How Reddit defeated Crypto Winter and established a $10 million market for customized avatars

When Reddit revealed its second batch of collectible avatars at 2:59 p.m. ET on October 20, Ethan was prepared and holding his phone.

Given that the iOS App Store takes a 30% share, he decided to try to purchase them on his desktop computer. Ethan, a 38-year-old graphic designer from northern Virginia who requested anonymity to avoid doxxing, objected to the concept that Apple would receive the money instead of independent artists. He was prepared to purchase some NFTs of Reddit’s unique Snoo mascot created by internet designers like Rojom and Foustling when he realized that the Stripe payment card integration on desktop wasn’t functioning for him. Instead, he was there with his iPhone and PayPal account.

When his bank contacted to inquire about whether the purchases were fake, Ethan was scrolling and clicking through his favorite collections. He made an effort to comfort them as soon as he could so he could return to the marketplace. A 38-year-old man paying actual money for artwork of online mascots? He ultimately bought roughly $300 worth, an amount he believed he could repay through secondary sales. Really?

The hype surrounding the drop, which Reddit dubbed the Spooky Season Collectible Avatars, makes people think back to a more prosperous time in cryptocurrency, around January 2022, when NFTs were all the rage and people were spending millions of dollars, frequently outbidding one another, to buy pixelated JPEGs of bespectacled primates.

The Reddit drop violates the logic of the Crypto Winter, during which the total volume of NFT trade has decreased by as much as 99%. Reddit has added millions of new wallets to the crypto ecosystem and sparked millions of dollars in sales by enabling artists to create designs of its iconic avatar, mint them on the Ethereum-connected Polygon blockchain, and sell them to users who want them as profile pictures—all while avoiding the dreaded label of non-fungible token.

Not the hated NFTs

Ethan perfectly captures how the social media network pulled off the improbable success story. A few months ago, he would have been as puzzled as his wife to learn that drawn avatars cost hundreds of dollars. He is not an NFT zealot. Being an artist, he was drawn in by the early excitement and opened an OpenSea account when NFTs first gained popularity. But he avoided getting too involved.

I thought it was too much of a crap shoot, and I believed the barrier was too high,” he stated.

Clearly, Reddit concurred. Reddit cofounder Alexis Ohanian told Fortune that he initially shipped a prototype avatar creator over ten years ago. The platform has been playing with the notion of letting users personalize its distinctive football-shaped alien mascot, Snoo, as their avatar for years. Eight years ago, Reddit released a simple building tool, then two years later, it improved it. With the exception of a brief trial of four NFTs in June 2021, it was not connected to blockchain technology, which would have allowed users to trade and sell them on secondary markets. The most recent one was integrated with Reddit’s in-platform currency and premium offers.

This changed in July when Reddit unveiled the introduction of “blockchain-backed collectible avatars,” which it characterized as limited-edition Snoo mascot-themed artwork created by independent artists that users could purchase and combine with other parts to make profile images.

Reddit did not utilize the word “NFT” once in the article’s roughly 800-word length.

NFTs are detested by many people, a Reddit user told Fortune. “The name has a bad reputation only by itself.”

To make the technology seem more approachable was a clever move. A spokeswoman said: “We envision blockchain as one approach, in the future, to deliver more empowerment and independence to communities on Reddit.” We are looking into tools to make them even more self-sufficient and self-reliant.

Simple explanations of the advantages of blockchain were provided in the announcement post. The avatars would be stored on the Ethereum-compatible Polygon, giving buyers “ownership and portability,” as well as the right to utilize the artwork both on and off Reddit. They may, in other words, sell them on secondary markets like OpenSea.

Reddit also made efforts to stay away from some of the technical terms and challenges of NFTs. Users wouldn’t need to create cryptocurrency wallets because all transactions could be made with fiat money. Instead, they would employ “vaults,” or blockchain-powered wallets, that are already built into other features of the Reddit site, such community points.

Ethan has used Reddit for almost 11 years, but like most users, he missed the news in July. Ethan watched Reddit start airdropping the avatars to power users for free in August to gain more traction, but he continued to maintain his distance. His attention was drawn to the unofficial network of users who congregated to give advice and make deals for their favorite works of art, the rapidly expanding r/avatartrading subreddit.

He started to research the various painters, even signing up for the r/avatartrading Discord server to talk to them. Rojom, a Reddit best-seller who creates bizarre black-and-white versions of Snoo with a blend of body horror patterns and religious symbolism, was his favorite. Although Rojom’s avatars are currently selling for thousands of dollars on OpenSea, they originally cost less than $100 when they were offered in Reddit’s shop.

