Parsing Metaplex: The hero behind dropping the cost of Solana Non-fungible Token minting by 1,000 times

By James Ho

Compilation: Deep Tide TechFlow

The Solana ecosystem is recovering, with Metaplex, an non-fungible token infrastructure protocol, ushering in a 10-fold increase in the last 1 month.

But compared to other application layer projects on Solana, the project doesn’t seem to be talked about much, and because it is rooted in infrastructure, the related products and technical principles are not particularly intuitive.

Two months ago, crypto VC Modular Captital had an in-depth discussion and research on Metaplex on its blog, and we compiled it to give you a better understanding of this fast-growing project.

Summary

• Metaplex is a well-established Non-fungible Token infrastructure protocol in the Solana ecosystem. They facilitate more than 99.9% of Non-fungible Token minting. They’ve established infrastructure standards for Non-fungible Token (TokenMetadata) and developed apps like Candy Machine and Creator Studio to make it easier for creators to set up fair launches.
• Despite the huge decline in the Non-fungible Token market in general (85-99% drop in Floor Price grid and market volume), Metaplex saw a more than 5x year-over-year increase in minting thanks to their launch of Bubblegum, a project for minting compressed Non-fungible Token (compressed Non-fungible Token).
• Metaplex’s compressed Non-fungible Token drop the cost of minting Non-fungible Token by more than 1000 times (from more than $10 in Ethereum to less than $0.001 per mint for Solana). This has led to a surge in experimentation to integrate Non-fungible Tokens into social, payment, creator, and physical infrastructure applications. Metaplex mints 180 million Non-fungible Tokens per year, compared to 25 million on Ethereum (more than 7 times more).
• Metaplex has recently started charging to maintain the project. If charging had been turned on in 2022, Metaplex would have generated $13.9 million in revenue.
• Solana has found success in mainstream web3 consumer use cases with its unique parallel computing architecture and local fee market. We believe Non-fungible Tokens can play a vital role in this as a narrative representing any unique digital content.
• Unlike the highly competitive Non-fungible Token market, we believe Metaplex has little competition and is likely to continue to lead Non-fungible Token minting through its infrastructure standards and front-end applications.
• Metaplex has the potential to become a Shopify-like product that allows creators to mint, manage, and monetize their Non-fungible Tokens. Over the next 3-5 years, we see Metaplex having the potential to support billions of Non-fungible Token mints per year and generate between $25 million and more than $100 million in revenue.

Background

Non-fungible tokens were a key innovation in the crypto space in the last crypto cycle. Non-fungible tokens are unique digital identifiers recorded on the Blockchain that are used to prove the provenance, authenticity, and ownership of digital assets.

The first attempt at Non-fungible Tokens involved the ERC-721 standard on Ethereum, which was first introduced in September 2017. CryptoKitties created one of the first Blockchain games that allowed users to collect and breed digital cats (all represented as Non-fungible Tokens). This caused congestion on the Ethereum network in November/December 2017 and accounted for more than 20% of network activity.

Non-fungible tokens are making a big push into mainstream audiences centered around digital images. CryptoPunks (launched in June 2017) and Bored Ape Yacht Club (BAYC, launched in April 2021) are among the highest-value Non-fungible Token collectibles, with 1 Non-fungible Token worth more than $400,000 at the peak of the 2021-22 market. During that period, we saw Non-fungible Token trading volume on the market grow from zero in 2020 to $60 billion annualized. Non-fungible token marketplaces like OpenSea valued more than $13 billion at the peak of the market cycle, with monthly trading volume of more than $2 billion to $3 billion, and annualized revenue of more than $1 billion, with a growth rate of 2.5%.

Like other areas of Crypto Assets, Non-fungible Token Floor Price and trading volume have dropped significantly over the past two years. Blue-chip Non-fungible Tokens like Punks and BAYC are down 80-90% from their market peaks, while Non-fungible Token market trading volume has dropped from $60 billion annually to over $3 billion. However, Non-fungible Tokens still achieved an annualized trading volume of more than $3 billion, and Punks, BAYC have floor prices of $35,000-$70,000, which is a testament to the power of digital community and culture. For reference, eBay processed $74 billion in GMV in 2022.

During the 2021-22 period, Non-fungible Tokens were primarily associated with speculative JPEGs, similar to Ethereum’s primary association with ICOs during the 2017-18 period. However, since then, Ethereum and Smart Contracts have evolved into much more. Today, smart contracts are the driving force behind permissionless finance, stable coins, DAOs, governance, tokenization of traditional assets, physical infrastructure networks, and more. Similarly, we see Non-fungible Tokens as a narrative for the next decade that enables digital property rights and ownership of any content type

Historically, a key obstacle to Non-fungible Token adoption has been minting costs, which grow beyond highly speculative use cases. For a standard collection of 10,000 Non-fungible Tokens, the cost on the Ethereum network today is 176 ETH, nearly $300,000 (about $800,000 at peak), equivalent to $30 per mint ($80 per session at peak). This may be an acceptable cost for speculative users, but it is prohibitive for everyday use.

