Blockchain game activity — both in terms of wallets and transaction volumes — declined in December. Unique active wallets (a proxy for users) decreased 1.5% month-over-month. NFT transaction volumes (including both collectibles and games) declined 10% month-over-month driven, in large part, by slowing engagement in top games like Axie Infinity and Farmers World. Meanwhile, funding activity for blockchain games cooled off some after a very active November.
That said, we believe this is just month-to-month variability, typical for such an early stage industry, and expect the fundraising environment to remain strong as we enter 2022. This stagnation may extend in the near-term if top games continue to show weakness, but given the extensive pipeline of (what we expect to be) higher quality games that will release over the next year, returning to growth appears inevitable. We dive into these trends and their drivers in more detail below.
Unique Active Wallets
- Per DappRadar, blockchain gaming daily unique active wallets (UAWs) decreased 1.5% to 1.24 million in December 2021. This was mainly driven by a decline in the top three games: Alien Worlds, Axie Infinity, and Splinterlands. We’ll discuss top game trends in more detail in the next section.
- As a reminder, UAWs are not a perfect indicator of users. A user can have more than one wallet, potentially overestimating actual user activity. Conversely, a user can play a game but not transact with a blockchain over a period of time, potentially underestimating actual user activity. For example, Sky Mavis reports that Axie Infinity has surpassed 2 million daily active users (DAUs), which is more than the entire blockchain gaming daily UAWs as reported by DappRadar. Furthermore, some blockchain games, like Alien Worlds, have been prone to bots which leads to overestimating actual user activity.
Top Games by Unique Active Wallets
- The decline in unique active wallets this month was driven by Alien Worlds, Axie Infinity, and Splinterlands. Each game decreased by 14%, 17%, and 6%, respectively. After launching its new Missions Game in November, Alien Worlds saw 100%+ month-over-month growth in wallet activity, so a slight pullback isn’t too concerning. Meanwhile, Axie Infinity has been struggling with declining prices of its in-game token SLP, which reduces in-game earnings and therefore the incentive for players (who treat it like a job) to grind. We covered this dynamic in our Axie Infinity deconstruction a couple months ago, and the Sky Mavis team continues to make changes to its economy as it prepares for the launch of Origins and land gameplay. We still have concerns but are watching closely.
- DeFi Kingdoms entered the top 10 with impressive 389% month-over-month growth. DeFi Kingdoms combines hero NFTs with heavy DeFi features that include a native token called JEWEL, liquidity farming, and a DEX. DeFi Kingdoms recently announced it would be developing a new game in partnership with the Avalanche blockchain and doing airdrops to JEWEL holders ahead of the launch. Simply put, DeFi Kingdoms growth appears to mainly be driven by the financial returns currently on offer to users and not gameplay. Separately, The Crypto You, X World Games, and Sunflower Farmers also moved into the top games by UAWs. Meanwhile, Arc8, Upland, Galaxy Blocks, and Binary X moved out of the top 10.
- We continue to see a concentration of wallets among the top 2-3 games, although the difference moderated some this month. The top game, Alien Worlds, has 4.3x the number of wallets as the 5th ranked game (compared to 10x last month). Although we expect power laws between games to persist, the gap between the top 10 will likely continue to shrink as more notable games launch in the next couple years.
- There were 5 games on the Binance Smart Chain (“BSC”) this month. BSC has regularly seen games in the top 10 in 2021, according to DappRadar. Many of these games have heavy DeFi offerings, allowing users to stake tokens and earn rewards. While many of these projects have experienced meaningful initial growth in wallets and transaction volumes as users chase financial rewards, they have just as quickly seen activity decline as the financial benefits prove unsustainable. A case study of this dynamic is CryptoBlades (pictured below). As more polished games are introduced on other blockchains in 2022, we expect BSC’s share of the top 10 to decrease.
- According to Cryptoslam, NFT transaction volumes (including both games and collectibles) declined 10% in December 2021 to $2.4 billion. This decline was primarily driven by popular gaming projects like Axie Infinity, Farmers World, and The Sandbox as well as collectible projects like Bored Ape Yacht Club and Art Blocks. We cover the trends among top blockchain game projects in more detail below.
