Protocol Analysis #4
This is the fourth article in our Protocol Analysis series. In this series, we use our investment template outlined in How to Analyse a Web3 Protocol to fundamentally and critically analyse a variety of crypto protocols, aiming to separate the ‘real’ from the hype. Let’s dive in!
Protocol: Zora, an NFT marketplace protocol offering tools for creators to transact with NFTs – buy, sell, create marketplaces, etc. – on multiple levels of the Web3 stack. Zora’s tools can be used to create NFT-based websites like Mirror and NFT marketplaces like Catalog, index data from the blockchain, and transact with NFTs on Zora’s native marketplace, Zora.co.
Overview of Zora🗒️
Founded in 2020, Zora is a decentralised protocol built on the Ethereum blockchain that provides tools and smart contracts for users to permissionless-ly interact with the NFT ecosystem by buying and selling NFTs, creating NFT marketplaces, etc. Think of Zora as a collection of smart contracts that are meant to be the base layer when interacting with NFTs. The Zora protocol enables others to build various experiences on top of it, such as NFT galleries, auction marketplaces, sales bots, etc. If OpenSea is Amazon, Zora is Shopify.
To date, Zora Labs has raised ~$60M, in multiple rounds from 2020 to 2022. The first major investor to back them was Kindred Ventures (also invested in Messari, Magic Eden, FWB, Goldfinch), in 2020. Their latest round took place in the first half of 2022, where they raised ~$50M at a valuation of ~$600M, led by Haun Ventures (ex-a16z GP, on the board of Coinbase and OpenSea), with participation from Coinbase Ventures. The raise, which took place right before the UST crash and the subsequent depression of valuations, ensures that Zora, if the team utilises the funds wisely, should have enough cash to last through the bear market.
How Does Zora Work? 🤷
The Zora protocol was built with a mission to build a new creator and community-owned economy, and to democratise creator monetisation while reducing dependency on centralised platforms.
NFT marketplaces like OpenSea mimic Web2, as their business models optimise for user lock in. For example, platform escrowed listings, limited royalty interoperability, etc, cause value to accrue to the platform once again. Zora wants to transfer this value accrual from the marketplace/app layer to the protocol layer.
So, how does Zora achieve (or intend to achieve) these hefty goals? Well, let’s dive into the core feature offerings as of Zora V3 – the latest version launched.
Trustless and Permissionless
As the protocol is built with smart contracts, deployment is one-way, and the subsequent features discussed are baked into the code. Neither can anyone arbitrarily change the code at some point in the future, nor shut the protocol down. Even if the marketplace on top goes down, the underlying protocol will remain, as it lives on the blockchain.
In addition, for developers and users, it is completely accessible to perform transactions or build on top of.
A ‘zNFT’ is a new NFT standard which extends from the ERC-721 token standard and utilizes EIP 2981 (giving ERC-721 a royalty standard).
To begin, on OpenSea, you only earn secondary transaction royalties if the transaction is on OpenSea or a marketplace with OpenSea integration. And even when you do earn royalties, they are withheld for 2-4 weeks. This is because ERC-721 or ERC-1155 tokens do not natively support royalties, making all royalty distributions a platform level event.
However, zNFTs implement royalties at the token level, as opposed to on the platform. Thus, regardless of the marketplace, the creator still earns a royalty, and instantly at that (as long as the NFT is EIP 2981 compatible). To aid “royalty interoperability”, the Zora protocol has integrated with Royalty Registry – an Ethereum-based contract that enables updates/additions of royalty contracts to NFTs post-mint. For example, a creator can earn a royalty even if their minted NFT did not originally support any of the on-chain royalty specifications.
Another interesting feature is that zNFT order books are built in at the token level. In existing marketplaces, after a predefined period of time, the auction ends. In Zora, the auction never ends. The list of bids for an NFT will continue to exist, even after a transaction successfully executes (unless the bid owner removes it). Therefore, transferring ownership of an NFT is equal to transferring ownership of the order book. This may cause friction from a UX perspective, and a couple of options to improve ease of use could be to either wipe the order book when ownership is transferred or explicitly prompt the buyer to keep or erase the existing order book.