“You really didn’t need to know anything”

Ethan enjoyed that he could create his own avatar by combining elements from other ones. He considered using one by a musician named Le Rock with a guitar in his profile photo because he plays the instrument himself. Best of all, the gas fees—the barrier that initially turned Ethan off of NFTs—were not prohibitively expensive. He discovered how to gather his free avatars and even purchased a few from the first generation, which debuted in July and were still for sale.

The low entrance barrier was something Ethan stated he truly liked about what Reddit does. You weren’t need to have any prior knowledge of blockchain, seed words, or wallets.

This made them so popular that the initial batch of avatars were all sold out on October 3. Additionally, sales volume was rising: Data from Polygon Analytics shows that total sales reached $1 million on October 3 after a month of fluctuating about just $40,000.

Initially sluggish to gain traction, the collectible avatar initiative was now showing promise. “Remember when Reddit Avatars were ridiculed and thought to be a great failure?” on r/cryptocurrency, a different subreddit, a user wrote. That reversed 180 degrees.

The r/avatartrading subreddit was thriving in the meantime. One of the moderators, who preferred to only be known as “Matt”, joined in August in order to figure out how to receive his free airdrop. There weren’t many members at all. There were more than 3,500 at the beginning of October.

Matt claims that the community was born as a result of the hype around some of the first avatar collections, such as Drip Squad. Users were still few enough that r/avatartrading members could purchase other collections in the anticipation that they would become very popular. The wager was successful because the market took off and some customers bought avatars only to sell them right away.

Total Collectible Avatar Sales Volume as of November 2: $10.36 million

With the release of the second-generation avatars on October 20, everything erupted, with several of the most well-liked collections selling out in a matter of minutes. Sales volume skyrocketed, and on Halloween, the total quickly surpassed $10 million.

It’s similar to day trading, said Matt. After investing over $900 in the company, he claimed to have 60 avatars totaling a combined 15 Ether, or roughly $23,000.

But is this hype just temporary or will it last?

NFTs, according to Michael Anderson, cofounder of the cryptocurrency-focused venture firm Framework, must provide value that goes beyond speculative value. For these NFTs to have long-term value, he said, “you have to have core usefulness built into them.”

An illustration of this is rarity, which can act as a status symbol, such as the Bored Ape avatars held by famous people like Mark Cuban and Paris Hilton. Even while some Reddit avatar collections have fewer mintings, this isn’t a key aspect of the project, which has nearly 3 million active avatars.

Another use case would be token-gating, which Anderson defined as providing something of value to the community, like access to various Reddit places. It’s also feasible that new users will be encouraged by Reddit’s avatars to engage with other parts of the cryptocurrency ecosystem where NFTs are still a joke.

Reddit’s chief product officer Pali Bhat made the announcement during a panel discussion at TechCrunch Disrupt on October 18. She said that over 3 million Redditors had created wallets, or Vaults, and that 2.5 million Vaults had been used to buy avatars, a number that, according to data from Polygon, has now risen to almost 3 million.

According to statistics that OpenSea exclusively supplied to Fortune, the number of new members on Polygon has increased by 75% since Reddit’s Oct. 20 drop, with Reddit bringing in roughly three times as many new users as any other project in the previous six months. Additionally, 20% of Reddit NFT owners who conducted a transaction on OpenSea went on to buy another NFT through the service.

Vance Spencer, a co-founder of Framework, said, “It’s certainly good to get new people into the field by whatever means necessary.” But how can you persuade those who come in looking for a Reddit NFT or a Starbucks gift card to leave and use DeFi?

Reddit NFT users are unlikely to branch out beyond the social media site, according to Matt, the moderator of r/avatartrading, especially considering the dire state of the cryptocurrency market outside of it.
In our interview, he observed, “I don’t see a lot of talk, and everything about people wanting to go outside.” How could they?

The main issue right now is that Reddit is luring millions of individuals who would never interact with cryptocurrency otherwise. This dynamic is strengthened by the fact that Reddit avoids all crypto branding, including alerts about the frauds and hacks that are commonplace in the sector.

According to Matt, a scammer targeted users of r/avatartrading and duped them into handing out their recovery phrases, allowing the scammer to steal their NFTs. He said that one user lost avatars valued at thousands of dollars.

The moderators have made efforts to inform users and invite visitors who can provide tutorials on safety and security, frequently staying up all night to provide assistance. After “just onboarding so many new Web3 users and so many NFT users, and they basically hung them out to dry,” according to Matt, Reddit has been completely silent.

A representative for Reddit claimed that r/avatartrading is an unofficial group and that the official Reddit-run forum, where the platform provides news and updates, is r/collectibleavatars.
Despite being illegal, r/avatartrading reached 10,000 members on October 25. Virginia-based graphic artist Ethan could only stand and stare in awe.

He claimed that the last instance of such overnight growth he had personally witnessed was on r/WallStreetBets when GameStop was involved.

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