Deep dive on NFT marketplaces

A comparative study between Consortium and Public Blockchain

Disclaimer: This article is a final deliverable from Prof. Luyao Zhang’s project entitled “From ‘Code is Law’ to ‘Code and Law’: A Comparative Study on Blockchain Governance,” supported by the 2023 Summer Research Scholarship (SRS) program at Duke Kunshan University. Our Summer 2023 scholars also receive additional support from Wang-Cai Biochemistry Lab Donation Fund. SciEcon wholeheartedly supports DKU’s noble mission of advancing interdisciplinary research and fostering integrated talents. Our support is solely focused on promoting academic excellence and knowledge exchange. SciEcon does not seek any financial gains, property rights, or branding privileges from DKU. Moreover, individuals involved in this philanthropy event perform their roles independently at DKU and SciEcon.

Keywords(hashtags)

NFT marketplaces #public blockchain #consortium blockchain

Highlights:

Research: The article explores the characteristics, inclusion criteria, transaction fees, trading methods, and purposes of consortium and public blockchain-based NFT marketplaces. It provides valuable insights into these platforms' governance models, transaction processes, and target markets.
Innovation: The innovation of this article is to compare the differences between the NFT market on consortium blockchain and public blockchain and explore the innovation and further development potential of the NFT market under different blockchain ecosystems.
Leadership: This paper is essential in NFT marketplace research. It examines how these markets push boundaries and introduces novel ideas in the NFT space. At the end of the article, it also points out the future development potential of the NFT marketplace around different blockchain ecosystems.

Figure 1: Article Flowchart (created by Whimsical)

Introduction

The emergence of Non-Fungible Tokens (NFTs) [1] has revolutionized the digital asset landscape, providing a unique means of representing ownership and authenticity in the digital realm. The increasing popularity and widespread adoption of NFTs in various markets have led to significant traction and sales because of the high prices associated with crypto art (Günay, 2023). As the NFT market continues to grow, different blockchain [2] architectures have been employed to facilitate NFT transactions, with public blockchain [3] and consortium blockchain [4] being two prominent options.

This exploratory research article explores and compares the characteristics, inclusion criteria, transaction fees, trading methods, and purposes of NFT marketplaces [5] built on consortium and public blockchains. By understanding the distinctions between these two blockchain models, we can gain insights into each approach's advantages, limitations, and potential use cases.

Previous research in the field has focused on the technical aspects of blockchain and the conceptual underpinnings of NFT. In the existing literature, there needs to be more attention given to the specific differences between consortia and public blockchains in the context of NFT marketplaces. This exploratory research article addresses these limitations by comprehensively analyzing these two blockchain models and their impact on the NFT ecosystem. To achieve this exploratory research article combines insights from the existing literature with firsthand visits to representative NFT marketplaces.

This exploratory research article contributes to the existing body of knowledge by providing a comprehensive comparative analysis of consortium and public blockchain-based NFT marketplaces. By synthesizing information from various sources, including government notices, research reports, and academic literature related to blockchain and NFT, we aim to provide a holistic understanding of these blockchain models' similarities, differences, and implications in the context of NFT transactions.

This study is a valuable resource for researchers, practitioners, and enthusiasts seeking to understand the characteristics, advantages, and limitations of consortium and public blockchain-based NFT marketplaces. By comprehensively analyzing these blockchain models, we aim to contribute to the ongoing discourse surrounding the future development and adoption of NFTs in different blockchain ecosystems.

Characteristic comparison

What’s the difference between Consortium Blockchain and Public Blockchain?

We can classify blockchain technology into different categories based on its governance properties. Omar et al. (2018) offer a classification of blockchains into three main types: public blockchain, consortium blockchain, and private blockchain.

A public blockchain is a decentralized network where consensus is reached through a permissionless consensus algorithm. Anyone can participate in the consensus process, and any node or miner in the network validates the transactions. The governance properties of a public blockchain are open to the public, and no single owner or central authority manages the consensus.

