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Executive Summary

Game Overview

ZED RUN is a horse breeding and racing NFT game that took off in Q2 2021 and received $20M in funding in July 2021. Over $120M in ZED RUN Ethereum-based NFTs have changed hands on OpenSea this year, with one horse selling for $158k back in May, despite a relatively small user base of around 43,000 total unique wallets and just over 9,000 daily active users. The game is primarily being played in English-speaking Tier 1 countries, with over 50% of website traffic coming directly from the US.

The game allows players to race horses in free and paid races for shares of prize money. Players can also breed horses to try to produce new champions, and owners of male horses can charge stud fees.

Business Model

Racing itself is rake-less (meaning the “house,” ZED RUN, takes no cut of the entrance fees), with horses that place third or higher splitting the whole pot. ZED RUN collects a portion of breeding fees, in addition to direct sales of their 38,000 minted “Genesis” horses, sales of horse “skins,” and corporate sponsorships (including NASCAR, Atari, and Netflix).

Breeding itself is heavily regulated by ZED RUN, which controls the market by setting minimum breeding fees and limiting male horses to 3 offspring per month and female horses to only 1 per month.

Revenue Sustainability

While sales of the fixed number of “Genesis” horses are nearly complete, the other revenue sources all appear to be sustainable (if the audience size grows). Breeding fees provide both direct revenue for ZED RUN and contribute to a prize pool that is put back into the race economy. Skin NFTs don’t have a maximum count, and corporate sponsorships can be lucrative given the high-value players, though the size of the audience will temper that potential. Lastly, although public details are lacking, the ZED RUN team is working to expand the game, which may come with new revenue sources, too.

Strengths

ZED RUN has positioned itself well, wisely embracing a compelling theme and an extremely valuable market (over $10B is wagered in the US every year). Previous high-profile purchases bolster the excitement — and FOMO — of their NFTs.

The game design can appeal to a variety of users, both players in it for fun and investors in it for profit. Being browser-based also means the game is easily accessible anywhere. Hidden complexity and endless stats encourage detailed analysis by players and build the mystique behind the game.

Weaknesses

A small, trending flat audience size is the biggest challenge facing ZED RUN. This is exasperated by a complex, difficult onboarding process. Obfuscated information means that players can’t evaluate the results of their breeding nor confidently verify any information or results in the game.

The game itself is very simple (so far), limiting the number of options and ways for horses to excel. All of the horses look identical outside of color, reducing character and collectibility. The poorly-designed class-based racing system requires constant changes.

Financially, ZED RUN has already minted and sold the vast majority of its top-value horses. However, dominant stable owners mean that the majority of players are losing money in the races (though breeding fees recirculate into prize pools to help offset this).

Opportunities

ZED RUN has a few avenues to pursue to try to rebuild audience growth. It could focus on smoother onboarding, embracing a demo mode or perhaps concierge-style setup. They could also launch the ZEST non-cash wagering platform to bring non-owners into the ecosystem, potentially at much larger volumes.

If careful to stay orthogonal in design, ZED RUN does have opportunities to innovate and create new gameplay challenges and modes to increase horse demand and broaden the pool of top-performing horses. New features like interactive horses could help reinforce the owner / caretaker role that players step into.

Virtually Human Studio has also announced its intention to move toward a more metaverse-style platform with player-creators joining in roles such as race track owners and accessory designer. This will take time to play out, of course.

Threats

ZED RUN’s biggest fear at this point should be stagnation and abandonment. Player growth has disappeared, player confidence and enthusiasm is waning, and efforts seem more focused on monetization than audience building. Conversely, horse inflation threatens to devalue horses and reduce interest in breeding, which could hobble the entire ecosystem. A well-funded competitor could have an opportunity to win over this hesitant audience.

ZED RUN is also using aggressive price controls, which runs contrary to the free market philosophy championed by crypto in general, and it risks distorting supply / demand and being touchy to adjust. Externally, ZED RUN is also dependent on ETH, meaning that factors outside of its control can significantly influence the value of in-game assets. Lastly, there’s always the looming risk of regulatory bodies putting heavy restrictions on crypto and gambling games in particular. The ZED RUN team will need to tread carefully.

The Story of Virtually Human Studio and ZED RUN

Horse racing is a multi-billion dollar industry in the physical world, and it turns out that the same enthusiasm is trickling into the digital world, too. ZED RUN, the core project of Virtually Human Studio (VHS) and a top-10 blockchain game in terms of transaction volume, is leading the charge.

The game is the brain child of Rob Salha and Chris Laurent out of Sydney, Australia. They were inspired by the excitement and energy of horse racing but wanted to democratize the sport and enable spectators to participate rather than just watch. Thus a digital platform with horse NFTs was born. Now, anyone can trade, race, breed, and cheer on their digital horses on digital race tracks for crypto winnings.

The ZED RUN platform launched in early 2019 and sold a total of 4,450 racehorses that year (for a total value of ~$150k), and with some seed funding the founders were able to hire a full team. In 2020, a year marked largely by product development, the team was able to launch some of the core features we see today — most notably live, 3D races (previously races were calculated and reported without any animation). After a quiet few quarters of building, interest picked up in mid-2020.

2021, on the other hand, unlocked much more forward momentum. ZED RUN secured a few major brand partnerships — including ATARI, Stella Artois, and NASCAR — and experienced some high-profile horse purchases, including one for $158k. The New York Times even covered the game.

VHS’s biggest win, though, was securing a $20M funding round in July 2021, led by TCG and Andreessen Horowitz. Now backed by funding and heavy-hitting VC clout, the big question is: what’s next for VHS and ZED RUN?

It looks like we have some answers, although public details are vague and lacking. Regarding ZED RUN, we see a couple interesting tidbits from the Series A announcement:

1. “With this capital infusion, VHS plans to expand its product and engineering teams as it continues to further evolve the ZED RUN platform with improved creator tools that enable a new wave of virtual racehorse owners.”
2. "Our vision for the future is to build a creator economy within the ZED RUN metaverse where players can work in professions such as stable owner, race track owner, breeder, accessory designer and more”

Even though it doesn’t really exist in the game today, VHS aims to empower creators and enable them to take on diverse roles within the ZED RUN ecosystem.

Further, the company has its sights set beyond ZED RUN. According to a Twitter thread by co-founder Chris Laurent, there are a couple more projects in development. The first is called Human Park — "a playground where anyone can become who they've always wanted to be” — and the second is a new collaboration with SpectreStudios, a virtual production company. We know very little about these projects (or how they’ll intersect, if at all), so we won’t comment on them in depth. However, it’s clear that VHS leveraged its initial success with ZED RUN to set itself up to work on much more.

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All that said, let’s not get too ahead of ourselves. This deconstruction focuses on ZED RUN, VHS’s core product, which faces a significantly different set of opportunities and challenges from those we outlined for the current king of play-to-earn games, Axie Infinity.

Before assessing the opportunities and threats of what’s to come, let’s dig into the current state of the game - including a look at the game mechanics, the underlying economy, the player base, the various player personas, and the current business model. Then we’ll talk about what’s next and wrap up with our key takeaways, lessons learned, and recommendations.

The Current State of ZED RUN

Let’s start with the basics. ZED RUN is a horse racing game in which players purchase, race, breed, and trade digital horses. If you want to watch a race, check out the video below to see an example:

https://youtube.com/watch?v=8wnTmjZV2Oc%3Fwmode%3Dopaque

Despite financial gain being an apparent primary motivation for ZED RUN players, the financial reality mostly mirrors real-world horse racing. The majority of players expect to lose money (only the top 3 race winners earn a profit), and this economic reality is fundamentally what makes the game financially sustainable. We’ll dig into the economic details much more in the following sections.

It’s also important to mention that despite generating relatively high transaction volumes, the daily active playerbase is quite small. There are only 8-10k daily active horse owners, which, for context, is less than 1% of Axie Infinity’s daily playerbase. Perhaps more importantly, growth has stagnated since September, and although the game is still profitable, it faces serious long-term risks if it is not able to grow from its current small audience.

ZED RUN is also built on the Polygon blockchain — technically a Layer-2 Ethereum sidechain — and its assets trade on OpenSea. The game doesn’t have a proprietary token (other than its horse NFTs), and everything is priced in ETH. This reduces the complexity of ZED RUN’s economy design, but it tightly couples the economy to fluctuations in the price of ETH.

Additionally — and unlike some play-to-earn games — there is no “single player” mode where players can earn real-world money just by grinding and putting in time. All income-generating activities in ZED RUN (racing and breeding) necessarily involve competing against or transacting with other players.

