the existing landscape of digital assets…but then there’s the new markets that haven’t even really been dreamed of yet.”

Towards the end of Web3’s big year, Jack Dorsey decided to rain on the parade. “You don’t own ‘web3,’” Dorsey tweeted. “The VCs and LPs do. It will never escape their incentives. It’s ultimately a centralized entity with a different label.”

It was a thinly veiled shot at Marc Andreessen, kicking off a broader feud between the two men. But the split between true believers and VCs is bigger than just two clashing egos, and OpenSea has ended up on what many see as the wrong side. Andreessen Horowitz investments have driven much of the recent crypto boom — most notably with Coinbase and OpenSea but also with dozens of smaller bets that have yet to pay off. In each case, the goal is to forge an early place in an emerging market and parlay it into a big-dollar exit — a goal that rests uneasily with Web3 dreams of decentralized ownership.

One analyst in the NFT space pointed to a 2020 paper from Andreessen Horowitz as a crucial playbook, describing how to operate in a decentralized space while maintaining a dominant market position. The post recommends “progressive decentralization” — in short, decentralizing as much as you can without losing control of the product or the marketplace.

“The dominant platforms seem to be really designed around Web2 values,” she said. “The decentralization stuff feels like a wrapper to get buy-in, but the core of it is really about market dominance.” (She asked not to be named for fear of being ostracized in the NFT community. “It definitely is a space where you have to be hyping the hype; otherwise, you’re out of the club,” she explained. “It’s kind of like Scientology in that way.”)

Reached for comment, OpenSea described its approach to the blockchain differently. “We take a coordinated approach to building a safe and friendly experience for our users without undermining the fact that they’re interacting with blockchains,” said Smith, speaking as an OpenSea representative. “As such, ownership is decentralized and offers portability and control over their digital property, which is simply not available in Web2.”

Other players in the community are less worried, seeing the NFT marketplace as too decentralized to be dominated by any single player. “I’m literally zero [percent] worried about a monopoly situation,” CryptoPunks CEO Cyrus Younessi told me. “They don’t control it in the end. Ethereum is a neutral open marketplace. If people want to trade something, they will find a way to do so… This whole space is built on not letting any one company make those determinations.”

At the same time, OpenSea’s rocketing growth has led to a string of platform problems, a result of slow investment in trust and safety infrastructure. The new surge in NFT trading has led to a surge in stolen tokens and other legal issues that require intervention, and OpenSea has been forced to serve as moderator of those disputes with few preexisting policies on when and how a token should be blacklisted. When the company took a second look at its “shared storefront” contracts earlier this year, it found more than 80 percent of the items were “plagiarized works, fake collections and spam,” leading to widespread takedowns.

There are also straightforward security issues, which have become newly urgent given the huge quantities of money on their platform. An interface bug that had been dormant for months let attackers trade on old contracts, causing hundreds of thousands of dollars in unintended sales. In a more embarrassing internal incident, OpenSea’s head of product was called out publicly for insider trading in September, using secret wallets to front-run sales on the platform. (He was fired shortly afterward, after what the company called “an immediate and thorough review.”) They’re the kind of headaches that might give an opening to a competitor, but so far, no competitor has emerged.

Even for skeptics, it’s hard to deny how powerful it is to have all the buyers and tokens in the same place, making offers and doing deals. With all her misgivings about the platform, the anonymous analyst still uses OpenSea and gets real joy from seeing a new offer. She told me about a surprise offer she’d gotten months before.

“I logged in to the site, and someone had placed an offer on an NFT that I got for free,” she told me. “I was doing the calculations, and I realized, oh my god, this is $20,000.”

She laughed, remembering the rush of success. “I felt converted. Like, I love OpenSea!”

This content was originally published here.