A consortium blockchain is a decentralized network where a specific group or consortium manages consensus. The consensus algorithm used in a consortium blockchain is permissioned, meaning only authorized nodes or validators can participate in the consensus process. A predetermined list of authorized nodes or validators validates transactions. The consortium members manage the governance properties of a consortium blockchain and are not open to the public.

A private blockchain [6] is a decentralized network where a single owner or entity manages consensus. The consensus algorithm used in a private blockchain is also permissioned, and only authorized nodes or validators are allowed to participate in the consensus process. A predefined list of authorized nodes or validators validates transactions. A single owner or entity controls the governance properties of a private blockchain, and the consensus is not open to the public.

A public, consortium, and private blockchain are open to close based on KYC criteria but do not move onto decentralization (Zhang et al. 2023).

Figure 2: the difference between blockchains (created by Whimsical)

Representative NFT platforms

According to the Notice on Further Preventing and Dealing with the Risks of Virtual currency trading Speculation issued by the Central People’s Government of the People’s Republic of China, considering potential transaction problems such as cross-border payment and tax evasion of virtual currency, virtual currency does not have the same legal status as legal currency. It is prohibited from circulating and using as currency in the market. Based on this basic trading environment, almost all NFT trading platforms in China are established based on consortium blockchains. Since only certain participants are authorized to access the network and participate in NFT transactions, the consortium blockchain can provide higher privacy protection. Among them, the representative platforms are Topnod [7] (鲸探), Honnverse [8] (虹宇宙), and Redcave [9] (红洞数藏).

However, in other countries where virtual currencies are allowed to circulate, public blockchains that allow more traders to participate have become a more popular option for building NFT trading platforms. At the same time, the public blockchain verifies and confirms transactions through consensus algorithms, which further guarantees the security of the NFT trading platform. NFTs on public blockchains can be traded globally, which provides greater market liquidity and a pool of potential buyers. Among them, the representative NFT trading platforms on the public blockchain are OpenSea [10], [Nifty Gateway[(https://www.niftygateway.com/)] [11], and Rarible [12].

Figure 3: Representative NFT platforms (created by Whimsical)

Inclusion Criteria

NFT marketplaces on consortium blockchains have higher inclusion criteria. According to the relevant data in the 2021 China Digital Collection (NFT) market analysis summary, first of all, they rely on consortium blockchains dominated by a certain company, of which Ali Antchain[13] (阿里蚂蚁链), XuperChain [14] (百度超级链), and Tencent Zhixinchain [15] (腾讯至信链) are the leading consortium blockchains. Only authorized and accredited entity participants on these consortium blockchains can jointly manage and maintain the blockchain network and share data and transaction information. At the same time, while meeting industry compliance and privacy requirements, it may limit the decentralization of original data. As a result, not everyone has the right and access to mint their NFT on these platforms. Only artists, institutions, or distributors invited or licensed by the NFT marketplace have the means to mint licensed NFT works. In addition, NFT buyers also need to conduct real-name identification on the trading platform to qualify to purchase NFT.

Compared to NFT marketplaces on a consortium blockchain, NFT marketplaces on public blockchains have lower inclusion criteria. On a public blockchain, anyone can take part in verifying and maintaining the blockchain network, and data and transaction information can be shared openly and transparently. No specific company or entity controls the public blockchain, and decision-making and governance are decentralized and jointly determined by the participants in the network. This ecosystem makes NFT transactions on public blockchains more democratic and open. In addition, anyone can mint, sell and buy NFT, regardless of whether a well-known brand or IP is behind it. This provides more opportunities for artists, creators, and general users to participate in and benefit from the NFT market.

Transaction Fee

Selling artwork on the Ethereum [16] blockchain requires a fluctuating onetime gas fee, ranging from $40 to $600 (Wang et al. 2021). Because of Ethereum’s proof-of-work system, the high gas fees discourage many individuals from participating in art trading or minting because of the potential costs (Cruz 2021). In addition, NFT marketplaces will also charge a percentage of the commission on the second transaction. Taking OpenSea as an example, it imposes a 2.5% fee on all secondary sales made through its marketplace, which is determined and applied when a listing or offer is created using OpenSea’s platform.