ZED RUN is also an entirely web-based experience with no single “app” that players are meant to download and interact with. Instead you simply manage your horses across a variety of different web pages.

Before moving onto the game mechanics, it’s worth mentioning that because ZED RUN isn’t vertically integrated (like Axie Infinity is with its own tokens, launcher, and exchange), players must juggle a confusing variety of services and tokens, which can make onboarding difficult, especially for those who are less crypto native. For example, players must learn how to use a crypto wallet (like MetaMask), purchase horse NFTs on the third-party OpenSea exchange with ETH, pay race entry fees with WETH (“wrapped Ethereum”), and need to follow detailed step-by-step guides to avoid costly mistakes.

Although managing the initial finances of ZED RUN can be fairly complicated, once you've successfully onboarded, you can easily manage everything from your web browser. Furthermore, there are no additional gas fees to race or breed your horses. The racing and breeding activities are implemented entirely in the browser and can be conducted from any internet-enabled device. This gives ZED RUN a natural leg up when it comes to distribution, because it routes around mobile App Store bans on blockchain games.

Game Mechanics Overview

Next, let’s dig into the game design. At a high level, racing and breeding are the two key activities that the game is built around, though the latter is an action players can choose to participate in without impacting their core gameplay experience. This results in the following core loop and optional meta loops.

The image above translates into the following gameplay steps:

• Establish a stable
• Purchase horses
• Enter your horses in races
• Earn money by winning races
• Breed your horses to sell to other players or to enter into races yourself

ZED RUN has a relatively simple core loop with far more complexity under the hood than initially meets the eye. The choices and actions available to players are limited, and the minimal available information is intentionally less than perfectly transparent. Players choose which horses from their stables should compete in which races, with the outcomes determined entirely by the computer thereafter.

In short, ZED RUN has very little “game” and consists almost entirely of metagame. Most of the attention and energy is thus directed towards the breeding and trading of horses, and this is primarily what is discussed on the Youtube and Twitch channels that cover the game.

Let’s now walk through how the core mechanics — racing and breeding — work to better understand how the full metagame functions. (Note: ConsenSys put together an excellent user guide that explains ZED RUN’s gameplay if you want even more details.)

Racing

The 12-horse races run constantly throughout the day, with multiple races often occurring every minute. A player may enter their horse on a first-come first-serve basis in free and paid races. Paid races cost money to enter and have prize pools for winners; free races cost nothing to enter and have lower rewards (or none at all), but they are valuable for testing out a horse’s abilities or can simply be enjoyed for entertainment purposes.

Each race has a few variables — class, entry fee, and distance — but is otherwise the same (there is not yet any simulation of ground texture or weather, for instance). Each horse has a performance rating number that determines which race class they are eligible for; this functions in a manner similar to weight classes in wrestling and boxing. Until recently, any horse was allowed to race above its class but not below it; however, they’re now restricted to racing exclusively within their own classes.

Races used to display the simulated odds of each horse winning the race, but that has recently been changed to simply marking the favorites with a "flame" icon. This is intended to make it more difficult for players to work out the performance profiles of their horses.

The first, second, and third place horses are awarded winnings out of the prize pool with a respective 60/25/15 split. ZED RUN itself used to take a rake from every race prize pool but has recently reduced that share to zero — a move that was met with great enthusiasm from the userbase. Additionally, ZED RUN now contributes up to $20,000 a day from breeding fees to fund modest prize pools for hundreds of free daily races.

A simple Stamina system was recently added that effectively limits how often each horse can race. A horse’s performance degrades once Stamina gets below 90%, and it takes 12 hours to fully recover. Notably, horses have individual fitness levels and Stamina curves, meaning some horses will be able to race at full capacity more often than others.

There are other planned features that will affect race outcomes in the future, most notably weather, but little is known about how they will work.

Simplicity of Races

The uniformity and simplicity of races — plus the lack of player input — narrows the possibility space of the "meta" considerably. It pushes players to invest in horses with a very narrow range of performance characteristics, as human skill does not factor in once the race has already started.

The upside to this is that it makes the influence of botting and automation much less when compared to Axie Infinity. There's very little that a machine can do in ZED RUN that would count as "unfair" play. For this very same reason, there is little incentive to employ scholars. There have been some initiatives to run scholars in ZED RUN, but we have found no evidence of significant scholar activity in this game. This makes sense given that there is almost nothing for them to do and thus little demand for their labor.

We thus turn our attention to the complexity of the metagame, which is also fairly constrained. Races do not have obstacles, weather, or even curvature which would open up new dimensions of horse performance in varying situations and against varying competitors. Instead, a horse's performance is measured primarily in terms of distance preference and class.

Class Calibration

There is a serious risk of "over-classing" one's horse to the point where it can no longer win but also fails to get demoted into a more appropriate rank. This comes from the way a horse’s class changes as it wins and loses matches. Winning matches causes it to gain class points, and losing matches causes it to lose class points. However, if a horse consistently finishes in the middle of the pack, its class will stay more or less the same.

As a good horse continues to win, its class increases until it hits a class filled with fierce competition (and, of course, it’s barred from participating in races of a lower class). This dynamic has led to a preference for horses with "U-shaped" performance profiles, where the horse either wins big or loses big. Winning big helps the horse earn money, and losing big helps the horse recalibrate and move back to a profitable class in the case it is promoted too high.

An ideal performance curve would look something like this:

On the other hand, an "A-shaped" performance curve where the horse typically finishes in the middle of the pack but rarely wins or loses is undesirable. Once the horse has ranked up, it will take many races (and many entrance fees) before it is able to lose often enough to rank down.

Naively, one might expect an "L-shaped" performance curve to be the best — a horse that almost always wins and almost never loses. The risk is that this kind of horse will rocket up the ranks quickly until it reaches the point where competition is the fiercest. Thereafter, it will be stuck in the middle of the pack with a more A-shaped performance curve, never losing badly enough to get back to a level where it is competitive again.

ZED RUN continues to tweak the rules for how horses gain and lose rank. It used to be a uniform pattern where placing 1-4th caused you to gain 1-4 points, and placing 9-12th caused you to lose 1-4 points. They changed this in November such that any horse that placed 7th or below lost 2 points, and again in December to the current (as of Dec 13, 2021) system:

This change will likely shift rankings to be somewhat more forgiving, but it still leaves room for frustration. The fundamental weakness of this design is that a "good" horse is not a horse that is at the absolute top of its game. Rather, a "good" horse is one that consistently performs close to the top of a narrow and arbitrary performance band but not any better than that.

This is similar to the strange incentives in High School wrestling that leads to eating disorders as athletes struggle to stay at the very top of arbitrary weight classes without going over. A more interesting design would be to make races — and horses — more multi-dimensional, so that performance for a given horse could be measured in "being good at races in the rain" or "being good at races with many curves and obstacles" in addition to short versus long and high class versus low class.

Another issue is the length of ZED RUN’s feedback cycle. In classic game design, a "feedback cycle" consists of the player:

• Making an input
• Causing an action in the game
• Observing the results of that action
• Evaluating the changed state of the game
• Making another input

In ZED RUN, this feedback cycle is fairly long and expensive. A player must carefully purchase or breed the right horses, test them in races, and deduce their performance characteristics. The time and money expense of these decisions discourages the player from making a large number of frequent choices, and thus it takes longer to search out the possibility space. Furthermore, the consequences of failure are more frustrating. All of this makes it more difficult to not only learn how to play the game but also succeed at it. Finally, the information available to players is intentionally obfuscated, indirect, and subject to a great deal of uncertainty and noise.

In a way, the game is too simple and too complex at the same time. The simplicity of the races makes most horses worthless and pushes players to seek finer and finer gradations of the same basic strategies, whereas the hidden complexity of how breeding actually works and what a horse's performance characteristics actually are, makes it risky to invest in a horse stable.

Increasing the complexity of the racing game itself would not only make races more exciting and fresh, but it would also make a wider range of horses viable. Meanwhile, decreasing the complexity of the onboarding system and the opaqueness of the game would make it more welcoming to new players, helping grow the user base.

Breeding

Breeding in ZED RUN is where most of the meaningful decisions take place and is the beating heart that drives the game’s entire economy. This is modeled very much after real-world horse racing — the prize pool for winning the Kentucky Derby is nice, but the real money is made by putting your champion stallion out to stud for the rest of his life.