- As a reminder, Cryptoslam only accounts for NFT volumes in the secondary market.
Top Games by Transaction Volume
- There was some month-to-month turnover in December’s top ten games by transaction volume. Four new games (NFT Worlds, Rumble Kong League, Wizards & Dragons Game, and Duskbreakers) entered this month’s top 10, with a few notable titles, including Wolf Game, falling out of the top 10. Similar to the Sandbox and Decentraland, NFT Worlds, a collection of 10,000 unique worlds that make up a virtual world game, has benefited from the recent interest in virtual real estate following Mark Zuckerberg’s presentation on why Facebook is rebranding to Meta. Meanwhile, Wolf Game was temporarily shut down by its developer after a bug in the smart contract was detected that provided a potential exploit
- November’s gaming-related NFT transaction volume decline was driven by Axie Infinity, Farmers World, and the Sandbox. These three games saw transaction volumes decline 60% month-over-month in December, with Axie down 64%, The Sandbox down 45%, and Farmers World down 90%. This is even more significant when considering that these three games made up 85% of the top 10 transaction volumes in the prior month.
- Axie Infinity, the top game by transaction volume, has seen its in-game token SLP supply increase exponentially over the past several months, leading to a falling SLP price. As we discussed in our Axie Infinity deconstruction, falling SLP prices has resulted in “scholars,” the majority of Axie players, no longer earning at levels above the Philippine minimum wage. This trend has continued since we published our report and is likely a key driver in the decline of Axie’s UAWs and transaction volumes.
- Transaction volumes continue to be dominated by the top games. The top game this month, Axie Infinity, had 36x the volume of DuskBreakers, the number ten game.
- Looking at transaction volumes by protocol, Ethereum Layer-1 and Layer-2s continued to have the most games this month. Meanwhile, WAX has two games in the top 10 versus three last month. Keep in mind, in the same way that we expect the top 10 games to heavily churn in the coming months and years, a similar pattern will likely emerge on the protocol front. We dug into the ongoing ”blockchain market share wars” in last month’s market update.
- As a reminder, Cryptoslam only accounts for secondary market transactions, with primary market transactions (those between a game and player) being excluded. For games where primary transactions are a key component of revenue, the table above can miss the full picture.
- Fundraising activity declined significantly this month to $137 million or a 87% month-over-month decrease. Nansen’s $75 million Series B was the largest transaction in December. We believe the decline is more about month-to-month variability than anything else, especially following Forte’s massive $725 million round in November as well as the natural slowness that comes with December’s holidays. Fund formation activity remains strong among gaming VCs and developer funds, signaling that blockchain game investment activity will continue to be strong in 2022. There’s plenty of capital waiting to be deployed.
- In terms of stage, seed rounds continue to dominate, which is unsurprising given the industry’s novelty. Game studios continue to attract the most investment activity by deal count. That said, infrastructure and service providers (e.g., Nansen) are also raising significant funding rounds.
- We expect funding activity to continue to increase over time, albeit with short-term variations, as the industry gradually matures and later stage projects require larger funding rounds. At the same time, we expect the hype cycle to hit hard in 2022, especially for projects where reality lags expectations. If we are right, this will likely result in lower valuations (for more speculative projects) and a more fundamentals-driven tone. We’ll also keep an eye on token / NFT sales; this is often a source of revenue for teams, but it can in many cases also be considered funding that’s separate from the traditional venture rounds.
Top 3 Industry Developments
#1: Lessons from the Launch of Ubisoft Quartz
On December 7th, Ubisoft became the first major video game publisher to announce the launch of NFTs in a mainstream game. More specifically, the company unveiled Quartz, Ubisoft’s NFT platform, where players can acquire “Digits,” Ubisoft’s NFTs. The first Digits are integrated into Tom Clancy’s Ghost Recon Breakpoint and feature three limited edition cosmetic items — a gun, a face mask, and pants — that players can earn for free based upon their engagement (i.e., playtime) and achievement in game (XP Level 5+).
The reaction to Ubisoft’s announcement was overwhelmingly negative. Ubisoft’s announcement trailer received 95% dislikes on Youtube shortly after release, contributing to the company eventually delisting the video. In addition, several industry outlets published articles criticizing the launch for a variety of reasons.
