The Generalist - OpenSea: The Reasonable Revolutionary

Hey friends,

This week, I bought my first NFT.

Why?

Partially for fun, partially because I thought it was cool, but mostly to learn about the topic of this week's piece: OpenSea. If you haven't followed the company's story so far, it's pretty wild. It includes a pivot, fierce competition with a better-capitalized rival, and a truly mind-boggling growth story.

Along the way you'll learn about things like CryptoPunks, Axies, Bored Apes, Meebits, and Fidenzas.

(Don't worry if those don't mean anything to you right now.)

I really hope you like it.

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IN COLLABORATION WITH MASTERWORKS...

Where to Invest $100,000 Right Now? Ask the Experts

Today, investors face a dilemma. Inflation is rising. Nearly every firm from Goldman to BlackRock project equity returns under 5% until 2035. The global pandemic has completely disrupted markets.

Finding promising investments is harder than ever.

Recently, Bloomberg asked financial experts where they’d invest $100,000 today. The response? They overwhelmingly recommended alternative assets, like art.

I recently took their advice, investing in multimillion-dollar art myself.=

Here’s why:

• Contemporary art appreciated 14% annually on average from 1995-2020,
• Global art industry is expected to grow by 51% by 2026
• 0.01 correlation to public equities

Thankfully, I didn’t have to buy the entire painting to invest.

Instead, I used Masterworks.io—the tech unicorn that lets you invest in art like stocks in a company. They use AI to identify works by artists like Picasso, Banksy, and Basquiat—then securitize and issue shares of those paintings.

Want in? Generalist subscribers get priority access*

Actionable insights

If you only have a couple minutes to spare, here’s what investors, operators, and founders can learn from OpenSea.

• NFTs are for real. Whether cynic or supporter, the numbers show that non-fungible tokens are far from frivolous. So far this year, NFT sales have totaled more than $13 billion, with much of that sum arriving in the last two months.
• Running lean is vital for markets with high volatility. OpenSea maintained a small team for its first few years, with just 7 employees as of late 2020. That allowed the company to weather the crypto bear market, hanging in until NFTs took off.
• OpenSea is extremely dominant. The exchange boasts a market share of 97%. That’s thanks, in part, to OpenSea’s superior asset breadth, easy listing process, and robust filtering system.
• Decentralization doesn’t have to be doctrinal. Much of the crypto community seems to view decentralization as both a source of legitimacy and a cure-all. While there’s clearly room for decentralized players — Uniswap being one example in the token exchange space — centralized companies can also thrive. OpenSea is the latter.
• Investors may want to watch out for new types of NFTs. If you’re feeling irked you missed out on CryptoPunks, Bored Apes, and Art Blocks, there may be some consolation. New formats are constantly being created; two experts suggest music and “intelligent” NFTs are worth watching.

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What are the most dominant companies in the world, by market share?

Chances are a few names come to mind: Google almost certainly, Facebook perhaps, Amazon, depending on the category.

Good answers, all of them. Google holds a 92% market share in search, Facebook and its associated properties boast more than 3x the active users as its next competitor, and Amazon’s domestic e-commerce dominance is pegged at 50%. (AWS’s share in cloud computing is 31%.)

Investors laud and governments squabble over this kind of eminence, this level of control. And yet, OpenSea bests all of them.

Since its founding in 2017, the NFT marketplace has grown to become the undisputed leader in the space with a share that exceeds 97%, and volume 12x that of its closest rival. The intuitive response to these figures is to ask about the market size. Sure, OpenSea is winning, but winning what, exactly?

Whatever one’s position is on the space, these numbers illustrate that NFTs are far more than a trifling interest and that OpenSea is more than just a peddler of esoterica. Already this year, more than $13 billion worth of NFTs have sold, with $25 billion in annual gross merchandise volume (GMV) within touching distance should sales for the rest of the year match last quarter. Such scale not only puts OpenSea ahead of its competition but beyond traditional, web2 marketplaces. In its most recent quarterly report, Etsy reported $3.04 billion in GMV; OpenSea surpassed that in August alone.
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Coupled with the high-octane culture of the crypto space, such figures could contribute to a portrayal of OpenSea as a peddler of risk, the grandest bazaar in a kingdom of the unhinged. That would do a disservice to the creativity and cleverness of NFTs and misjudges what makes OpenSea unique.