Unlike Axie Infinity, where there is no notion of biological sex, ZED RUN’s horses come in the traditional male and female variety. Male horses may breed up to 3 times a month, whereas female horses can breed only once per month. ZED RUN horses may continue to breed indefinitely without going sterile, just at a capped rate. Given that horses are currently immortal and there is no mechanism for “burning” or “sinking” horses, we expect the total supply of horses to increase over time.

Another major difference with Axie Infinity is that you can breed with horses owned by other players. In fact, the game has an entire "Stud Farm" market where male horses offer their services to anyone willing to pay their fee.

In any breeding transaction the owner of the female pays the stud fee and receives the offspring. The owner of the male receives a portion of the stud fee (between 40% and 56%) depending on how long the horse was in the Stud Farm. 15% goes to ZED RUN and the rest goes into the “Prize Pool” fund. This allows Zed Run to consistently fund races and tournaments, assuming breeding continues to happen.

Note that if the player owns both horses and chooses to breed “in stable,” the Stud Fee must still be paid but is reduced by 35%, with all of it going to the Prize Pool and ZED RUN in a 70/30 split. Stud Fees are denominated in ETH and set by the stud owner, though minimums are enforced by ZED RUN based on the horse’s Breed Type and Bloodline.

ZED RUN thus establishes a strong centrally-planned economy with controls in place on both price and supply. Supply is controlled by throttling the rates at which horses may produce offspring, and price is controlled by setting mandatory price floors on horses based on their characteristics.

Horse DNA

Horses in ZED RUN have a few genetic elements. While the interactions are complex, and we encourage you to research them in depth if you’re interested, here’s a quick rundown.

First off we have the biological sex of the horse, denoted in-game as gender:

• Gender - Determines who gets the stud fee and who gets the offspring when breeding

Many factors contribute to a horse's underlying "genome," which in turn drives the horse's performance characteristics, but the exact formula is unknown. What we do know from ZED RUN is that the following three factors have an outsized influence:

• Bloodline - The biggest impact on the racing performance of a horse, Bloodline can only be preserved through breeding like lines and determines 80% of the minimum Stud Fee. These are cheekily named after notable crypto researchers (in descending rarity of Nakamoto > Szabo > Finney > Buterin). Offspring of parents of different bloodlines will inherit the “lesser” of the two bloodlines.
• Breed Type - An indicator of rarity similar to Genotype, in the descending order of Genesis > Legendary > Exclusive > Elite > Cross > Pacer. Breed Type determines 20% of the minimum Stud Fee. Offspring of parents of different breed types will generally inherit the lower of the two breed types.
• Genotype - Noted as ZXXX, this a quick reference for how far down the family tree a horse is, with Z1 being the best and rarest and Z268 being the worst. The name "Genotype" here is a misnomer and has nothing to do with the biological term of the same name. It is better understood as a loose indicator of generational distance. A horse's Z number is the arithmetic sum of its parents’; a Z1 bred with a Z10 will yield a Z11.

Generally speaking, the rarer a horse's bloodline and breed type and the lower its Z number, the better it is. That said, the way this plays out in practice is intentionally obfuscated from the player, with noticeable variation between horses.

Next we have the Racing Characteristics that may (or may not) affect performance. Like the breeding factors, everything is intentionally obfuscated, which we’ll discuss later.

• Ability Score - A general value for how good the horse is at racing
• Distance Preference - To be discovered through experimentation, each horse can favor a different distance of race which theoretically increases their performance for that distance
• Fatigue Factor - Seems likely to impact drain of Stamina
• Gate Preference - Reported to be in the horse’s genes but has no stated effect on racing, for now

Finally we have the aesthetic quality of the horse’s color:

• Coat Color - Has no impact on racing, but may affect value through aesthetic preference and collectability. Coat Color has its own complex set of breeding rules, rarities, and statuses.

The most important characteristics by far are bloodline, breed type, and genotype (z-number).

Intentional Obfuscation

There is a lot of intentional obfuscation to keep players guessing. With enough data and variables you can always find something that seems to be statistically significant (one player analyzed data and suggested that the hemisphere of the race appears to affect performance), and, at least according to one line of thinking, that’s where the magic lies.

For example, odds for races are calculated by ZED RUN based on the entrants, but the exact odds were removed in August 2021 in favor of the “flame system”, which only identifies the 3 horses with the best odds in each race. ZED RUN spun this as “a more fair approach to racing and racehorse discovery”.

It is also possible that many performance characteristics of horses are “hiding in plain sight.” If you inspect a Zed Run horse on the blockchain using a tool like OpenSea or PolyScan, you will see something like this:

These applications are clearly reading from the blockchain to display publicly known variables such as Bloodline, Breed Type, Gender, etc. However, it is conceivable that additional information that governs future planned features is already present in the NFT metadata for each horse. This information is not immediately legible, however, because the source code for Zed Run's smart contracts are not publicly posted, breaking with common practice of other blockchain games (including Axie Infinity).

The bytecode for the smart contracts, however, is published on the blockchain and can be publicly viewed. Unfortunately, decompiling it yields many unknown and unlabeled fields whose purpose is not immediately apparent - some may even be red herrings intended to never be used except to throw off would-be data miners.

It may be possible in principle to reverse engineer this information, and financially motivated actors will certainly try, but given that there is no downloadable Zed Run client to probe, and all races are resolved by closed-source centralized servers, there is not much surface area to explore. These design decisions seem intentional and serve to create an aura of mystery around the game.

Counterintuitively, that’s likely much of the appeal for many players. It allows armchair statistical analysis, arguing over speculation, superstitions, factions of believers, etc. ZED RUN is not perfectly transparent — making it “fairly unfair” in a way — but, psychologically speaking, the system is brilliant; it provides an insane amount of data with little visibility into the inner-workings, and it seems to have even “salted” the results with red herrings like gate preference, location of the race, etc.

Shifting Meta

One big question mark is how the meta will shift and, more importantly, how stable owners will react when it does. It’s one thing if a game developer adjusts the meta of an esports game to keep competition fresh and adjust for overly-dominant strategies. However, it’s different when a shift in the meta could mean that your $1,000 stud is suddenly a dud (or conversely, your seemingly asthmatic mare is suddenly a beast in newly-added snowy weather).

ZED RUN has the power to make fundamental changes to the gameplay, has done so already, and has stated intentions to continue to do so. Stamina is a recent example of a new feature that partially relies on a Fatigue Factor gene that was always present in horses but never expressed before. Similarly, we know that all horses have a Gate Preference gene but also that it does not yet impact racing outcomes.

Will players find these sorts of changes an appealing part of the game, accentuating the sudden shifts in fortune that horse racing features? How will players who invested large sums into horses feel if their performance goes down after a change? It’s hard to say but something that ZED RUN needs to weigh carefully.

Anti-Crypto?

For all of the possible upsides of encouraging a game about mystery and speculation that encourages players to crunch numbers and swap theories, it is worth pointing out that such a design runs counter to the touted principles of the blockchain and "web3" movements. We don’t want to be overly-ideological — after all, players at scale won’t care too much about the specifics of a game’s underlying technology — but it’s important to note where certain blockchain games fall on the spectrum of "transparency" and "decentralization."

ZED RUN has neither. Players may "own" their NFTs in a narrow sense, but there is no way to know for sure what is going on behind the proprietary centralized servers that bestow value upon those NFTs. There is also no way to audit that the algorithms haven't been changed or tweaked at the whim of the developers without notice to the community. The flip side of using intentional obfuscation to encourage "fun" speculation is that it also leaves room for players to speculate that you are secretly up to no good.

A recent insider trading scandal is likely to only add fuel to this fire. ZED RUN admitted that a team member used internal information to identify and purchase 4 desirable horses. To their credit, ZED RUN admitted to the wrongdoing and made compensation to the affected parties who may have lost races (and therefore money) because of the fraudulent trading.

The problem is that this type of wrongdoing was even possible in the first place, and it might never have been exposed had ZED RUN decided to cover it up instead. The lack of transparency and auditability runs counter to foundational principles of blockchain gaming, and the amount of control ZED RUN exerts gives it wide latitude to make all manner of changes to the game's internal workings without disclosing anything. Any such unannounced changes or tweaks, even done with benevolent intent, could mean the difference between gaining or losing money for particular players, which is sure to give buyers pause.

Racing Economy

Financially, there are three types of races: free, paid, and tournament.

Economically-speaking, paid races are the simplest. They are pure zero-sum games where 12 entry fees are split 60 / 25 / 15 for the top three winners. Or alternatively, the winners can expect gains of 620% / 200% / 80%. Entry fees themselves can range wildly - we’ve seen as low at $2 and as high as $500. There are no gas fees to enter races and ZED RUN takes no cut for themselves, so it’s pure zero-sum.