In order for Non-fungible Tokens to become ubiquitous, they need to shift structurally from scarcity to abundance.

Introducing Metaplex

Metaplex is the protocol behind the Non-fungible Token standard in the Solana ecosystem. Initially incubated at Solana Labs, the company was founded by a team that included Stephen Hess (former product lead at Solana Labs) and began operating as an independent organization in the fall of 2021. Metaplex has developed a range of products that allow artists, brands, and creators to mint Non-fungible Tokens and launch self-hosted minting pages through a range of APIs and low-code tools.

Metaplex drives the vast majority of activity (99.9% of Non-fungible Token minting), spanning multiple product lines of infrastructure and utility tools. Here are some examples:

• Token Metadata (Metadata) – The Solana program is responsible for attaching additional Metadata to fungible or non-fungible Tokens. For Non-fungible Tokens, this includes names, symbols, URIs, features, royalty fees, and more.
• Candy Machine – Leading minting and distribution program for launching a fair Non-fungible Token collection on Solana. It allows creators to get their digital assets on-chain in a secure and customizable way.
• Auction House – allows the marketplace to implement an agreement without an escrow sales contract.
• Fusion – A program that adds on-chain tracking and composability around Non-fungible Token ownership. It is used to implement complex ownership models by creators.
• Creator Studio – A no-code, web-based tool for creators that enables them to easily create, sell, and Non-fungible Token on Solana without writing a single line of code.
• Bubblegum – A program for creating and interacting with compressed Metaplex Non-fungible Token that these Non-fungible Token are secured on-chain using Merkle trees.

Since its inception, Metaplex has facilitated the minting of 144K+ series collections, 61.7 million+ Non-fungible Tokens, 14 million+ collectors, and $1.1 billion+ in creator revenue. The minting cost of 10,000 Non-fungible Tokens is only $2,500-$3,000 (equivalent to $0.25-$0.30 per mint), compared to $2.50-$300,000 ($25-$30 per mint) for Ethereum.

The most commonly used programs for Metaplex include Candy Machine and Token Metadata. Unlike most other Blockchain, Solana separates logic and data into two distinct components – these are called programs and accounts. Instead of storing data in internal variables, the program (which holds the application logic) interacts with the account (which saves state and data) and is able to modify them. One such program is Candy Machine, the leading minting and distribution program for fair Non-fungible Token issuance on Solana. Token Metadata is another such program that attaches Metadata to fungible and non-fungible Tokens on Solana.

Metaplex’s programs are publicly viewable and forked by everyone under an Open Source license. While the Source Code is publicly available, Metaplex’s license does not permit others to copy or fork the code for profit, or to provide competing products or commercial alternatives that conflict with Metaplex’s economic interests. In addition, Solana’s architecture separates programs and accounts means that if a new startup were to fork Metaplex’s Non-fungible Token standard, many key players in the ecosystem (such as Non-fungible Token marketplaces, wallets, custodians, and node providers) would need to integrate the program. This comes with a huge coordination overhead.

In fact, Magic Eden (Solana Non-fungible Token Marketplace) has previously attempted to launch its Open Creator Protocol (OCP), which defines a new standard for royalty Non-fungible Token collections. This effort had limited success, but was later shut down.

As a result, Metaplex has a strong and dominant position in the Solana Non-fungible Token ecosystem, while building programs on the application and infrastructure standard layer.

Compressed Non-fungible Token

Despite challenging Non-fungible Token and Crypto Assets market conditions, Metaplex has significantly increased the number of Non-fungible Tokens minted each week with its infrastructure, from 500,000 per week for most of 2022 to 3 million+ per week today. This more than 5x increase was driven by the launch of a compressed Non-fungible Token standard, further dropping minting costs. Today, the cost of minting 100,000 compressed Non-fungible Tokens is just $100, which equates to less than $0.001 per mint.

Metaplex’s compressed Non-fungible Token program, called Bubblegum, achieves this breakthrough through Solana’s Merkle tree program, known as account compression. This is achieved by moving the storage of Non-fungible Token Metadata (image URLs, traits) off-chain through indexers and RPC Node providers. Instead of storing Metadata in a typical Solana account, compressed Non-fungible Tokens store Metadata in a ledger.