This is not a company governed by a manic, YOLO-doctrine, but one guided by patience and conservatism. While adversaries experiment with new features and different models, OpenSea has obsessively focused on improving its core product. The result is a subtly paradoxical business, one that’s empowering something radical, but doing so with moderation — a reasonable revolutionary.
Today, we’ll brave the open seas ourselves, exploring the company’s past, present, and future. Read on for a voyage alighting on:

• Origins. WifiCoin and the pivot that led to OpenSea.
• Market. Revisiting NFTs and their development.
• Product. The subtle moats surrounding OpenSea.
• Leadership. Devin Finzer’s disciplined world-building.
• Valuation. A16z's deal of the year.
• Competition. Rarible, Foundation, and others are coming for the king.
• Vulnerabilities. How OpenSea might flounder.
• Frontier. Where will NFTs go next and is OpenSea well-positioned?

Wagmi (to the end of this piece).

Origins: The Short Reign of Wificoin

Devin Finzer’s first hit business came in 2011. On Halloween of his junior year, the computer science student released his creation to the rest of Brown University’s student body.

Built with fellow students, Coursekick was a social class registration system that made it easy to pick your own classes and see what your friends were signing up for. Especially compared to the decrepit incumbent system, it proved a popular proposition. Within a few days, CourseKick had 500 users; a few days later it hit 1,000. Little more than a week later and 20% of Brown’s student body was on the platform.

In an interview with the school newspaper, Finzer described his vision to create “Pandora for classes.”

While that didn’t come to fruition, CourseKick served as valuable training for not one but two of the most successful founders in recent memory — one of Finzer’s co-founders was Dylan Field, CEO of design platform Figma, last valued at $10 billion. It’s surreal to visit Coursekick’s untended Twitter page and find the pair, ten years younger, celebrating their creation’s traction:

The experience at CourseKick stoked an entrepreneurial obsession for both men, though it would take Finzer longer to find a project in which his talents fully flourished. After graduating, he headed to Pinterest, working as an engineer on a growth team. Less than two years later, he had decided to build something of his own yet again.

In April of 2015, just a month after departing Pinterest, Finzer rolled out two new projects: Iris Labs and Claimdog. The first of those developed a suite of ophthalmological tools including a series of eye charts for the iPhone.

Though that seems to be have been a modest success — the apps are still in use, and Finzer’s LinkedIn states the suite has received 1.2 million downloads — Claimdog was the real focus.

It was an ingenious idea, well-articulated by Finzer in the company’s Product Hunt launch post:

Finzer ran the business for a little over the year before receiving an acquisition offer from CreditKarma, one that he and his co-founder accepted. Under its new ownership, Claimdog became the parent company’s “Unclaimed Money” product.

It was while working at his acquirer that Finzer fell down the crypto rabbit hole, becoming increasingly fascinated by the blockchain and the new economic system to which it was giving rise. That was a sharp juxtaposition from the more staid financial realm of his day job and coincided with the bull-run of late 2017.

By the fall of that year, he’d decided he wanted to build a business in the space, teaming up with another young software developer, Alex Atallah. A CS graduate from Stanford, Atallah’s experience neatly mirrored Finzer’s: he founded “Dormlink” in college, a social network for student quarters, before taking on the CTO-mantle for two further startups. Like Finzer, he’d developed an obsession with the crypto space that he wanted to take further.

In September of that year, Finzer and Atallah presented their project at Techcrunch’s Hackathon. Wificoin was in keeping with projects that had gained prominence in the space. In exchange for sharing access to a wifi router, users could earn coins, that could, in turn, be used to buy wifi access from others in the company’s network. In that respect, it was not dissimilar to Helium, a network sharing platform built on the blockchain that had raised an impressive Series B from Google Ventures, the year before.