Ubisoft was not the only game company to receive a backlash from its community after announcing the launch of NFTs. GSC Game World entirely scrapped its plans for NFTs in the game S.T.A.L.K.E.R. 2: Heart of Chernobyl based on players’ reactions to the announcement. “Based on the feedback we received, we’ve made a decision to cancel anything NFT-related in S.T.A.L.K.E.R. 2. The interests of our fans and players are the top priority for the team. We’re making this game for you to enjoy — whatever the cost is. If you care, we care too.”
Putting aside all the hype and backlash, it’s worth more deeply examining how Ubisoft launched Quartz, why it launched NFTs in this manner, and what led to the negative reaction. These learnings can potentially help other major publishers and the broader industry begin to incorporate best practice for winning over more gamers and achieving more positive future launches.
As we discussed in last month’s market update, Ubisoft is not new to blockchain games. The company stands out as the only traditional publisher that has been active in blockchain games since 2018. Ubisoft has released a couple minor play-to-earn games (Rabbids Token and One Shot League) and has worked with several leading crypto-native studios via its Entrepreneurs Lab accelerator program. Collaborators include the creators of Sorare, Axie Infinity, and Guild of Guardians. Quartz is built on the Tezos blockchain, in which Ubisoft is a partner and validator. Given the company’s history in the space, we aren’t surprised to see Ubisoft be the first traditional publisher to launch NFTs in a major title.
We think several decisions from Ubisoft’s Quartz announcement make sense. As a reminder, in our view, there are three high-level strategies for major publishers to organically enter Web3 gaming:
- Mint collectible NFTs based on existing game IP. This strategy is relatively straightforward. It creates merchandise-like revenues for publishers and doesn’t involve many of the complications involved with integrating tokens into virtual economies.
- Mint or move in-game assets onto a blockchain, thereby creating in-game NFTs. Whereas collectible NFTs live outside a game economy, major publishers can also create NFTs with in-game value. In this way, in-game NFTs have both hedonic and functional value for players/owners. And players can trade these NFTs with other players for cryptocurrencies (e.g., Ethereum) or fiat. At the same time, this creates new challenges for game economists and designers, who now have to integrate assets with real world value into their games and maintain sustainable game economies.
- Create full-blown token economies, which can include fungible engagement-like tokens (e.g., Axie Infinity’s Smooth Love Potion) and governance tokens (e.g., Axie Infinity’s AXS). This is the most challenging strategy, but it can also be the most beneficial for user acquisition and retention, in our view. Players, who own governance tokens, now have a stake in the game economy’s future performance. For game developers, they now have more considerations when balancing the game economy. And in cases where decision making is fully decentralized, developers potentially cede some amount of control to token holders. That said, most blockchain games that have a governance token, like Axie Infinity, are still quite centralized in decision making.
First, we think that it makes sense for Ubisoft to choose a “walk” (strategy 2) approach before running full speed (strategy 3). In addition, by focusing on cosmetic items, Ubisoft avoids potential pitfalls associated with other player-to-player trading economies that impact a game’s core gameplay, such as those seen in Diablo III’s real money auction house.
Second, Ubisoft’s Digits incorporate several key features aligned with the promise of NFTs. They embrace scarcity with each Quartz edition limited to a set number of Digits. They infer digital ownership with each Digit displaying a unique serial number. They celebrate provenance with each Digit containing a history of previous owners represented by their Ubisoft player name and allow for trustless trading among players outside of grey markets. Finally, Quartz is intended to be a single interface / platform for all NFTs across Ubisoft’s properties. This allows Ubisoft to potentially open the door for “microverse” interoperability across games on its platform. As a result we would not be surprised to see this model adopted and tweaked by other major publishers. Quartz is the first of its kind but won’t be the last, in our opinion.
Finally, Ubisoft is building Quartz on top of Tezos, a decentralized blockchain. In addition to being a partner of Tezos, this decision appears to have been driven by Tezos’ relatively benign environmental footprint. According to Ubisoft, transactions on Tezos consume significantly less energy than other blockchains like Ethereum or Bitcoin. While there’s some truth to this claim, much of the positioning is marketing-driven since one dominant (and somewhat naive) narrative among non-crypto gamers is how blockchains are enviornmenally destructive.