It follows from the rules of races that the majority of players of free races are losing money in the long-run. In a paid race, for every 12 horses who enter, only 3 will make a profit, the rest losing their entry fees to the prize pool.

That said, free races and tournaments (which are free to enter but for which you must first qualify) are funded by ZED RUN, who put up to $20,000 per day into prize pools. When a tournament is not happening, this money is distributed throughout up to 888 daily races, for an average of about $22 per race, though the exact configuration is subject to ZED RUN’s daily whims.

When a tournament is scheduled, the free races no longer have prize pools (but can still be used for qualifying purposes). Instead, the daily prize money is pooled for the tournament prize. For example, the October tournament had 15 days of qualifying and then a prize pool of $300k (which is $20k * 15).

So the big question is, where is this $7.2M per year in prize money coming from? According to ZED RUN, it’s taken out of breeding fees. Furthermore, how long can they afford to be this generous? Let’s do the math and put together a chart.

First, we worked out the base cost of breeding. We were able to use Archive.org and historical news articles and blog posts to work out changes to the base breeding cost in Ethereum as of various dates. There may be other inflection points but we can at least confirm these:

From there we can use the official ZED RUN FAQ to work out minimum stud fees for every bloodline/breed type permutation, since Archive.org confirms that the posted formulas have not changed over time, only the base cost.

Finally, for every non-genesis horse in the database, we looked up its father’s bloodline and breed type and used the table above to assess the correct minimum stud fee. We then converted that value to USD using a daily ETH→USD conversion rate chart.

We show two values here:

1. “Base fee” in orange shows what the minimum breeding fee would yield if all horses were bred in the public stud farm.
2. "Extra fee" in yellow shows the additional amount that would be raised if all horses were bred in-stable, where 70% of a discounted (35% off) stud fee goes to the prize pool, compared to 29% of the non-discounted stud fee from public breeding.

Keep in mind that all this is a measure of the lower bound of prize pool allocations. If players are consistently paying higher than the minimum breeding fees, then the prize pool contributions could be higher still. At first glance, and considering that the true figures are likely higher, ZED RUN's daily $20K prize pool seems to be sustained by a comfortable margin.

That said, spend on breeding fees peaked in September and has declined for two months in a row. We similarly observe that this is driven by a steady two-month decline in the number of new horses born each month:

This aligns with our general thesis that ZED RUN is sustainable on its face, but faces other long-term risks if the team cannot manage to grow its userbase.

ZED RUN Players

ZED RUN needs to increase its userbase if it wants to be stable long-term, so let’s take a look at its current audience.

Who Is Playing ZED RUN?

A very small number of people.

According to PolygonScan there are 43,284 holders of ZED Horse NFTs on the Polygon blockchain as of this writing, which gives us an upper limit on the maximum user base. Open Sea similarly reports 43,300 unique wallet IDs that own at least one horse. These accounts are known as “stables,” and represent the total maximum userbase that is capable of playing the game.

And how many of these stables participate in horse races on any given day? As of last week, 9,275.

Zed Run has always had a small userbase, but it saw a great surge in popularity starting in July, the same time Axie Infinity saw its second major surge in growth. Even then, ZED RUN plateaued at about 10,000 daily unique stables participating in races (our best proxy for daily active users) and has struggled to grow past that figure.

On the other hand, ZED RUN players are overwhelmingly from Tier 1 countries, particularly the United States, Australia, and Canada:

Despite its tiny userbase, ZED RUN enjoys some advantages that Axie Infinity would be jealous of. For one, most ZED RUN players are likely playing as a hobby, or speculative investment, rather than as a job. These players are less dependent on the game for income, which might make them less mercenary if a better option comes around.

Also, ZED RUN players are a net asset in the long-run as they continue to put new money into the game both to breed and to race, compared to Axie Infinity whose players are a net long-term liability. Unlike Axie scholars, ZED RUN players have skin in the game, so they are also less likely to suddenly leave - as long as their investments stay above water.

The audience is also much higher value to advertisers, something that ZED RUN is already taking advantage of with one-off advertising sponsorships and could likely also monetize with dynamic ads. It’s also likely to weather a drop in ETH value far better than Philippine players when Axie’s SLP dropped in value.

ZED RUN could do well to focus their energies on user acquisition, which feels unfocused at the moment. Their initial burst of media attention has now dwindled, and they seem to be overly reliant on their Youtube and Twitch audiences to do their general outreach for them. They have invested in some partnerships with big name brands and real-world horse racing events, but user growth nevertheless remains stagnant for the past few months.

We can get some further hints at daily activity by looking at transaction volumes. The game enjoyed a massive surge in interest between April and June after it moved onto the Polygon sidechain, but it has settled on a much lower level of daily activity after a month-long shutdown in breeding activity. Breeding was shut down for maintenance reasons, but as we can see below, economic activity never fully recovered after it was turned back on.

Despite the small player base, the amount each player is spending on stud fees and race fees is significant. The top 500 horse holders, roughly 1.2% of the entire population, collectively own 24% of all ZED RUN horses. The number 1 holder owns a whopping 727 horses, which is almost certainly a “Guild.” A “Guild” in the context of blockchain games specifically refers to an organization of investors and players who pool their money to purchase NFTs in play-to-earn games, paying out earnings to their members.

ZED RUN itself proclaims that (as of this writing) there have been 694,000 races (both paid and free), for a total of $44,800,000 USD won by players. We further know from our calculations that a minimum of $14,800,000 has been spent on stud fees, anywhere from 29% to 46% of which has itself been allocated into the prize pool for race payouts.

It is difficult to use that figure to calculate an average spend per user as money continuously circulates throughout the ZED RUN economy, but it's plausible that the lower bound of average "throughput" per user could be hundreds or even a thousand dollars. Given this figure is surely shifted high by whales, we can only imagine how much the highest spenders have put in.

But let's try anyways. The top holder owns 727 horses, and from a quick spot check of their inventory it's mostly legendary and genesis horses. If we price all of these horses at the current floor price on OpenSea as of this writing which is 0.009 ETH (about $41 USD), that holder's portfolio would be worth at least $30,000, and that's an extremely conservative underestimate. Many of the horses were likely purchased when they were cheaper, but the transaction log shows a steady pace of continuous transactions going back months, so a lot of their purchases were probably made at recent prices. It's plausible that top players have put tens of thousands of dollars into this game, if not more.

The 5 Player Personas in ZED RUN

Players will fall into at least one of three main personas, which we will call Racers, Breeders, and Stud Farmers. Two other personas exist external to the game: Flippers and Wagerers. Racers and Breeders could be motivated either by fun or by profit, while Stud Farmers and Flippers are only profit-driven, and Wagerers are (in theory) only fun-driven. The gameplay and goals differ significantly for each of these personas, so let’s dig into them a bit to understand who is participating in the ZED RUN ecosystem.

Persona #1: The Racer

The Racer spends her time trying to understand and strategize on the actual racing of the horses. She looks to figure out how to best optimize her chances of winning through interpreting the horses’ characteristics and ability deviation, working to find the best “U-shaped” placement graphs as described earlier. She can analyze tons of races and try to figure out what combination of variables provides the best results.

If it’s anything like real-life horse racing or any other gambling, it’s likely that a lot of superstitions and red herrings will be embraced. For example, players seem to think that gate selection impacts outcomes, even though the official ZED RUN Discord is reported to say that it doesn’t (each horse does indeed have a preference, but it doesn’t affect performance…right?).

While some players enjoy the thrill of winning on its own, the financial motivation for the Racer will be collecting prize pools from races and tournaments. knowyourhorses.com even calculates an ROI based on historical data. The horse below has earned an ROI of 6.99% (for a net so far of about $8 USD) across 35 races.

Meanwhile, this one below truly is Something Special and has done extremely well, netting an ROI of 62% for about $15,000 USD across 578 races.

This is the type of success story that is the huge draw for the Racers. But what are the realistic numbers behind it? While Something Special turned a profit of $15k, the owner paid about $25k in entry fees (with current exchange rates), which is not something many people would be comfortable with. This isn’t like winning a jackpot 20,000:1 odds ticket. The best return you can hope for on an individual race is 7.2x (60% of 12 entry fees), so it takes repeated entries and wins to see anything substantial.

Persona #2: The Breeder

The second type of player persona, the Breeder, aims to make money by breeding new horses and then selling them (or racing them if he’s also a Racer persona). He won’t experience the thrill and swings of fortune by entering and winning races, and he is less likely to buy into superstitions unless it helps him sell the horses. Instead, he plays a different odds game that looks more like typical gacha mechanics.