On a more technical level, metadata standardisation (or the lack thereof) is an ongoing friction point across the NFT ecosystem. Examples of this include the inability of the NFT to communicate to a front end what file type it is, inability to update the link pointing to the NFT creative, and more. In the current standard, an NFT’s metadata contains a URL that points to the location on the internet where the NFT is stored – an AWS server, IPFS, an individual server, wherever. The metadata also contains text that contains the name of the NFT, mint date, and other details. The URL in the metadata is not updatable today, so once the NFT has been minted, the URL cannot change. If the link ever breaks, then the NFT itself loses value. To solve this, Zora decouples the metadata and the URIs, makes the URIs updatable, and includes hashes of the initial URI and the current URI, to identify where the NFT was hosted initially and where it is hosted now. If a zNFT holder has changed the URI of their Bored Ape NFT to a Rickroll, the subsequent holder can change it back to a portrait of a simian.
All NFTs on the Zora protocol can accept bids in any ERC-20 token. This broadens protocol liquidity and improves purchase UX. It also means that the audience of users is extremely broad, encouraging usage and adoption.
In a traditional auction, the highest bid is accepted and the auction ends. On Zora, the seller has the right to pick who the winning bid is, even if it isn’t the highest. This is quite powerful when one would rather sell to a famous celebrity at a lower price, with the hopes of the art appreciating further in the long term, by virtue of it being owned by the celebrity.
Sell On Share
On Zora, buyers can define a “sell on share” for any bid they make. Analogous to a sell-on clause in football, it is essentially a commission which is paid to the initial seller. For example, if there is a 10% ‘sell on share’ defined in the bid, and if A accepts that bid from B, then A will earn 10% commission when B sells the NFT to C.
Of course, there is the chance that market participants try to game the system, but Zora is betting on the development of social graphs and/or other on-chain identity solutions to make the ‘sell-on share’ feature a net positive. In fact, this concept of ‘bidder identity’ will also give rise to interesting market dynamics with the previously discussed feature of seller autonomy.
The Finder’s Fee is essentially an affiliate link where third-party players can earn a commission by matchmaking between buyers and sellers. NFT owners can define this percentage when listing their NFT. This is essentially payment for a brokerage service, which opens up a lot of interesting applications in a world where billions of NFTs exist and curation becomes critical. The role played by finders can be akin to that played by an art dealer, but the barrier to entry to participate in the market is much lower, possibly hinting at the emergence of one type of ‘Web3-native’ influencer, who curates, brokers, and sells NFTs.
Today, if you list your NFT for sale on marketplaces like OpenSea, your NFT is effectively escrowed by the marketplace. With Zora, the NFT remains in your wallet until the transaction takes place. Not only is this a superior design choice from a security perspective, but also allows the owner to benefit from any utility the NFT may have until the sale takes place.
As seen in the table below, Zora claims to be the most gas efficient out of the popular NFT marketplaces (~39% cheaper than OpenSea). Note that gas efficiency for listing an NFT for sale is not an apples-to-apples comparison as a marketplace like OpenSea can be free only by leveraging off-chain facilities (lazy minting), while Zora is 100% on-chain.
Zora’s creators believe that protocols like Zora can be both free for everyone and valuable to own at the same time. With no source of revenue, it is difficult to reconcile the two. And in all fairness, it is yet unclear how such an outcome will look like in steady state. However, as a first step, the protocol has built in a ‘fee switch’ – an ability for any module built on Zora to charge fees on transactions conducted using that module. This right exists as NFTs (ZORFs), which are currently held by the Zora DAO.
The intent here is that by implementing such a design choice, the protocol can be quantifiably valued, as the NFT (and the accompanying right to switch on a fee) can be sold by the DAO. For example, if a developer builds a module (for example, a module that enables auctions to take place on Zora) and owns a ZORF, then the developer can choose to turn on the fee switch for the Auction module. What this means is that every time another protocol uses the Auction module and builds it into their product, the owner of the ZORF (i.e., the developer) accrues fees from the usage of that module.
Zora monetises from selling ZORFs, and the developer monetises from turning on a fee switch.