That said, Tezos has limited blockchain game activity (active wallets, transaction activity) to date. According to DappRadar, only four games registered any activity on Tezos in the last 30 days. Indeed, most game activity is taking place on other chains (e.g., Ethereum, WAX, Polygon, Immutable, Ronin, Flow, Solana, etc.). Ubisoft likely believes its players will embrace whichever environmentally friendly blockchain that its IP integrates with and hopes to abstract away any direct blockchain interactions via Quartz.
In our opinion, Ubisoft showed guts as the first traditional publisher to dive into NFTs head first. That said, there are several areas in which Ubisoft’s announcement could have been improved, and other teams can vicariously learn from how everything occurred:
#2 - Focus on messaging and Web3 education. The Quartz announcement trailer highlighted that Digits are unique, scarce, and environmentally-friendly but was likely confusing to players who aren’t already conversant in crypto. Educating traditional gamers on why this product/solution is potentially valuable is important. Likewise, disclaimers that absolve the company from any wrongdoing will likely come off as red flags.
#3 - Focus on what the community wants. Does your existing player base even want to own NFTs? It should not be surprising that traditional AAA gamers appear to dislike the idea of NFTs, and the negative reaction shouldn’t have caught Ubisoft by surprise as much as it did. After all, the industry has seen mobile F2P games drive growth despite the derision of hardcore AAA gamers. Just as it was then, there is a risk of trying to fit a round peg into a square hole. Along these lines, we believe traditional publishers should have a clear understanding of what their communities want before introducing NFTs into AAA titles. It may make more sense to experiment with NFTs in i) new crypto-native games with new IP, ii) new crypto-native games with already successful IP, or iii) already successful games with audiences that are more apt to embrace NFTs (e.g., sports, casual). Simply put, it’s better to fish where the fish are feeding. Identifying and targeting natural early adopters is more likely to succeed than trying to convert today’s skeptics, in our opinion.
In summary, Ubisoft’s announcement signals that traditional publishers are taking blockchain games seriously. The company deserves a ton of respect, in our opinion, for its many years of activity in the blockchain games space and its bold move as the first traditional publisher to integrate NFTs into a major title. At the same time, we believe that there are valuable lessons to be learned from the internet’s response. It will be fascinating to see if and how EA, Take-Two, Activision, Zynga, and other legacy publishers respond. Unlike with F2P, most industry incumbents appear poised to not sit this wave out.
#2: Breaking Down the Solana Gaming Ecosystem
Non-crypto gamers, on average, tend to spend roughly $60 per year on games. And yet, on Ethereum, the most utlized blockchain for NFT transactions, users can see transaction costs rise above $60 for a single transaction. Putting aside other adoption barriers for a moment, Ethereum’s transaction costs alone are a crucial barrier to mass adoption. We already see clear evidence of this. For example, Axie Infinity saw a surge in users and transactions when it moved off of the Ethereum blockchain and onto its proprietary Layer 2 chain (Ronin). As a result, Ethereum Layer-2s and new Layer 1 blockchains have grown in prominence to fill the demand that Ethereum hasn’t been able to cost-effectively meet.
If you’ve been following NFTs and blockchain games over the past 6 to 12 months, chances are you’ve come across Solana. Notable projects like Star Atlas, Phantom, Audius, Raydium, Fractal, and Degenerate Ape Academy are all built on the relatively new Solana blockchain. In the 2021 crypto bull market run, Solana’s native token, SOL, was one of the best performing cryptocurrencies, seeing its fully diluted market cap increase from $960 million to $87 billion by the end of the year. In fact, its token currently has the fifth largest market cap out of all crypto projects - an incredible achievement. Additionally, according to Token Terminal, total protocol revenue increased from $39K in January 2021 to $7 million in December 2021.
Let’s dig a layer deeper. What exactly is Solana, what’s all the fuss about, and what is its gaming ecosystem shaping up to look like?