In contrast, transaction fees for consortium blockchains are not open and transparent. Traders can only get the final price of one NFT. The price may include a share for the platform, publisher, and copyright owner, but the exact percentage has yet to be discovered. In addition, since I prohibit secondary trading on the platform, there is no commission for secondary trading.

Trading Methods and Purposes

On consortium blockchain in China, almost all transactions on NFT are in RMB. Since virtual currency does not have the same legal status as fiat currency, it cannot be used as currency in the market. Although the payment forms in these NFT marketplaces are Alipay [17], WeChat Pay [18], etc., its essence is still the transaction method of RMB. This trading method avoids virtual currencies' legal and regulatory risks and provides higher compliance for trading participants. In addition, compared with the price volatility of virtual currencies, trading in RMB can reduce counterparties' market risk and risk tolerance. Payment methods such as Alipay and WeChat Pay are very common in China, and users are familiar with and trust these payment tools, making NFT transactions more convenient and seamless. In addition, because of the wide acceptance and use of the RMB, more trading participants may be more willing to use the RMB for trading, increasing the activity of the NFT market. There are many platforms to release NFT to emphasize the nature of public welfare or commemorative significance. The way to get it is to participate in activities or lotteries as free distribution, attract more attention and participation, and promote local culture or history. A specific event, person, or historical moment is permanently recorded on the blockchain, ensuring memory and inheritance. Increase user participation and interaction, and enhance the social value of NFT.

In addition, according to the 2022 Digital collection industry research report, the restrictions of the secondary trading market make NFT trading more controlled and orderly, reducing excessive speculation and speculation in the market and reducing bubbles and unstable factors in the market. In addition, NFTs on consortium blockchain in China rarely have the right to use commercial activities. This means that the value of NFT is mainly focused on collecting, self-viewing, and increasing social attributes. The tendency to think of an NFT as digital art or collectible further limits the hype surrounding the phenomenon, which makes consumers more focused on the art and cultural side of the experience, rather than simply speculating and chasing short-term profits. This is also related to the initial English-to-Chinese translation process, where Non-Fungible tokens (NFT) are not translated directly but are translated by extension into digital collectibles (数字藏品). Digital collectibles are translated to emphasize the collectible characteristic of the NFT rather than the commodity characteristic.

There are differences in the manner and purpose of NFT transactions on public blockchains compared to consortium blockchains.

First, public blockchains, typically Ethereum, have NFT ownership, transactions, and cryptocurrency payment records that can be recorded on the blockchain (Michael 2022). On OpenSea, a public blockchain-based NFT marketplace, the mainstream currencies traded include ETH [19] and WETH [20], which are cryptocurrencies (Pawelzik and Ferdinand 2022). Unlike using RMB on China’s consortium blockchain, standard payment methods on public blockchains include Ethereum and other cryptocurrencies. These virtual currencies have the same status as fiat currencies and can be used as a market exchange medium. This makes NFT transactions on public blockchains more flexible and global, attracting transaction participants worldwide.

In addition, the purpose of NFT transactions on public blockchains is also more diverse. Besides the purpose of collection, self-viewing, and social attributes increase, NFT on the public blockchain is also widely used in digital art, games, virtual reality, and other fields. Game developers can create and trade virtual items as in-game rare collectibles. These application scenarios expand the use of NFT and the market demand.