Zora Auction House
Zora is aiming to decentralise the art of curation through its Auction House, where NFT owners can choose to list their NFTs with specific curators. Curators can charge curation fees and their role is to auction off NFTs listed with them. Curators all have different specialties and niches, making it more interesting and beneficial for users to follow certain curators rather than NFT marketplaces for new collections and discovery. Curators now do not even need to directly own NFTs to carve out a role for themselves – given the minimal capital requirements, this vastly expands the potential audience that can now become curators. This is the type of functionality that groups of individuals (in a small DAO, for example) can also utilise, in the vein of Friends with Benefits (FWB) and FlamingoDAO.
The Trends Supporting Zora’s Emergence 📈
NFTs have burst into prominence since summer 2021, and the primary vehicle for user interaction with NFTs has been marketplaces like OpenSea, LooksRare, SuperRare, Rarible, etc. NFT use cases have exploded as well – look at this graphic highlighting real-world NFT use cases from @shivsakhuja:
Vertical marketplaces may be better suited to many of these use cases, with an aggregator layer on top. Zora provides users the tools to create these marketplaces and the zNFT standard’s features allow for much higher flexibility than the existing NFT standard. Zora’s interoperable nature may turn out to be very well-suited to the way in which the NFT market grows.
Traction, Use Cases, and Future Roadmap 🚀
Since the NFT landscape is highly fragmented, there aren’t any projects attempting to decentralise the base layer for all NFT interaction. This vision has attracted a handful of projects to leverage Zora. Notable projects include Mirror, Friends With Benefits, and Catalog.
While it is still early days, the founders that claim ~50% of all transactions on the protocol take place on third-party websites, which is a good indicator of the network’s health as a base protocol instead of a marketplace.
Real-World Utility from the zNFT Inbuilt Order Book Function
A marketplace inbuilt into the token enables all sorts of real-world utility. Take tickets, for example. Imagine that Person A has a ticket to a football game, but they can’t attend the game anymore and want to sell their ticket. In today’s world, they would have to list the ticket individually on multiple marketplaces like Viagogo and StubHub (if that is allowed), or maybe only on one marketplace. The listing process is time-consuming, and the audience looking to buy the ticket is limited to that marketplace’s users. Such systems tend towards monopolies or oligopolies when a platform that has the most available tickets and users ends up winning, which allows the platform to extract a much higher cut of the final sale price.
In a Zora-based system, since the token itself holds all buy/sell orders, the role of a marketplace changes. A marketplace can simply query tokens for sale, provide a clean UI for users to buy the items, and focus most of its energies on effective curation of NFTs by category and a friction-free on-and-off-ramp experience. The cost to set up such a marketplace would inherently be lower. Users would have a lot more platforms to ‘list’ on, and they could hold on to more of the final sale price as platforms with lower fees have a higher chance of winning out.
Freemium Model – ZORFs
The ZORF model is essentially a freemium model, where it is free to use Zora’s tools and smart contracts to create a variety of NFT experiences, but separate access will be sold for other in-demand features like fee-switches. This hints at a potential way in which Zora could monetise in the near-term, by selling the right to use certain platform features. This composable combination of features could also be what differentiates dApps built on top of Zora from a user perspective.
Zora has only just released V3. It looks like Zora is building out its Creator toolkit right now, with the ability to create Generative NFTs being worked upon, and another ‘iykyk’ feature coming soon. Given the glasses on the latter features are signature Nouns, maybe a collaboration is being worked upon.
The founding team includes Dee Goens (Creators and Community), Jacob Horne (Product), Slava Kim (Design), Dai Hovey (Engineering), Ethan Daya (Engineering) and Tyson Battistella (Engineering). The sextet are all Coinbase alumni, and it was there where they all met.
From the limited information available about the team online, it looks like Jacob Horne is the face of Zora currently. He, specifically, spent around three years at Coinbase (graduating from intern to product manager), before venturing out on his own, first with a fashion NFT project called Saint Fame (an experiment with NFTs and physical apparel), and later, Zora. He is also well known in the Web3 community due to his insightful essays.
