So far we have been explaining the possibility of business and technical implementation of NFT. As I said before, NFT itself is just an implemented smart contract on a blockchain and the smart contract is managing mapping information between token ID and owner's address. NFTs are payed attention because we can trade them actually and NFT marketplaces has the main role of trading.

NFT marketplaces are classified to Decentralized type and Centralized type. In this article, we explain about these types and consider the advantages and disadvantages for business entities and end users.

## Two major classification of NFT marketplaces

<div class="center">
    <img src="https://open-token.s3.ap-northeast-1.amazonaws.com/data/uploads/6780/cfaa/6780cfaa-a8ac-40a3-803d-4532d008fc2d.png"  alt="Architecture of Decentralized marketplace"/>
    <figcaption>Architecture of Decentralized marketplace</figcaption>
</div>

Decentralized marketplace does NOT need central managers. Because they don't need central entities, the program or logic of NFT trading is implemented as a smart contract on a blockchain. The core logic of NFTs and trading are inside of smart contracts. In the above chart, the server provides only HTML/Javascript, but in a complete decentralized marketplace they don't need server entities at all. 

In decentralized marketplaces, all NFT creation and trading transactions are realized with only communication between clients and smart contracts.  For example, when you want to create NFTs, you can submit necessary info on a browser and the javascript program communicate to smart contracts with Web3 library and the smart contract generates NFTs.  With Web3 library, it's also possible to sell and buy NFTs. At this time, the crypto currency is used as a gas-fee, Ether in case of Ethereum. It is possible to keep anonymous and communicate with smart contracts directly. 

<div class="center">
    <img src="https://open-token.s3.ap-northeast-1.amazonaws.com/data/uploads/676d/1e54/676d1e54-97c8-488e-8cee-59075085f71f.png"  alt="Architecture of Centralized marketplace"/>
    <figcaption>Architecture of Centralized marketplace</figcaption>
</div>

In Centralized marketplaces, there is a centralized server like existing cloud services. NFTs are implemented with smart contract, but there are also datas representing each NFTs in the central region. In contrast to Decentralized marketplaces, the logic of NFT trading are implemented in the internal servers. In case of web application, the internal web server provides HTML/Javascript. In case of mobile application, the application communicates with the internal API servers. 

In Centralized marketplaces, it's necessary to communicate with the internal servers when you create NFTs and trade NFTs. The currency which is used for the transaction is not limited to crypto currencies. It's possible to execute transactions with Fiat currencies like USD, JPY. At the time of transactions, the record of NFT creation and trades is just a data stored in the internal central servers. In other words, at the moment that you purchase NFTs in a centralized marketplace, the ownership is recognized in the central marketplaces but the ownership is not recorded on a blockchain yet.

To record the ownership on a blockchain, it's necessary to communicate with NFT smart contracts to do so. To do so, we need to export NFTs from the centralized marketplace to our own wallet address. To export the NFTs, it's necessary to pay the native crypto currency on the blockchain as a gas-fee. The company or end users need to pay the gas-fee. 

We will deep dive into each marketplace types.

## Decentralized Marketplaces

In case of decentralized marketplaces, a client application must use wallet to communicate with smart contracts. Concretely, if it's client application using web browser, you need to install wallet management extension like <a href="https://metamask.io/" target="_blank">Metamask</a>. And you also need to import secret key in advance. If the client application and the wallet is connected, it's possible to communicate to smart contracts with Web3 library. 

The advantages of decentralized marketplaces are as follows.
* <span class="red">The safest service</span> because there is no central entity to attack
* <span class="red">Anonymity is kept</span> because there is no intermediaries
* Payment has done in real time
* The system architecture is simple because the state of NFTs is always synched to a blockchain

This kind of marketplace is safe service because there is no central entities to attack. But the smart contracts itself is still points to be attacked. The critical attack on Ethereum in its history was an attack to a smart contract. It's necessary to implement smart contracts carefully by using open source libraries like OpenZeppelin. There is no intermediaries, complete anonymity is possible to realize. If payment transactions are implemented in a smart contracts, the revenue distribution has done in a real time. Companies and NFT sellers could collect money faster. In contrast to centralized system, the state of NFTs is synchronized to a blockchain at any time, the structure of system is simple. 