As a result, compressed Non-fungible Tokens inherit the security and speed of the Solana Blockchain while dropping storage costs by moving such storage off-chain. Since the entire computation history is on the Solana ledger, if any indexer or RPC provider goes down, the entire state data can be reconstructed by replaying all historical transactions. It is worth noting that all compressed Non-fungible Tokens are compatible with the regular Non-fungible Token standard and can be decompressed into regular Metaplex Non-fungible Tokens losslessly. In a way, this is similar to Ethereum’s rollups offloading computation and state storage to L2 Blockchain (Optimism, Arbitrum), while Ethereum itself stores merkle roots and data availability. This allows Ethereum to trustlessly rebuild state when the L2 rollup Blockchain is compromised.

Metaplex launched compressed Non-fungible Tokens in November 2022. Since then, 57 million + compressed Non-fungible Tokens have been minted. Due to the low cost of minting, many applications have found creative use cases:

• DripHaus – A platform that connects creators and fans by Airdropping their works (art, music, games, comics) to fans. On Solana, 20 million + compressed Non-fungible Tokens have already been minted at $2,000, while the cost on Ethereum will exceed $300 million.
• Helium – Decentralization network of 2 million+ IoT hotspots owned by users. Helium migrated from its own Blockchain to Solana, and in the process, they issued 1 million + compressed Non-fungible Tokens on Solana to represent user-owned hotspots.
• Dialect – Wallet-to-Wallet messaging app. Emojis and stickers are Token into compressed Non-fungible Tokens, so they are collectible and ownable. Users can mint custom emojis and stickers and share them with friends. More than 20,000+ users have minted and collected these stickers.
• Tiplink – Crypto payment app that allows users to send and receive funds via a web link or URL. Tiplink allows new users to claim AI-generated compressed Non-fungible Tokens, allowing users to test their products as a growth strategy. Tiplink has gained more than 1 million users (independent minters) through this acquisition strategy.

Experienced cases such as Dialect, Tiplink, DripHaus adopting compressed Non-fungible Tokens, which is not possible in Ethereum or other ecosystems. As the cost of minting Non-fungible Tokens drops to less than $0.001, apps are finding innovative ways to integrate Non-fungible Tokens into everyday use cases – including payments, artwork, chat stickers, and physical infrastructure networks. In addition, Magic Eden and Tensor have launched support for compressed Non-fungible Tokens in their marketplaces, indicating the adoption of the compressed Non-fungible Token standard from the Solana ecosystem.

Monetization

For most of its history, Metaplex has operated all of its products for free. The company raised $47 million in venture capital from Multicoin Capital, Jump Crypto, Asymmetric, and many other leading funds, selling 10.2% of its tokens in a strategic round. This capital funds the development and maintenance of a wide range of programs within the Metaplex library. In late May 2023, Metaplex announced plans to further improve the sustainability of the agreement. These changes include:

• There are plans to convert the Token Metadata program to full immutability, which means it will no longer be able to be upgraded or modified.
• Access to the Token Metadata program will remain permissionless, all users will be treated equally, and $MPLX will not be used for token gating before or after.
• Introduce a small fee for the use of the Token Metadata program, mainly 0.01 SOL (approximately $0.20) for each uncompressed Non-fungible Token created.

Fee income is used to fund the development of other programs maintained by Metaplex (such as Candy Machine, Auction House, and Bubblegum). Notably, these changes are strongly supported by key players such as Solana Labs (from which Metaplex was spun off), Magic Eden, and Tensor (which are the largest Solana Non-fungible Token marketplaces).

In 2022, Metaplex facilitated the minting of 22 million Non-fungible Tokens. At the price of the day, if Metaplex charges 0.01 SOL ($0.20) per mint, this translates to $4.4 million in revenue, or $13.9 million if charged at the daily SOL price. Since its inception, Metaplex will earn $23.5 million in revenue on a daily SOL basis.

Since the introduction of compressed Non-fungible Tokens, more than 99% of ongoing Non-fungible Token minting is now done under Bubblegum. Please note that there is currently no monetization of compressed Non-fungible Token minting. Currently, only standard Non-fungible Tokens using the Token Metadata program are monetized. We believe that in the medium term, Metaplex’s primary focus should be to further drive experimentation, use, and adoption of Bubblegum, which has significant growth potential in mainstream consumer crypto applications.

Historically, Non-fungible Tokens have been scarce. In a world where Non-fungible Token minting costs $20-$30, this is a logical conclusion that only supports high-value, artificially scarce assets like CryptoPunks and BAYC. However, with prices dropped by more than 1,000 times, we believe Non-fungible Tokens are transforming into core infrastructure that supports digital experiences – whether in areas such as consumer payments, gaming, social, identity, music, physical infrastructure, and more.

Going forward, we believe Non-fungible Token will be more and more about enrichment.