The Breeder will need females (fillies and mares) to be able to produce new horses. He will also need a high volume to see any real success, since females can only breed once per month. And he will need to be able to pay breeding fees, even if he is breeding within his own stable with males that he owns.

He might breed for race performance, but he may find that things like Coat Color are also viable to target and sell to collectors. He will have to know and try to predict the market as well as take advantage of whatever characteristics his horses have.

Once new horses are bred, it’s then up to the Breeder to sell them, which means listing them on OpenSea, paying OpenSea rates, managing bids for his horses, etc. All of this means that there is a particularly high barrier to entry if it is to be done with any kind of scale.

Persona #3: The Stud Farmer

The third core persona is the Stud Farmer. In contrast to Racers who require very active interaction and Breeders who are constantly creating and moving inventory, the Stud Farmer makes some initial investments and then just has to check in weekly to put horses up for stud service. Maintenance is low once the initial studs are acquired, though picking the right studs is critical.

Stud fees can be substantial, and minimum fees are set by ZED RUN, which keeps the market strong. However, this also renders many horses effectively unbreedable since the price floor will be above what natural supply and demand would price those horses.

Extra Context (Part 1): Breeding Economics

To better understand the motivations of Breeders and Stud Farmers, we need to conduct a bit of a deep dive into the economics of breeding.

The player population of Zed Run has ceased to grow since September, so there is no demand for new horses simply to play the game, only to gain an edge over other players. Furthermore, horses are immortal; they never die or decrease in ability with age. After the recent update, they are temporarily limited by fatigue, but other than that they remain in pristine shape forever. This is a recipe for horse inflation, which leads to declining horse values, which then drives declining stud fees.

Let's start by looking at the overall distribution of horses in ZED RUN. The three characteristics that absolutely dominate breeding considerations (in order of importance) are Genotype Z-number, Breed Type, and Bloodline.

Nakamotos are the most prized bloodline, and Buterins the most numerous. One might expect Nakomotos to be in the shortest supply, but they are actually more numerous than Szabos, which are supposed to be more desirable than Finneys and Buterins. This could be an example of market distortions caused by price controls (minimum breeding fees).

In sharp contrast to bloodline (where the cheapest category dominates), the top three breed types (genesis, legendary, and exclusive) account for more than 75% of the entire population. Genesis horses are fixed in supply and cannot be produced from breeding, suggesting that players are constantly breeding Genesis and/or Legendary horses together to the exclusion of lesser breed types. Not only is the total number of horses inflating, the population of the more desirable breed types is swiftly inflating as well. Under current conditions, we expect the Legendary and Exclusive population to continue to grow at the expense of lower categories, further inflating the supply and driving down the price of these horses (unless new player growth picks up).

We see a similar story when it comes to Genotype. As this number can only increase in offspring relative to their parents, breeders prioritize studs with the lowest z-numbers, yielding a population where 70% of horses have a genotype of Z20 or lower. We expect the population of sub-Z20 horses to continue to grow as well, driving prices further down (again, unless new player growth picks up).

As long as the player population remains stable, we expect the price of all these categories of horses to drop as the supply continues to increase. As the bulk of horses become concentrated in the same high-value categories, demand will shift to finer and finer gradations between members of that once-elite group.

Extra Context (Part 2): Genesis Dominance

That's it for the population itself. However, another picture emerges when we look at which horses are being used to produce all these offspring.

The single greatest determinant of breeding demand by far is the genotype Z-number.

Stallions with Z5 or below are responsible for siring nearly a third of all non-genesis horses, and there is a veritable cliff at the Z10 mark which accounts for 78% of all offspring. By the time you get up to Z20 fathers, 93% of all descendants are accounted for.

The figures are even more striking for Mares — the Z1’s alone are responsible for birthing 16% of all horses. Z5’s and below account for 29%, Z10's and below account for 65%, and at the Z20 mark you reach 90% of the entire descendant population.

The long tail for Mares is thicker than it is for the Stallions, but Z1 genesis females are clearly the prime favorite for breeding stock.

The next greatest determinant of breeding demand is the father's breed type, with genesis and legendary horses accounting for a full 82% of all offspring. The Father's Bloodline doesn't have nearly the same outsized effect on breeding choices.

This make sense given that most breeders are optimizing first and foremost for low Z-numbers and desirable breed types. Furthermore, Bloodline accounts for a full 80% of the minimum breeding fee, meaning that a Z5 Genesis Buterin could in theory be cheaper to breed with than a Z10 Legendary Nakamoto. If your mare is already a Buterin herself, her offspring would be a Buterin anyways no matter which mate you picked.

What’s the upshot? Everybody wants to breed with a Genesis horse, but might settle for a Legendary if necessary.

Although the number of horses continues to grow, the active breeding population remains concentrated among elite horses, which makes sense given that the actual number of players controlling the breeding hasn’t grown in months.

Now let's see where the stud fees are going. (These are minimum estimates, as a reminder.)

The math is pretty clear: most of the stud fees are going to horses with a Z number of 10 or below (and especially 5 or below), whose bloodline is Nakamoto or Buterin, and whose breed type is genesis or legendary.

Breeding activity is dominated by genesis horses, which are strictly limited in number. ZED RUN has pledged there will only ever be 38,000 genesis horses, and as of this writing 72% have already been released.

Additionally, there are two factors that are known to increase a horse's value: being 1) unraced and 2) unbred. This is due to the "unopened card pack" effect, where the horse's racing performance and breeding characteristics are still somewhat unknown and could potentially be much better than average. Once the horse has been "opened" in either way, its characteristics will be revealed. Most of the time those characteristics will be near average or worse, and the horse's value will go down accordingly. We expect financially motivated players to keep a certain number of genesis horses unraced and unbred to preserve their value, further restricting available supply.

Even though 28% of Genesis Horses have yet to be released, nearly all of the most desirable ones have already been minted:

Given that ZED RUN's horses can breed at most three times a month, and given that players are most interested in breeding with genesis horses, this puts a hard throttle on the ongoing supply of Genesis-fathered horses.

It all adds up to more and more “elite” horses serving the same number of players, with a stable full of Genesis horses being less of a bonus and more of a requirement for maintaining a long-term edge.

How much are players taking home collectively from breeding? It’s hard to say without knowing how much breeding is done in-stable, but if all breeding were done on the public stud farms, then these figures would represent a lower bound of payouts to players:

Ultimately demand for breeding is tied to demand for high performing horses who can win races. As top players continue to breed ever more elite stables, the marginal returns on breeding at the highest levels may decrease. Without mechanisms for countering horse inflation, players may lose interest in the breeding game.

Do horse prices support this conclusion? Tracking every single transaction on the market is prohibitive to query, but a pretty clear picture is painted just by looking at prices for Z1-Z5 genesis horses over time:

Prices surged in July along with user growth and then leveled off in September, when user growth stalled, and horse prices overall have declined for two straight months. However, we clearly see a pattern where Z1 horses have outsized value, with prices declining rapidly as you move towards Z2 and below. Low Z-number Genesis horses are the most desirable for breeding purposes, but even their value will continue to decline if the userbase does not grow.

The real thing breeders are paying a premium for is certainty. In a typical gacha pull or lootbox game, the player faces uncertainty about their prize before they pay to open the box, but they are immediately clear about the value of their reward after. In Zed Run the situation is almost entirely reversed — the bloodline, breed type, and genotype of the offspring is perfectly knowable in advance simply by looking at prospective parents, but one cannot know how good the offspring is at actually winning races until they are put to the test long after they are already born. The appeal of breeding with Genesis racehorses is that the likelihood of “breeding true” to the parents’ characteristics is increased.

As time goes on, players will inevitably work out the true performance profiles of their horses, and the steady hoofbeat of breeding will inflate the total supply of horses. These two trends will combine to reduce the uncertainty of which horses are the top performers, and top players will fill their stables with these to compete in the highest stakes tournaments and paid races.

ZED RUN has already responded to both “horse inflation” and "certainty inflation" with two measures: 1) replacing published odds with the more ambiguous "flame" system, and 2) adding a stamina system that throttles how often one can race their best horses. These two changes seem designed to prop up demand for newly bred top-tier horses.

However, if ZED RUN moves too aggressively in countering "certainty inflation" they run the risk of undermining faith in the breeding system altogether. What's the point of dialing things in this far if it's just going to change out from underneath you?