Despite Atallah admitting that the product was “very hackable” in its current instantiation, the pair were accepted to Y Combinator to take their project further.

It was, by some accounts, an uneasy fit. Though rightfully known as a great talent and opportunity spotter, YC has not always shown a nuanced understanding of crypto. One former OpenSea employee expressed the belief that YC’s team was skeptical of the space in those days, while in our discussion, Finzer acknowledged teething problems.

"YC is certainly not tailored toward crypto companies,” he said, remarking that the accelerator relies on a template for startup building that feels alien in the world of web3. These novel businesses are “exceptions to the rule,” according to Finzer.

YC’s apprehension might have been influenced by Finzer and Atallah’s near-immediate pivot. In the interim between Wificoin’s acceptance to the program and its start in January of 2018, the crypto market had indelibly changed.

November 28, 2017 proved a historic day for the crypto community, though its significance came disguised — like so many other innovations ​​— as a toy.

Though a test version had debuted at ETH Waterloo the month prior, that date represented the official launch of CryptoKitties. These goofy digital cats generated huge interest through the end of that year and into the next with frenzied bidding seeing one collectible, “Genesis,” selling for 247 ETH, roughly $118,000 at the time. (In case you’re wondering, that’s $894,000 based on this week’s prices.)​
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While some scorned the project (and many continue to), others saw past the googly-eyes. A CryptoKitty was not just a cute drawing, but a “non-fungible token” (NFT) built on top of a cryptographic standard called ERC-721, which supported other NFTs. Now, for non-crypto natives, this might sound like impenetrable jargon, but I promise it’s not as hard to understand as you might think, and is ​​— I think — important.

Let’s quickly ask ourselves three questions:

1. So, what is an NFT again? It’s a unit of data that cannot be changed. That unit can be anything: a picture, a song, a video, or even a drawing of a wacky cat.
2. Why would someone want to buy one of these? That’s a longer conversation and one I’ve written about here, but it often has to do with status, scarcity, and belonging. Owning an NFT can grant clout, showcase your personality, or give you access to private groups.
3. How does ERC-721 play into this? Think of it as the underlying infrastructure for projects like CryptoKitties. What’s important to know here is that ERC-721 is also the infrastructure for many projects beyond CryptoKitties. So if you could build a marketplace on top of ERC-721, you could easily support other NFTs.

It was this last point that really stuck out to Finzer.

IN A MEME

For the more pictorially inclined, here's the whole piece — all 8,500 words of it — encapsulated in a single meme.

ZUCK: THE GAME

For a while, I've wanted to try and create a "playable" case-study. Something like a Choose Your Own Adventure book built for the internet and focused on a business problem.

This week on Twitter, I shared my first attempt. "Zuck: The Game" puts you in the shoes of a young Mark Zuckerberg and asks you to build Facebook. To complete your mission, you'll have to avoid the wrath of Harvard's administration, placate the Winklevoss twins, and stay focused.

I've been (pleasantly) surprised by the strong response the game's gotten so far. In just 5 days, it's been played +4,250 times with the average user spending 16 minutes on it! Woah.

I'd love to hear your feedback as I think more about this format and whether it's worth advancing. Share it with your friends if you find it fun!

PUZZLER

All guesses welcome and clues given to anyone that would like one. Just respond to this email for a hint.

Jim is wise, and Jim is swift. The serial riddler won again demonstrating his numerative gnosis in the process. He was joined by fellow seers Steven V, Alex, L, Jeb B, Krishna N, Srinivas P, Joe H, Keshav J, Dan M, Michael G, Robert H, AustIn V, Mladen D, and Hari A in cracking our previous code.

The answer? ENT.

No, not the mythical tree grandfathers from J. R. R. Tolkien's Middle-earth, but rather the first letters of the numbers Eight, Nine, and Ten. That completes a sequence composed of the first letters of the numbers 1-10. Aha!

With another great week of thinking, reading, and writing wrapped up, I'm going to go get some ice cream. I hope you guys have a chance to enjoy a treat of one kind or another today.

🍨,

Mario

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*See important disclosures​