Metaplex has established leading Non-fungible Token infrastructure standards and applications that are the most available and scalable for consumer products that reach more than 100 million users. In 2022, Metaplex demonstrated its potential for $4 million-$14 million in annual revenue in limited use cases. We believe the protocol has the potential to drive billions of Non-fungible Token mints per year (up from the current 150-200 million annualized calculations), continue to build leading infrastructure standards and applications, and grow into a sizable revenue and business outcome.

Valuation and scenario analysis

Considering that Metaplex’s experimentation and monetization of compressed Non-fungible Tokens has just begun, it is difficult to predict the future state of Metaplex. We try to concretize various scenarios:

• Our 2022 scenario highlights what Metaplex’s revenue would be if it charged a fee. Given that Solana’s minting costs are significantly lower than Ethereum’s, and Non-fungible Token valuations are high, we believe Metaplex will have the pricing power to implement fees without losing too many mints and earn $14 million in revenue that year.
• Our current scenario highlights the phenomenal growth of compressed Non-fungible Tokens, at an annualized rate of growth in Q3 2023. Impressively, Metaplex has more than 180 million annualized mints, which is 9 times the amount Ethereum minted today and 2.7 times the amount minted by Ethereum in 2022. As the cost of minting is dropped by a factor of 100 (in SOL), we see a corresponding 30-fold increase in mintage. This is despite a drop of more than 95% in Non-fungible Token trading volume and floor price.
• Our charging scenario assumes that Metaplex will charge the same 83% fee for its compressed Non-fungible Token product as its traditional minting. Considering that this only increases the price of compressed Non-fungible Tokens from $0.002 to $0.004, we don’t think this will significantly impact the number of Non-fungible Tokens being minted. Metaplex will be able to generate $1 million in revenue at these current valuations. For reference, OpenSea achieved $7.6 billion in revenue in 2022 and now generates $30 million.

Our base scenario assumes that Metaplex will be able to increase its usage by a factor of 10 from now on. The price of Solana increased from $20 to $40. This will bring in more than $20 million in minting revenue, with an average cost of $0.02 per Non-fungible Token, for a total of 2.5 billion Non-fungible Tokens minted. Metaplex is also able to add value-added services regarding Non-fungible Token management and sales. Similar to Shopify, which allows online merchants to create and manage stores, Metaplex is trying to build a comprehensive service for the issuance and management of Non-fungible Tokens. We think this could add another $5 million in app-related revenue (which would require 2-40,000 subscribers at $10-$20 per month). At a 20x multiple, this would support a $500 million valuation.

Our optimistic scenario assumes that Metaplex is able to drive 1 billion Non-fungible Token mints per year. For reference, compare with the following annual data:

• 2.5 billion blog posts
• 8.6 billion TikTok videos uploaded
• $70 billion for virtual goods (assuming $10 per unit = 7 billion items)
• 200 billion tweets
• 1.8 trillion photos
• 8.4 trillion text messages

Although the cost per mint will increase as the price of SOL rises, we believe that if the Solana ecosystem becomes more valuable, mutterers are willing to pay a premium commensurate with Solana minting. At a multiplier of 20x, this translates into a result of $3 billion.

Risks and countermeasures

The use of Non-fungible Tokens is still in its early and emerging stages. Most Non-fungible Tokens minted during 2021-2022 are speculative. Today, we’re seeing app attempts in messaging (stickers), payments (growth acquisition), creator content (discovery), and physical infrastructure (token representation), but these are still in their early stages, and if apps don’t build their businesses on them, they may not last or ultimately fail to monetize.

Risks from the Solana interface. Since Solana separates logic and state into programs and accounts, it allows specific programs such as Metaplex token Metadata or Solana Library (SPL) to dominate the standard for SPL Token and Non-fungible Token minting. The Solana ecosystem has been developing interfaces that will replicate functionality in the EVM ecosystem, where developers can replicate ERC-20, 721, or 1155 standards to issue fungible and non-fungible tokens. This work is still ongoing, and developers will need to build new codebases that replicate/surpass what Metaplex offers today for an already inexpensive fee. Still, this can be a long-term risk.

Solana ecosystem dependencies. Today, most of the activity takes place in Ethereum or EVM-compatible ecosystems, be it DeFi, Stable Coins, payments, Non-fungible Tokens, etc. Despite the FTX incident, Solana has proven itself to have a strong community, with a unique architecture of parallel transaction processing, a local fee market, and scalability that grows in tandem with compute and Moore’s Law. However, as the Ethereum ecosystem continues to mature and address its own scalability challenges, it is possible that Non-fungible Tokens will not happen on Solana, even if they succeed in becoming a widely adopted technology for everyday consumer applications.