Then, what is disadvantages of decentralized marketplaces? 
* <span class="red">Users need to pay gas fee</span> when they create or trade NFTs.
* <span class="red">It's difficult to improve usability of the system</span>
* Because the most of logic is implemented in smart contracts, <span class="red">it's weak for the system change</span>
* There is no organization which guarantees the NFTs
* High level of user literacy is required (using metamask, etc.)
* The currency is limited to crypto currencies, like Ether

Users must pay gas fee when they execute functions on smart contracts to change the state of the blockchain. In case of decentralized marketplaces, the most of logic is put into the smart contracts. The processes of smart contracts are slow and the data structure is also limited. Smart contract has the disadvantage that it's weak for system change. In cloud services, it's quite normal to update the system frequently. But we can't change the smart contract which is once deployed. To change the logic of the smart contract, we change the source code(Solidity), compile the source code again and deploy the code as a new smart contract. It would be hard to tell users that the addresses of smart contracts has been changed. Some users would feel unsafe that there is no organization which guarantees the reliability of NFTs. 

## Centralized Marketplaces

Centralized marketplaces is like existing cloud services. To use the service, users need to be authorized with the original authentication mechanism. The NFTs in centralized marketplaces are not always synchronized to the blockchain. For example, even if a user create a NFT on the marketplace, the transaction is not recorded to the smart contract at that time. The NFT might be recorded to the blockchain if the user explicitly exports the NFT from off-chain. This is possible because centralized marketplaces has internal databases representing the NFTs. Why does centralized marketplace use internal databases? First, it's possible to implement NFT transactions without gas fee. Second, it's easy to manage and fast to access data. 

The advantages of centralized marketplaces are as follows.

* <span class="red">No gas fee</span> for off-chain transactions
* <span class="red">Fiat and Point can be used as a currency</span>
* It's possible to guarantee the reliability of NFTs
* Not require high level of literacy
* <span class="red">It's possible to provide high usability</span> like existing web services
* <span class="red">Flexibility to system changes</span> except smart contracts

Until we export NFTs to the blockchain, we don't need to pay gas fee at all for any processes. The NFTs on user interface are just data representing NFTs. If you want to record the owning NFTs to the blockchain, you need to pay the gas fee. In centralized marketplaces, the currency is not necessarily crypto currency. Fiat currency or Point is possible to choose. Centralized marketplace can guarantee the reliability of NFTs. If the central entity provides the metadata of NFTs, users could feel safe. All logic except smart contracts are implemented like existing web system, it's possible to improve to provide high usability.

Then what is the disadvantages of centralized marketplaces? 
* <span class="red">Not safe</span> because there is a point to be attached
* <span class="red">Regulations</span> in case of charging money in advance
* <span class="red">Difficult to keep anonymous</span>
* The system architecture is complicated
* The payment timing depends on the organization

In case of centralized marketplaces, NFT transactions has done off-chain. To do so, the mechanism of import / export is necessary. The most naive implementation is that publishing the address for management and letting all users transfer NFTs to the address. In this approach, the NFTs off-chain is owned by the management address on the blockchain. The valuable NFTs are managed by the one wallet and this wallet will be the target. And NFTs off-chain and NFTs on-chain are not necessarily synchronized. So if we could hack the centralized marketplace and change the ownership of NFTs off-chain and export the NFTs, it would be possible to take the NFTs away. 

In centralized marketplaces, I said it's not necessary to use crypto currency. For example, you can buy points by credit card and use points for NFT transactions. But in Japan, to introduce points for transactions, companies need to apply "Prepaid Payment Instruments" and get approval from government. 

In centralized marketplaces, it's difficult to keep anonymity. Users need to record at least ID and password, and all activities are monitored. In a service like exchanges, normally users are asked to provide identifications.

## Decentralized vs Centralized

Advantages and disadvantages of centralized / decentralized marketplaces are as follows.

<div class="center">
    <img src="https://nft-review.s3.ap-northeast-1.amazonaws.com/data/uploads/332d/5f4c/332d5f4c-6754-42af-8ed6-317f3dbf6b1b.jpg"  alt="Decentralized vs Centralized Advantages and Disadvantages"/>
    <figcaption>Decentralized vs Centralized Advantages and Disadvantages</figcaption>
</div>

Being decentralized and being centralized are the extreme options. In reality, we should take both features into account and select hybrid approach. 

## Summary

We explained about features of decentralized marketplaces and centralized marketplaces. Coincheck's NFT marketplace is centralized one. If the business entity has user database and has the license of "Prepaid Payment Instruments", centralized marketplace could be the option. 

The biggest problem of decentralized marketplaces is gas-fee. Every one knows the fact that the gas fee of Ethereum is high. We'll pay attention for solutions of gas-fee.

NFT marketplaces where we can trade NFTs are classified to Decentralized type and Centralized type. In this article, we explain about both architectures and consider the advantages and disadvantages for business entities and end users.

Classification of NFT marketplace (Decentralized vs Centralized)

Web3/Blockchain Developer.

I used to be a CTO in a startup company which is currently listed in &quot;Mothers&quot; in Japan.
I have been working as a CTO or lead developer in some startup companies.
Currently interested in blockchain and web3!!

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