With such a small overall userbase and a fixed amount of genesis horses, it's not clear if ZED RUN will be able to sustain player interest (and asset values) in the breeding game long term.

Persona #4: The Flipper

With the dynamics of breeding and racing out of the way, let’s briefly touch on two other player personas — those that play “outside” of the game. Let’s start with The Flipper.

The Flipper, or perhaps The Day Trader, operates entirely external to the game, instead spending nearly all of her time on OpenSea. Her goal is buy low, sell high. She looks for under-priced horses, places low-ball offers, and generally tries to collect horses that she believes she can later sell for more.

She could be looking to flip the horses over quickly but also could feasibly be thinking more long-term, holding onto horses like any other NFT speculator, waiting for ZED RUN to explode and horse costs to go up. She could potentially focus on just listing on OpenSea, but there’s also a substantial Discord community that sets up private sales and could be more lucrative (and time-intensive).

Persona #5: The Wagerer

Finally, we have the Wagerer who effectively treats ZED RUN as a sports betting service. This functionality is not yet available, but ZED RUN previously promoted its own custom ZEST token as a way for players to participate in ZED RUN without spending money. ZED RUN has been silent about ZEST since around Sep 2020, though, and the ZEST web app appears to be down, so it’s unclear what, if anything, will be done with ZEST, nor why ZED RUN has at least temporarily put it on hold.

We call this persona the Wagerer instead of the Gambler, because ZEST is a non-limited currency that is, at least for now, non-transferrable and not intended to be “an investment product,” which means he can’t cash out.

But that’s not to say that there’s no money to be made here. Mobile casino games have clearly shown that there is tremendous profit potential in gambling without payouts, and ZED RUN could certainly get in on that business, selling ZEST as an IAP.

Business Model Analysis

ZED RUN has positioned itself to have diverse, clear revenue sources, which puts it into a strong position, well-aligned with ensuring great player experiences, even if it doesn’t really innovate on business models in the way Axie Infinity is hoping to.

ZED RUN makes money in four different ways:

• Taking a 15% cut of all breeding fees
• Promotional partnerships (advertising)
• Selling drops of genesis horses
• Sales of Horse Skin NFTs

Let’s take a look at these revenue sources one at a time:

Breeding Fees

ZED RUN’s variant on a gacha-style loot box is breeding, where players spend money for a chance at a valuable horse. It does differ from simple lootboxes, though, in that the drop tables are affected by the horses used and are unknown (which would likely make it illegal in China).

However, the much bigger difference is that ZED RUN itself takes only a small cut (15%) of the money spent on breeding. With the rest of the money staying in the ecosystem (split between stud owner and prize money), players have a financial incentive to participate in breeding and value is fed back into the economy at a rate that scales with breeding interest.

ZED RUN's take from breeding fees are simple enough to model; similarly to what we did for prize pool payouts, we chart a range of values assuming all breeding is done from the public stud farms (dark blue), and additional fees that would be gained if all breeding were done in-stable (light blue):

Again, as these fees are calculated from minimum breeding fees, this merely sets a minimum bound on potential revenue.

Corporate Sponsorships

As we mentioned earlier, ZED RUN has successfully set up a number of high-profile sponsored events, including Stella Artois, Atari, and NASCAR. They have offered for sale 1000 NFTs of the "ZED Pass - Edition One - NASCAR":

As the inaugural edition of the ZED Pass, the NASCAR ZED Pass is a standalone NFT that will reward holders and unlock future in-game utility within ZED RUN. Owners of a NASCAR ZED Pass will receive benefits and access to future NASCAR-branded initiatives, including special airdrops, entry to exclusive events, and additional perks.

Most recently ZED RUN partnered with Netflix to promote the upcoming Western The Harder They Fall (because they ride horses?). This resulted in two “Redwood City Classic” races. These high-stakes races had a $3,000 USD buy-in and carried a $75,000 USD prize pool (so $39,000 was supplied by ZED RUN).

This type of sponsored event could be steady income for ZED RUN if they can keep their audience size up. This is especially true given the high value of the ZED RUN demographic (which is mostly United States, followed by Australia and Canada).

Genesis Horse Sales

ZED RUN’s most basic revenue source is direct sales of the eventual 38,000 “Genesis” (that is, Generation 1, from which all other horses will be born) horses. This is a limited source though that is already nearly used up - about 10,600 remain, but only 200 of those are from the most desirable lineages (Nakamoto and Szabo), so the untapped value for ZED RUN is low.

We’re unsure how much money ZED RUN has generated from genesis horse drops; however, since nearly all of them have been sold already, this cannot be a major source of ongoing revenue.

Skins

ZED RUN has officially announced their plans for skins in the game. In short, phase 1 will have skins tied to the horse they are acquired with, but phase 2 will enable owners to remove the skin of a horse (shudder) and use it as a separate NFT.

Because the game has very visible participants it has a good chance of skins being desirable, especially from big brands. For example, the above-pictured Pong skin + Z1 Colt named P0ng was last sold for a cool 30.39 WETH, or about $55,000 USD at the time.

Skins can continue to be rare, lucrative items from Sponsored events (as they have exclusively been so far), but they also could be sold directly to players by ZED RUN. Either way, it’s an additional layer of value added to ecosystem. We’re also unsure how much money ZED RUN has generated from Horse Skin NFT’s, but since this is a straightforward application of the cosmetics market in F2P games, selling skins is likely to be a plausible source of ongoing revenue.

In Summary

Despite its tiny audience size, ZED RUN is theoretically on more sustainable ground than Axie Infinity, which is only capable of generating income as long as new players regularly join in large quantities. ZED RUN, by contrast, makes money from a very small but seemingly stable base of users who — for now — are content to pour money into the game. Revenue from genesis drops will inevitably dry up, but this can be more than offset with sales of horse skin NFTs and promotional and event NFTs.

The greatest cause for concern is that breeding revenue has likely decreased for two months in a row. This is troubling not just because the revenue is declining, but because all of the game's other revenue models depend on maintaining the interest of its userbase, and a decline in breeding activity might be a leading indicator of the playerbase tiring on the game itself. Given the playerbase is so small, even a small number of notable users leaving the economy could have an outsized impact.

Sustainability - A Contrast with Axie Infinity

In our previous deconstruction of Axie Infinity, we identified some significant issues that, if not solved, will lead to Axie Infinity’s economy being unsustainable. Specifically, revenue is centered around the act of onboarding new users, asset prices heavily depend on continued growth of the userbase, a vast majority of players are looking to take more out of the economy than they put in, retention is artificially inflated by players using it as a job, and we question how successful the land-centric user-generated content model will be.

ZED RUN certainly shares a number of characteristics with Axie Infinity, and it would be easy to assume they fit in the same general game bucket. In both cases players buy, breed, and trade digital livestock in order to compete in competitive matches which reward digital currency that can be exchanged for real-world money. That said, there are some key differences that give ZED RUN a different prognosis.

Player-funded Core Loop

In Axie Infinity, players earn SLP tokens for playing the game, and this is clearly a significant motivator for much of its population. This means that Sky Mavis needs to keep minting SLP to distribute as prizes. This is, in theory, balanced out by SLP sunk into breeding, but if that sink disappears (that is, if demand for breeding drops) then SLP is flooded, the value will tank, and that in turn will drive a huge percentage of players away. This can cause a vicious cycle where the least successful players leave the system, leaving only highly skilled players to compete with average players. Given that earnings are tied directly to MMR rankings, average players now become low-ranking players and struggle to stay above the minimum MMR to qualify for earnings, some of them begin to leave, and the cycle repeats.

By contrast, ZED RUN player winnings are funded primarily through paid-entry races (on their results page, ZED RUN reports over $45M won by players, and ZED RUN hasn’t put anywhere near $20M into the pot). This is self-sustaining as long as players continue to enjoy racing and betting (as well as affording it), much like online poker. Even if ZED RUN stops putting any money into the prize pool, the primary way players are winning money wouldn’t change.

The catch is that if this game follows the same pattern we have seen in online poker, most of these players will be losing money. Whereas some players likely see money spent on stud fees as an investment, every paid race that is lost is money that goes out of one player's pocket and into another’s.

It is the continued presence of these “fish” upon which the successful “sharks” ultimately depend. As the old poker saying goes, if you can't tell which of the other players is the fish, well, you're the fish.

More Money In than Out

Ironically, the fish/shark dynamic is one of the key reasons that ZED RUN is capable of being sustainable.

Axie Infinity's core problem is that by branding itself as the quintessential "Play-to-Earn" game, the vast majority of the players it has attracted intend to take more money out of the game than they put in. This defies all laws of economics and is fundamentally unsustainable unless the game attracts a new type of player that’s willing the leave the game with less than he or she initially put in.