Thoughts from Using the Protocol 🖱️
Zora is incredibly easy to use. Firstly, Zora.co, its native marketplace, is very easy to navigate and the UI is clean and simple.
Zora’s Creator toolkit is one of its distinguishing features. It is really easy to create an NFT collection – currently, it only offers the ability to create a limited-edition series of a single artwork, but as mentioned above, Generative Art is soon to come. Only a few key details are needed, which, for good (and for bad), completely democratises NFT creation.
Zora also has a very distinct design, best encapsulated in Zora Zine, its magazine. Zora seems to be building a culture, which can play an important role in increasing awareness and user stickiness. Zora is all about creators, and its core beliefs, product, branding, and manifesto are all completely aligned towards this goal.
There isn’t much to talk about here since Zora doesn’t have a token. On that, though – it is interesting and (in our slightly biased opinion, since we’ve seen many poorly designed tokens and tokens when they’re not needed at all) perhaps commendable that Zora has focused on getting its core product right rather than focusing on a token.
The two main entities at the center of the Zora ecosystem are the Zora DAO and Zora Labs.
Zora DAO is an on-chain entity, holding all governance rights to the protocol. Today, it is essentially a multisig wallet controlled by Zora Labs. Zora Labs is a private for-profit entity that is building the Zora protocol and holds the governance rights to deploy newer versions of the protocol, and ZORFs. They generate revenue by building open source developer tools and charge for support/integration services, for companies using the protocol (similar to Redhat)
Given the centralisation of control, the idea is to progressively decentralize the ownership of the Zora DAO, but how this is going to happen in practice is unclear. A token offering could be one option, but no clear roadmap has been provided by the team.
In many metrics, it is difficult to directly compare Zora’s performance compared to that of other NFT platforms. One metric that may be useful is the total accepted bid value. Zora’s stands at a paltry $16.5 million to date, which pales in comparison to OpenSea’s $6.5 billion and LooksRare’s $2.6 billion, and even Coinbase NFT’s $7 million which it has collected in the troughs of the bear market.
Activity on Zora has accelerated in the last few months, in contrast with the rest of the NFT market. The below Dune dashboard highlights a sharp uptick in Total Mints and Total Distinct Creators since May 2022, increasing by 203% and 342% respectively.
Transfers and mints per day have also increased materially since June 2022, as have the tokens sold by day, again indicating increased user activity. The increase in activity could potentially be from Mirror introducing Writing NFTs in May 2022. This adds further credence to Zora fitting the Fat Protocol Thesis, where increased usage of the platforms built on Zora accrues more value to the Zora protocol.
Some other key stats:
1,600 collections have been deployed to date using Zora’s Creator toolkit. The fixed size toolkits are much more popular than the open edition versions.
The total volume traded is 553 ETH (~$850k).
Nouns and State of Mind are the two most transacted-with collections, with Nouns far and away in the lead with 257 ETH traded (~$400k).
Total bid volume on Zora Auction House is $120 million, with total sales volume at $25 million.
Closing Thoughts ⌛
Zora subscribes to the Fat Protocol Thesis, which says that in Web3, most value will accrue to the protocol that allows dApps to be built on top of it, rather than the dApps themselves. Zora’s set of smart contracts and tools provide a complete, easy to use suite of services that is expressly aimed at creators and curators. Zora is putting its resources and effort into expanding the overall NFT ecosystem.
The primary concern with Zora is similar to that of any open-source protocol – with their key differentiator coming from technology, it is very easy for someone to replicate the code. This makes the founding team’s ability to bootstrap an initial user base critical for the long-term success of the protocol. In addition, a potential challenge is that a competitor centralised marketplace like OpenSea could implement instantaneous royalties using EIP-2981 and tools like the Royalty Registry. This would significantly reduce the incremental benefit a user would get by picking Zora over OpenSea, given the dominance of the latter’s user base.
Another potential concern is its monetisation plan, which is not very clear at the moment. However, there are many avenues for monetisation that Zora could take, such as the ZORFs product and turning on a fee-switch for transactions on its marketplace.
All in all, Zora is a well-knit together product that has a good chance of being a cornerstone of the NFT ecosystem in the years to come.
Required Reading 📚
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