How Reddit Defied Crypto Winter and Created a $10 Million Market for Customizable Avatars — Just Don’t Call Them NFTs

He wanted to try buying them on his desktop computer, since the iOS App Store takes a 30% cut. A 38-year-old graphic designer living in Northern Virginia who asked to be identified by his first name to avoid doxxing, Ethan didn’t like the idea of ​​the proceeds going to Apple instead of independent artists. Unfortunately, the desktop Stripe credit card integration didn’t work for him, so here he was with his iPhone and PayPal account, ready to capture some NFTs of Reddit’s custom Snoo mascot designed by internet creators like Rojom and Foustling.

As Ethan scrolled and clicked through his favorite collections, his bank called and asked if the purchases were fraudulent. He tried to calm them down as quickly as possible so he could get back to the marketplace. He ended up buying about $300 worth, an amount he figured he could recoup through secondary sales, and which his wife wouldn’t yell at him about — a 38-year-old man who pays real money for the art of mascotting online ? Really?

The frenzy surrounding the drop, which Reddit dubbed Spooky Season Collectible Avatars, recalls a rosy era of crypto, circa January 2022, when NFTs were all the rage and people splashed out millions of dollars, often outbidding each other, to buy pixelated JPEGs . of bespectacled primates.

The Reddit fall defies all logic of Crypto Winter, where overall NFT trading volume has collapsed by as much as 99%. By allowing artists to create designs of their signature avatar, create them on the Ethereum-linked Polygon blockchain, and sell them to users who want them as profile pictures, Reddit has injected millions of new wallets into the crypto ecosystem and raked in millions of dollars. sale, while avoiding the dreaded label: non-fungible token.

“Everything Hated”

Ethan encapsulates how the social media platform managed to pull off the unlikely success story. Just a few months ago, he would have had the same confused reaction as his wife to spending hundreds on illustrated avatars. He is far from an NFT fanboy. As an artist, he was intrigued by the initial hype, and created an OpenSea account when NFTs first exploded. Still, he never got that involved.

“I felt like the barrier was too high and it was just such a bummer,” he said.

Reddit clearly agreed. The platform has been toying with the idea of ​​letting users customize its iconic football-shaped alien logo, Snoo, as their avatar for years, Reddit co-founder Alexis Ohanian told Fortune that he first sent a prototype avatar builder over 10 years ago. Reddit introduced a basic build tool eight years ago and an updated version two years ago. While the latest was integrated with Reddit’s currency and premium offerings into the platform, it was not tied to blockchain technology, which would allow users to trade and sell them on secondary markets, except for a short trial with four NFTs in June 2021.

Michael Nagle—Bloomberg/Getty Images

That changed in July, when Reddit announced the launch of “blockchain-powered collectible avatars,” which it described as limited editions of its Snoo mascot designed by independent artists that users could buy, mix and match different items to create profile pictures. In the nearly 800-word post, Reddit did not use the term “NFT” once.

“NFTs are widely hated,” one Reddit user told me Fortune. “Just the name itself has a negative reputation.”

It was a wise move to make the technology seem more accessible. “In the future, we see blockchain as a way to bring more authority and independence to communities on Reddit,” a spokesperson said. “We’re exploring tools to help them become even more self-sustaining and self-directed.”

The announcement post detailed the benefits of blockchain in simple terms. Buyers will have the rights to use the art on and off Reddit, and the avatars will be stored on the Ethereum-compatible polygon, meaning buyers will have “ownership and portability.” In other words, they could sell them on secondary markets like OpenSea.

Reddit also took steps to avoid some of the jargon and difficulty of NFTs. All purchases can be made with fiat currency and users do not need to set up crypto wallets. Instead, they would use blockchain-powered wallets built into the Reddit platform — branded “vaults” — that were already integrated into other aspects of the platform, such as community points.

Ethan has been a Reddit user for over 11 years, but like most people, he didn’t notice the July announcement. To spur more traction, Reddit began releasing the avatars for free to power users in August, which Ethan saw, but he still kept his distance. What caught his attention was the rapid growth of the r/avatartrading subreddit, an unofficial community where users gathered to share tips and make offers for their preferred artwork.

He started learning about the different artists involved and even joined the r/avatartrading Discord server so he could chat with them. His favorite was called Rojom, a Reddit bestseller who creates surreal black-and-white versions of Snoo with a mix of body horror patterns and religious iconography. Rojom’s avatars initially went for under $100 when listed on Reddit’s store, though they now sell for thousands on OpenSea.