ZED RUN, on the other hand, does not come with the expectation that most players will earn money by playing, but the opposite. So far the audience seems to accept this — similar to real life horse racing.

Audience Size Drives Income, not Audience Growth

Axie Infinity and ZED RUN's business models seem similar on the surface but are actually quite different.

At first glance, the games’ asset models seem very similar. Axie NFTs hold value because players hope to use them to win battles and earn money. Horse NFT's hold value because players hope to use them to win races and earn money. Likewise the basis for the breeding value of Axies and Horses alike seems similar — the expectation of generating offspring who will become money makers in turn. So what's different?

Axie Infinity's Achille’s heel is that their income model is set up to depend not on the size of their audience but on the pace of its growth. ZED RUN, on the other hand, makes plenty of income even on a stagnant user base. That’s because existing players spend money every day simply for the privilege of entering races and breeding horses. ZED RUN enjoys a high spend per user, whereas the long term median spend per user in Axie Infinity is likely net negative.

The long term risk to ZED RUN’s sustainability is that if the audience size does not increase, the fish may churn out, at which point the sharks will leave as well.

No Looming Land Recession

ZED RUN faces many challenges in its future, but it has at the very least avoided setting itself up for a specific kind of predictable crisis.

ZED RUN is nearly out of genesis horses to drop, but it’s not likely headed for a full-on "land-like recession” where players who do not own key assets are completely locked out of core gameplay features (unless they pay astronomical rents).

By contrast, Axie Infinity — at least if they stick to the plan outlined in their whitepaper — will almost certainly face such a crisis. This is because over the 30 year history of multiplayer online games, whenever we see "land-like assets" which fulfill three basic characteristics, we also see "land recessions." As a reminder, these characteristics are:

1. The asset is strictly scarce
2. The asset is necessary for production
3. The asset obtains locational value based on its proximity to population centers and areas of economic activity

ZED RUN genesis horses fulfill the first characteristic, but not the other two. Yes, the breeding system is heavily tilted towards genesis horses. This has a troubling distortionary effect as discussed in this paper, but at the very least it’s not a recipe for an intractable land recession.

Strengths

Compelling Theme, Valuable Market

Horse racing is exciting, and wagering on the results is even more exciting. There’s a reason that in 2019 there were $150M in wagers on the Kentucky Derby alone. Horse racing in the US saw $11B in legal wagering in 2018, and an estimated 7 - 14 times that illegally. ZED RUN has put itself into a very valuable spot, and the fact that their audience is almost entirely Tier 1 countries reinforces this fact. In free-to-play terms, the average revenue per user in Tier 1 countries is often at least 10x that of Tier 3 countries, which also puts them into a strong position for advertising and partnerships.

Variety of Player Personas

There are a number of very different ways players can participate in the game, both for fun and for profit. Players can explore the options and find the interactions that work best for them, and it means that they should be able to attract both players for fun and serious investors.

High-Profile Purchases

Any successful NFT venture can point to some seemingly outrageous purchases to build the FOMO hype and ZED RUN was fortunate enough to land some of these early on. With many horses selling for five figures and at least two going for over $100,000, NFT buyers have big dollar signs in their eyes.

Runs in a Browser

Whereas many other crypto games rely on downloadable clients, ZED RUN stands out as being entirely browser-based. This allows them to deftly circumvent mobile app store restrictions on blockchain games and increase their total potential audience size.

Encourages Analysis by Players

For some sports fans, meticulous analysis of the statistics can be just as much fun as watching the games themselves. Baseball is the classic example, and ZED RUN fits right into this mold. Twitch and Youtube videos about ZED RUN are positively dominated by this kind of analysis, which the game's nature leans right into.

Unrevealed Complexity

ZED RUN thought ahead well by not implementing all of the stats built into the horses. By having genes that are present but not expressed they have created a clear path to expanding the game while retaining all of the breeding done up to that point. Owner reactions may vary depending on how the genes in their horses play out, but either way this was a wise move for them.

Weaknesses

Small, Stagnant Audience Size

We sound like a broken record here, but audience size is ZED RUN’s biggest problem and opportunity. While they have done quite well with Genesis drops on this small group, future sustainability, player satisfaction, and revenue growth depend on getting user numbers up.

Difficult Onboarding

Growing the audience will be challenging given how hard it is to get started as a stable owner. While palatable to the innovators who are comfortable with crypto, the broader audience is likely to get confused and balk at some of the steps required to get into your first race as a player.

Inability to Evaluate New Horses

Because all of a horse’s genes and racing statistics are hidden, there is no way for a player to know if the new horse they bred is a jackpot or a bust. The excitement of a gacha-style random drop is thus nullified - players don’t know whether to be excited or disappointed. Additionally, the only way to figure this out is to race the horse a bunch, which requires time and money (since free races are discouraged).

Unverifiable Results

ZED RUN stated early on that it would be “provably fair,” but to our knowledge, with everything obfuscated and black-boxed, there is no way for players to verify anything about their horses’ genes, characteristics, breeding, and race results. This lack of transparency is partially at odds with much of the crypto movement and, especially given their recent insider-trading scandal, may create concern and doubt about the underlying algorithms and data.

Simplicity of the Racing Game

ZED RUN horse races are very simple. The tracks are perfectly straight without any bends, and there is not (yet) any concept of other variables from real-life horse racing: weather, mud, temperature, etc. Because the races themselves are so simple, the rest of the game adds complexity in the form of obfuscation and abstract variables. That said, because performance in racing is the fundamental goal of the game, demand for horses is still channeled into a very narrow set of characteristics.

Class System

The class system helps compensate for the one-dimensionality of the horse racing game. However, this splits performance tests into a series of arbitrary bands where the player's goal is not to get as fast a horse as possible but a horse that performs at the very top — but no better — of one of these bands. This makes the game much more about delicate fine tuning than just trying to be the best, a task which is made much more difficult by the game's intentional obfuscation.

Uniform Aesthetics

Every horse in Zed Run is seemingly the same size and uses the same model, the same animation, and even the same basic texture map. The only thing that varies is the color. This spare approach to aesthetics reduces the value of horse coats almost entirely to their numerical rarity, and it further distances the game from its real-world inspiration. This choice was probably made to keep costs down, but it serves to depress potential emotional attachment to the horses and in general just makes everything look the same.

Most People Lose Money

For every 12 horses entered into a race, 9 will lose money. The money recirculates throughout the ecosystem, and ZED RUN puts money back in that they take from breeding fees; however, at the end of the day, the low performing "fish" are feeding the high performing "sharks." On one hand, this makes the game much more sustainable than Axie Infinity, because people are actually continuously paying for the privilege of playing. The fundamental weakness is that in the long-run the fish continue to bleed funds month-after-month, and there may be limits to how much money they are willing to lose. If it’s anything like real-world racing, though, which has lasted the test of time, then this might not be a meaningful concern.

End of Genesis Horses

Genesis Horse drops are among the most valuable and exciting events in ZED RUN, but nearly all of that energy has been used up. Only a fraction of Genesis Horses remain to be minted, and even among that fraction the amount of remaining Genesis Nakamotos are almost entirely gone.

Opportunities

Free-to-Play Audience Creation

ZED RUN’s biggest hurdle going forward is likely its tiny audience, but that also means there’s significant opportunity if they can figure out how to meaningfully grow. One of the best ways to build audience is to go free-to-play, and in this case ZED RUN has a clear path by enabling players to wager on horses with a virtual currency (likely the pre-existing ZEST).

Enabling cash-out would put them under significant regulatory requirements, but they could follow the model of mobile casino apps that are one-directional, allowing players to buy currency but never cash out. Instead, players just get to play fantasy horse racing with horses that are owned by other players.

Even if not paying users, these additional players would be very valuable to ZED RUN, boosting the active user count, public awareness, the value proposition to advertising partners, and likely also end up converting quite a few of them into stable owners. It’s not a small undertaking, but it could be the best ROI available to them at this time. Later on it could become a significant revenue stream through IAP as well, but that’s not the primary short-term value.

Smoother Onboarding

It is very difficult to start playing ZED RUN in its current condition. ZED RUN should do everything it can to make it easier for new players to get into the game, start racing, and breeding horses. This is a complicated topic and much easier said than done, but reducing the steps and cost of getting started it will make user acquisition significantly easier and cheaper. Adding new users is also a key means by which horse inflation is fought.