The hype surrounding NFTs has driven excitement and speculation, leading to inflated prices and a frenzy among buyers (Rae 2021). Since transactions on public blockchains are relatively open and decentralized, this provides specific opportunities for speculation and price volatility in the market. Since anyone can participate in trading, and trading information is open and transparent; some NFTs may be subject to speculation and speculative attention in the market. A particular NFT work or project may rapidly appreciate due to hype and market heat, attracting speculators to take part and driving up the price. Such speculation can lead to price bubbles and market instability. Speculation and speculation in the market are part of NFT transactions on public blockchains, which may be more evident in specific popular projects and works. The case of CryptoPunks [21], unique collectible tokens stored on the Ethereum blockchain, gained heightened value and experienced NFT hype because of their unique and limited nature, coinciding with the growing popularity of NFTs. Between January 2021 and January 2022, CryptoPunks had a high percentage of price bubble days, showing significant inflation and intense speculation surrounding these NFTs. The NFT hype surrounding CryptoPunks, fueled by record-breaking sales volumes and celebrity involvement, intensified demand and created a market frenzy, ultimately driving their prices (Wang 2022).

A Particular highlight: Innovation on the consortium blockchain

According to the 2022 Digital collection industry research report, the NFT on the consortium blockchain has an innovative form of NFT combined with cultural creation. The NFT provides a path for the digitization of museum artifacts. For example, from May 16 to May 23, 2022, Topnod launched a series of activities of the Treasure Plan — 28 cultural and museum units for re-interpretation and creation of cultural and creative NFT. Among them, the representative museum collection of the Nanjing Museum of the Ming Dynasty phoenix golden hairpin is online as NFT on Topnod. In addition, the physical artifacts are vulnerable to damage and require delicate maintenance, and NFT can make these artifacts more accessible to participants in a digital form. This allows the two to combine and flourish. This is mainly concentrated in the innovation of major museums, the digitalization of classic cultural relic images, the development of secondary creations related to them, and the construction of cultural relic blind box NFT as an online commodity, which can get rid of the barrier of time and space for the public to buy. Based on the profound history and culture of China, the combination with cultural relics in museums enhances the artistic value and cultural heritage of NFT.

Figure 4: NFT Ming Dynasty phoenix golden hairpin on Topnod

Case Study: R-SPACE vs OpenSea

R-SPACE and OpenSea are two different NFT marketplaces with differences in identity verification, blockchain, associated platforms, payment methods, and secondary markets.

Brief introduction

R-SPACE [22] is a digital art platform launched by Xiaohongshu [23] (小红书) based on the Tencent Zhixinchain. Based on NFT technology, the works of art presented on the Xiaohongshu digital art platform have a unique serial number on the chain. R-SPACE is not a standalone App, and users can purchase NFT directly within the Xiaohongshu app. After that, we can see NFT digital art created and sold by artists in R-SPACE on the Artist’s Xiaohongshu home page, and your NFT will also be displayed on your Xiaohongshu home page.
Figure 5: R-SPACE homepage in the Xiaohongshu app

OpenSea is the world’s first and largest digital marketplace for crypto collectibles and non-fungible tokens (NFT). It provides a platform where users can buy, sell and discover exclusive digital items.

Figure 6: OpenSea

The cost of entry

R-SPACE requires users to undergo real-name authentication associated with their identification cards. On the other hand, OpenSea does not require ID verification and only necessitates associating with a cryptocurrency wallet [24]. A cryptocurrency wallet is a digital application that stores cryptographic keys, allowing users to securely manage their virtual currencies on blockchain networks and providing features such as sending, receiving, and storing cryptocurrencies and tuning their balance through interaction with blockchains (Suratkar et al. 2020). With Phantom [25], a cryptocurrency wallet that can be used as an account on OpenSea, you only need a licensed browser and install a plug-in to register a private cryptocurrency wallet.

Figure 7: Identity verification requirement on R-SPACE

Figure 8: Wallet connection requirement on OpenSea

Figure 9: Phantom

Blockchain

R-SPACE operates on the Tencent Zhixinchain, while OpenSea is built on the Ethereum blockchain. OpenSea is also compatible with multiple blockchains, including Ethereum, Klatyn [26], and others that receive support under the Polygon [27] ecosystem.