“You didn’t really need to know anything”

Ethan liked that he could use different elements from different avatars to create his own. He saw one by an artist called Le Rock with a guitar that he could use in his profile picture – he plays guitar himself. Best of all, transaction costs, or gas fees, were low, a barrier that initially turned Ethan off of NFTs. He learned to collect his free avatars and even bought a couple from the first generation that launched in July that were still available.

“That’s what I really loved about what Reddit did — the barrier to entry was minimal,” Ethan said. “You didn’t really need to know anything about blockchain or seed phrases or wallets.”

Others noted: By October 3rd, the first generation of avatars sold out. Sales volume also increased: According to data from Polygon Analytics, total sales passed $1 million on October 3, after hovering around just $40,000 a month earlier.

The collector avatar initiative, which was once slow to take off, turned out to be a success. “Remember when Reddit avatars were considered a huge failure and everyone made fun of them?” wrote a user on another subreddit, r/cryptocurrency. “Yes, it ages like milk in an incubator.”

Meanwhile, the r/avatartrading subreddit flourished. One of the moderators, who asked to be identified as “Matt” because of the value of his inventory, joined in August because he wanted to find out how he could get the free airdrop. There were only a handful of members. At the beginning of October, there were more than 3,500.

According to Matt, the community started because fanfare grew around some of the early avatar collections, like one called Drip Squad. The number of users was still small enough that r/avatartrading members were able to acquire other collections in the hope that they would take off. The bet paid off as the market took off, with some buying avatars only to flip them immediately.

Everything exploded with the launch of second-gen avatars on October 20, with many of the most popular collections selling out in minutes. Sales volume exploded, with the total racing past $10 million on Halloween.

“It’s almost like day trading,” Matt said. He said he has about 60 avatars worth a combined 15 Ether—about $23,000—after putting about $900 into the store.

The question is whether the hype cycle can last.

Michael Anderson, co-founder of crypto-focused venture firm Framework, said NFTs must offer value beyond pure speculation. “You have to have core tools built into these NFTs for them to have sustainable value over the long term,” he said.

An example is rarity, which can serve as a kind of status symbol, such as the Bored Ape avatars, owned by celebrities from Mark Cuban to Paris Hilton. While some of the Reddit avatar collections have fewer features, it’s not a core feature of the project, which has nearly 3 million avatars in circulation.

Another use case could be to provide some kind of community value, such as access to different areas of Reddit, which Anderson described as token gating. It’s also possible that Reddit’s avatars will push new users to interact with other aspects of the crypto ecosystem, where NFTs remain a punchline.

At a panel at TechCrunch Disrupt on October 18, Reddit’s Chief Product Officer Pali Bhat revealed that over 3 million Redditors had created a wallet, or Vault, and that 2.5 million Vaults had been used to purchase an avatar—a number that has grown to almost 3 million, according to Polygon’s data.

In data provided exclusively to Fortune, OpenSea said it has seen a 75% increase in new users on Polygon since Reddit’s fall on October 20, with Reddit bringing in nearly three times more new users than any other project over the past six months. Additionally, 20% of Reddit NFT owners who made a transaction on OpenSea have purchased another NFT on the platform.

“It’s obviously good to bring new people into the space in the necessary ways,” said Framework co-founder Vance Spencer. “But how do you get people who came in for a Starbucks gift card or a Reddit NFT to go off and actually use DeFi?”

“Just hung them out to dry”

Matt, moderator of r/avatartrading, is skeptical that Reddit NFT users will expand beyond the platform, especially given the bleak crypto landscape outside of the social media platform.

“I don’t see a lot of talk in our chat and all about people wanting to venture outside,” he said. “Why would they?”

The biggest obstacle now is that Reddit is attracting millions of people who would otherwise never interact with crypto—a dynamic that is amplified by the fact that Reddit avoids crypto labeling, including warnings about scams and hacks that are endemic to the industry.

Matt said r/avatartrading users were targeted by a scammer who tricked them into giving up their recovery phrases so the scammer could empty their NFTs. He said one user lost avatars worth thousands of dollars.

The moderators have taken steps to educate users and invite guests who can provide guidance on safety and security, often pulling all-nighters to offer support. Matt said that Reddit has been quiet on the radio after it “just brought in so many new Web3 users and so many NFT users and they just hung them out to dry.”

A Reddit spokesperson said that r/avatartrading is an unofficial community, pointing instead to r/collectibleavatars as the official Reddit-powered community where the platform posts news and updates.

Despite its unsanctioned status, r/avatartrading passed 10,000 members on October 25. Ethan, the graphic designer from Virginia, could only watch in amazement.

“The last time I personally saw growth like that overnight,” he said, “was r/WallStreetBets with the GameStop stuff.”