Is OpenSea any more decentralized than eBay?
eBay is the most iconic (if not the first and largest) peer-to-peer platform for trading (predominately physical) collectibles, along with a plethora of other items. OpenSea is the first and largest peer-to-peer platform for trading digital collectibles. It does this by allowing its users to buy and sell ownership of unique digital items (aka non-fungible tokens or NFTs) on a blockchain which keeps track of who owns them. Perhaps for this reason, OpenSea is often described as a decentralized platform – see here, here, and here. On its YC page, OpenSea is described as “The largest decentralized marketplace for NFTs.” But how different are these two marketplaces really when it comes to the extent of decentralization?
Traditional platforms like eBay are centralized because the corporation that owns the platform alone determines and enforces design and governance rules for that platform. In contrast, the notion of decentralization associated with blockchain-based platforms means that some significant design and governance rules are fixed via smart contracts that the corporation has no control over once they are put in motion, or via the voting of stakeholders (e.g. the buyers and the sellers in the case of a product marketplace).
Important design and governance decisions for eBay include:
which buyers and sellers are allowed to operate on the platform
how the sellers and their listings appear on the platform
how buyers and sellers are allowed to communicate
how transactions are conducted (e.g. determining whether a transaction is completed or not, and so when and if the buyer’s payment is released to the seller)
the ratings & reviews system for sellers
the fees charged to buyers and sellers
Of course, there are many important decisions regarding transactions that are controlled by sellers rather than by eBay, which is why it is a platform and not a reseller of the sellers’ items. eBay lets sellers determine what inventory to put on or take off at any time, what pictures to display for their items, what prices to set, how to do the delivery, and how much customer service the seller has to offer, including whether to issue refunds for returned items.
Let’s now compare this to the situation on OpenSea.
OpenSea can control (1) and (2) to the same extent that eBay does, but up to now it has chosen a much more hands-off policy, possibly due to the early stage of its marketplace and resource constraints. For (1) and (2), OpenSea retains the right to remove sellers or listings that it finds problematic. There can be subtle copyright issues of sellers who create or list collections that appear similar to existing prominent collections, and OpenSea has had to remove some such sellers or collections. Sometimes scammers create and sell “copies” of popular NFTs by changing something small, like one character in the name, which could confuse novice buyers. OpenSea does have a blue verification checkmark, which appears next to accounts or collections that OpenSea has verified and deems safe. However, probably due to the surge in NFT projects and the lack of human resources necessary to do this at scale, right now blue checkmarks are mostly given to celebrity accounts and collections that have achieved more than 100 ETH in sales. The vast majority of OpenSea accounts remain unverified.
OpenSea has been criticized for its very loose governance policy, including not removing offensive listings and not doing enough to filter out scams. It is conceivable that as it matures, it will tighten up its policies and start screening sellers and collections more tightly, which would bring it closer to how eBay currently operates.
For (3), OpenSea does highlight a few projects more prominently on its front page, but otherwise lets users search and order results according to 10 different criteria, with the default being most recently listed. By comparison, the default ranking on eBay is “best match” and uses an algorithm that takes into account seller ratings and other factors. eBay does allow its users to also search and order results according to five other criteria. While OpenSea doesn’t collect ratings and reviews, and use that to rank projects or sellers, it is certainly something it could consider adding in the future.
On (4), OpenSea does not enable communications between buyers and sellers, but if it did, there is nothing stopping it adding rules of conduct similar to eBay’s.
On (5), (6) and (7), because transactions are executed via smart contracts on the blockchain, OpenSea does not need to approve transactions, hold the buyer’s money in escrow, offer dispute resolution services, or create a ratings and reviews mechanism to help buyers ascertain the reliability of sellers (all of which eBay does). Indeed, the whole point of blockchain-enabled contracts is that the certificates of ownership of digital assets are automatically authenticated, and transactions are automatically filled. Of course, there is still the possibility of scams discussed under (1) and (2) above, but such scams are only possible pre-transaction and rely on confusing the buyer about what it is they are purchasing. This is something OpenSea clearly warns buyers of in its terms of service.
Finally, on (8), OpenSea has full control over the fees charged to buyers and sellers, just like eBay. The main difference is that OpenSea’s fees are significantly lower: 2.5% transaction fees charged to sellers vs. eBay’s complicated array of seller fees, with the most common rate being 12.55% plus 30 cents on each sale.
To sum up, the key differences are as follows:
eBay has more control over how transactions are being conducted and disputes resolved, simply because OpenSea can rely on the underlying blockchain infrastructure to take care of completing transactions.
OpenSea does less in terms of verifying accounts and listings, but this is a choice. Nothing (other than lack of resources) prevents it from doing the same amount of verification of who/what is allowed to sell as eBay does. And OpenSea most likely will do more on this front in the future given pressure from users.
Thus, there is no meaningful way in which OpenSea is more decentralized than eBay. In particular, OpenSea gives none of its governance decisions to platform participants, so fundamentally it’s no different from a classic centralized platform like eBay.
This begs the question: why do some people still refer to OpenSea as a decentralized marketplace? What they may have in mind is that OpenSea allows creators who mint their NFTs on OpenSea to move them anywhere they want, i.e. they are not tied to the OpenSea platform. This is in contrast to some other NFT marketplaces like Nifty Gateway, which promote curated and exclusive NFTs that after being minted can only be traded on Nifty Gateway. This walled-garden approach is the familiar business model of many online games like Fortnite, where items (e.g. skins) cannot be traded outside of the game. But allowing trading of NFTs outside of the marketplace where they originated is a property of openness and not decentralization. OpenSea, as the name suggests, has chosen an open model.
For OpenSea to become truly decentralized, it would need to give up some control over some of the governance rules discussed above, for example by issuing tokens and allowing token holders to vote on those rules. Competing NFT marketplace Rarible has done exactly this by issuing its $RARI token and setting up the Rarible protocol and governance rules. The tradeoffs involved in going from centralized to decentralized are really interesting in our view, and will be the subject of future posts.