Payment methods

R-SPACE primarily utilizes Alipay or WeChat Pay, facilitating Chinese yuan (RMB) transactions. On the other hand, OpenSea predominantly uses Ethereum (ETH) and Wrapped ETH (WETH) as the main currencies, with transactions taking place through registered cryptocurrency wallets.

Figure 10: Payment selection on R-SPACE

Secondary market

R-SPACE does not permit secondary trading and only allows fixed pricing, resulting in stable prices. In contrast, OpenSea permits secondary trading, and prices fluctuate based on market supply and demand.

Figure 11: Records of multiple transactions on OpenSea

In conclusion, R-SPACE and OpenSea exhibit notable differences in identity verification, blockchain choices, associated platforms, payment methods, and secondary markets. These differences may influence users’ choice of marketplace and trading approach, allowing them to select an NFT platform that aligns with their needs and preferences.

Conclusion & Discussion

The exploratory research article highlights the comparison between the consortium and public blockchains in the context of the NFT marketplaces. It discusses the characteristics, degree of decentralization, transaction method, and purpose of NFT transactions on consortium and public blockchains, and introduces a representative NFT platform. It also selected case studies comparing R-SPACE and OpenSea, two major NFT marketplaces. However, in existing research on NFT transactions on both public and consortium blockchains, more attention must be devoted to the relationship between NFT and the normalization of IP transfer. NFT is not intellectual property per se, but a tool used to commercialize intellectual property. By tying digital assets to a unique NFT, copyright holders can use the NFT to sell and promote their intellectual property works (Okonkwo 2021). So for further research, is it possible to use the characteristics of NFT marketplaces on a public blockchain and consortium blockchain to make NFT transactions a standardized form of intellectual property transfer and specify the transfer of relevant rights in the transaction process?

Relevant Materials

[1] Non-Fungible Tokens (NFTs)

NFTs are unique digital identifiers recorded on a blockchain, certifying ownership and authenticity of various digital files, such as artworks and videos. They can be bought, sold, and traded due to their non-fungible nature.

[Non-Fungible Tokens (NFTs)]

[2] blockchain

A blockchain is a secure and distributed ledger with interconnected blocks containing cryptographic hashes, transaction data, and timestamps. The blocks form an immutable chain where altering any block requires changing all subsequent blocks, ensuring the integrity and irreversibility of recorded transactions.

[blockchain]

[3] public blockchain

A public blockchain is a decentralized network where consensus is reached through a permissionless consensus algorithm. Anyone can participate in the consensus process, and any node or miner in the network validates the transactions. The governance properties of a public blockchain are open to the public, and no single owner or central authority manages the consensus.

[public blockchain]

[4] consortium blockchain

A consortium blockchain is a decentralized network where a specific group or consortium manages consensus. The consensus algorithm used in a consortium blockchain is permissioned, meaning only authorized nodes or validators can participate in the consensus process. A predetermined list of authorized nodes or validators validates transactions. The consortium members manage the governance properties of a consortium blockchain and are not open to the public.

[consortium blockchain]

[5] NFT marketplaces

An NFT marketplace is an online platform where users can buy, sell, and trade non-fungible tokens (NFTs). It serves as a digital marketplace designed to exchange unique digital or physical assets that NFTs represent. NFT marketplaces provide artists, creators, collectors, and investors a platform to showcase, discover, and transact with NFTs.

[NFT marketplaces]

[6] private blockchain

A private blockchain is a decentralized network where a single owner or entity manages consensus. The consensus algorithm used in a private blockchain is also permissioned, and only authorized nodes or validators are allowed to participate in the consensus process. A predefined list of authorized nodes or validators validates transactions. A single owner or entity controls the governance properties of a private blockchain, and the consensus is not open to the public.

[private blockchain]

[7] Topnod

Topnod (鲸探) is a comprehensive application platform based on Ali Antchain technology, which integrates NFT purchase, collection, viewing, and sharing. You can access it from both the standalone app and Alipay mini-programs. It only supports NFT impermanence transfer but does not support NFT resale.