For example, a “tutorial” or “demo” mode could allow new players to experience the game before investing, and then walk them through the process. It’s also possible that something like a direct “concierge” service, in which prospective players use online chat to get help setting up, could be cost-effective due to the high value of each new stable owner.

Feature Innovation

ZED RUN has plans for releasing new features, such as weather, that will add some much-needed diversity and complexity to races. The downside is that every new change that affects race outcomes can invalidate entire stables of carefully bred horses overnight. ZED RUN should thus focus on features that add orthogonal complexity, such as entirely new types of races, that open up new possibilities and new dimensions for horses to perform in, rather than new variables that just upset the former equilibrium. Adding more complexity would both make a wider variety of horses valuable as well as encourage users to use more horses, which is another means of countering horse inflation.

Increased Transparency

Intentional obfuscation has its benefits, but ZED RUN needs to get ahead of a number of concerns and doubts growing in the community. We would open up and allow players to see the genes and traits of horses, as well as the odds for each mating. This would have a number of advantages:

• Breeders would have the gacha-style experience of seeing immediate, exciting results
• Buyers on OpenSea would have more confidence making purchases
• Visible breeding odds would be more in line with some regulatory requirements on gacha mechanics
• It would help build general confidence in the platform

Note that the racing algorithm should still be kept secret - there’s a lot to be said for some mystery that leads to speculation, superstition, and excitement. However, we would also guarantee to players that if changes are made to the racing algorithm, we would immediately announce that fact (even if not the specifics). There would also need to be some rules put in place to avoid “Moneyball” analysis of races prior to entering, but overall the community would benefit significantly from more transparency and increased communication in general.

Horse Play

For all the talk about owning a virtual horse stable, there is precious little to actually do with the horses other than race and breed them. Tradeable NFT horse skins are a step in this direction, but again are ultimately another financialized commodity rather than a new game feature that increases the value of the assets players already own. There is no way feed the horse, groom the horse, “train” the horse, ride the horse, or any other activity that reinforces the player fantasy of owning a mighty steed.

Additional Player Personas

Related, Virtually Human Studio has teased the idea of enabling players to take on more types of roles — “stable owner, race track owner, breeder, accessory designer and more.” We agree that adding more layers to the ecosystem with new roles to play could encourage more types of players to join the game. Wagerers, as mentioned above, is one important example, but the creative surface area is much wider.

Threats

Stagnation

ZED RUN’s current situation is not great. We interviewed several top players and guilds who expressed deep frustration and concern with the development team's lack of communication and concrete plans for future user growth. These players voiced concerns over the recent expansion into cosmetic skins and events, saying that the priority should be user acquisition and community investment, rather than trying to squeeze more money out of a small and slowly dwindling audience.

Furthermore, with most of the most valuable genesis horses already dropped — and a promise to never drop any more — one of the game's primary attention-grabbing resources is nearly tapped dry.

Bottom line: ZED RUN needs to focus on user acquisition and onboarding. Bring more people into the game and make it easier and simpler for them to start playing.

Horse Inflation

We’re starting to beat a dead horse at this point (pun absolutely intended), but ZED RUN suffers from a breeding metagame that optimizes for a narrow range of desirable characteristics all driven by chasing a narrow band of performance stats. This creates an enormous supply of "chaff" horses cluttering up the market. Furthermore, the "good" horses that are bred continue to grow in supply, with no burn mechanisms or aging mechanics to rotate the stock. This causes to a growing number of horses, which, when paired with a stagnant player base, leads to declining horse prices. Asset prices that are trending down in value may discourage users (new and old) from putting more money into the game.

Dependence on External Token (ETH)

Axie Infinity uses two custom tokens, SLP and AXS, to run its economy, while ZED RUN’s is powered by ETH. This means that ZED RUN’s “real money” value fluctuates with ETH, which is entirely outside of ZED RUN’s control. Meanwhile, SLP and AXS values depend heavily on Axie Infinity’s own performance.

ETH is more stable in that it is unaffected by what ZED RUN does, but it presents a double edged sword: ZED RUN's economy will be affected by Ethereum's volatility at no fault of its own. Although daily races are priced in dollars and likely take spot ETH --> fiat exchange fees into account, the base breeding price, at least according to documentation records, doesn't seem to be updated as often, which could cause wild swings in breeding activity if ETH suddenly spikes or crashes.

The greatest downside, however, is the pain and cost of having to move ETH onto and off of the Polygon blockchain, paying high gas fees each time. This high transaction cost makes it difficult to onboard new players. That said, the high exit costs perhaps also give existing players a reason to delay cashing out their winnings.

Aggressive Price Controls

ZED RUN maintains extremely fine-tuned control of its virtual economy. This can help stabilize prices and avoid sudden shocks, but it also prevents the market from naturally responding to changes in supply and demand. This can lead to unpredictable distortions, such as suppressing natural demand for certain kinds of horses and thereby narrowing the meta. Further, the price controls were originally designed in response to old market conditions, which have now shifted. This locks ZED RUN into a pattern where every tweak is a big, infrequent change, which can also catalyze market shocks. It's the sort of unenviable task that might best fall to someone with a PhD in economics.

Competition

ZED RUN still ranks as the #1 all-time Racing NFT game on CryptoSlam!, but it is vulnerable to being overtaken by a competitor. The userbase is comparatively tiny, players' frustrations are large, and the game itself is not massively complex. A well funded competitor — which, frankly, we don’t see right now — could give them a serious run for their money.

Skepticism and Doubt

ZED RUN faces a climate of suspicion and doubt from its own user base. Several top breeders expressed concern to us that ZED RUN was making unannounced changes to the race outcome algorithm, undoing all their hard work. Even if those players are mistaken, how would they know? ZED RUN's intentional opacity invites this kind of speculation, and the recent insider trading scandal only further undermines community trust. ZED RUN is stuck in a challenging place because intentional obfuscation is a core part of its appeal, but also the very thing that puts limits on player and investor confidence in its economy.

Regulatory Bodies

Regulation is also something that is a general concern of crypto currencies and apps. At some point, we’re going to see governments become much more active in regulating crypto. But ZED RUN’s direct recreation of an established and well-understood regulated gambling business makes it a bigger target and more likely to catch some senator’s eye.

Intra-Company Distractions

Virtually Human Studio is launching at least two more non-ZED RUN projects. Not only will these additions distract key executives from focusing their undivided attention on ZED RUN, but these projects appear to be in the works before the company could solve the user stagnation issues in its core product. It may not be an issue if the team is staffed with the right talent, but it’s something to keep an eye on.

Naavik’s Take

ZED RUN's player activity never recovered after the pause in breeding a few months ago, a relative oversupply of horses is leading to declining prices, the company seems more focused on adding new ways to monetize a stagnant userbase than they are in growing it, and the game's inherent opacity is undermining the trust of its players, all capped off with a recent insider trading scandal.

ZED RUN is a game that could have a lot of potential. Being entirely web-based is a serious strength that would allow the game to significantly expand its user base, but this would require putting more focus on user acquisition and maintaining community trust.

The racing game itself is rather simple, and the rules that govern its race outcomes and breeding are arguably too mysterious. With scarcely any more Genesis horses to drop, the team must invest in the game itself and expand the playerbase. Otherwise, slowly depreciating assets will finally reach the point where players collectively cut their losses and jump aboard one of ZED RUN's many competitors instead.

If Naavik were to head up ZED RUN, these would be our top five tactical priorities:

1. Improve the onboarding experience — experiment with tutorials and potentially a concierge service.
2. Increase transparency — an air of mystery around the racing algorithm is required, but more communication around when the racing algorithm changes would build more community trust.
3. Feature innovation — add orthogonal complexity (new types of races, tracks, and racing conditions) in order to deepen the metagame.
4. New player personas, starting with free-to-play wagerers — one way to expand the audience and revenue potential is to enable users who don’t own horses to still bet on races (and potentially model it off of successful mobile casino games).
5. Horse play — related to the above point, there eventually needs to be more to do with horses than racing and breeding, which could unlock more player personas and further deepen the metagame.

This, of course, is all easier said than done. However, it would lead to more users, better engaged users, fight off horse inflation, and move ZED RUN towards a more vibrant and diverse economy with more upside potential. We imagine Virtually Human Studio has some of this on its internal roadmap, but because signs of weakness are showing we encourage the team to move faster in these directions. After all, it would be a shame if the first mover in horse racing NFTs were to lose its competitive positioning because it couldn’t keep pace with the rising demands of blockchain gamers.

Big thanks to Lars Doucet and Anthony Pecorella for writing this report!