Solana is a Layer 1 blockchain, like Bitcoin or Ethereum. Its origins date back to 2017 when its Solana Labs founder and CEO Anatoly Yakovenko published a whitepaper draft detailing a new timekeeping technique for distributed systems called Proof of History (“PoH”). What makes Solana interesting is that its different system architecture design allows for significantly higher transaction speeds and lower costs than other blockchains. Whereas Bitcoin can handle 7 transactions per second and Ethereum can handle 10 to 30 transactions per second, Solana can currently handle greater than 60,000 transactions per second. Meanwhile, whereas it costs $2-$4 to do a transaction on Bitcoin and $25 - $100 to do a transaction on Ethereum, it costs less than $0.01 to do a transaction on Solana.
Simply put, Solana is really fast and really cheap compared to other blockchains. To experience this point, if you’ve used a MetaMask wallet to purchase Ethereum NFTs and haven’t tried a Phantom wallet to buy a Solana NFT, we suggest giving it a try. The experience is that much smoother, in our opinion.
For blockchain games, the implications of fast transactions and low costs are significant to the user experience. Indeed, according to Nonfungible, the average NFT price per blockchain game project was in the hundreds of dollars in 3Q 2021, and a figure that will inevitably decline with greater adoption. Transaction fees that are 10% - 100% of an NFT’s value, as they often currently are on Ethereum Layer 1, are unsustainable if blockchain games expect to attract a more mainstream audience.
How does Solana achieve this, and what are some of its drawbacks? Without getting too technical, Solana uses a Proof of Stake consensus mechanism plus Proof of History (PoH), its innovative decentralized source of time. (Do watch this video that explains how PoH works in more detail.) The idea is that PoH creates a global clock whereby all transactions carry a reliable timestamp. This allows Solana validators to agree on the time order of on-chain events without talking to one another as opposed to validators waiting to synchronize on every block. In doing so, Solana’s ecosystem can reach consensus extremely quickly and achieve much greater scalability than other blockchains.
That said, critics have pointed out that Solana’s system architecture creates an inherently more centralized blockchain than Ethereum. Solana requires more intensive hardware and network bandwidth usage among its validators. This restricts Solana node operations to data centers, whereas Ethereum is governed by active users who can run nodes from home. This can be seen in the number of validators. Whereas Ethereum currently has over 200,000 validators, the Solana ecosystem is only secured by 1,060 validators. Another concern related to the ecosystem’s centralization is that insiders own a large percentage of the SOL token supply. According to Messari, “insiders” (e.g., VCs, development team) own 48% of Solana’s token supply, higher than most other public blockchains.
Nevertheless, the broader Solana ecosystem is significant and growing rapidly. On the demand side, Solana-focused crypto wallet Phantom has seen users grow 4,400% from 40,000 monthly active wallets in July 2021 to 1.8 million in December 2021. Phantom’s founder recently said that the company is shooting for monthly active wallets to grow to the “10 million to 50 million range” by the end of 2022.
Shifting to the supply side, the image below represents what the Solana ecosystem looked like in March 2021, according to Solanians. At the time, there were under 100 projects listed. Notice that there isn’t even an NFT or gaming category. Star Atlas, the only game we can identify, is listed as “coming soon.”
This is what the Solana ecosystem looked like six months later in September 2021.
At that time, Solanians highlighted 200+ projects. Also, notice the growth in gaming and NFT projects from one (Star Atlas) in March 2021 to 30 in September 2021. Today, there are so many projects that Solanians has given up trying to fit everything onto one slide. The Solana website currently lists over 1,000 projects, of which 103 are games.
There’s clearly been a surge in projects across the Solana ecosystem over the past 12 months. This is especially the case in the gaming and NFT category. Solana Labs has supported ecosystem growth, in part, by forming Solana Ventures to “accelerate the growth of the Solana blockchain and adjacent ecosystems by providing capital to the most promising teams building in the crypto ecosystem.” Along these lines, Solana Ventures has announced two significant partnerships recently that aim to provide capital to gaming teams building on Solana. The first was a $100 million blockchain gaming fund in partnership with investment firm Lightspeed Venture Partners and the cryptocurrency exchange FTX. The second was a $150 million blockchain gaming fund in partnership with investment firm Griffin Gaming Partners and blockchain infrastructure provider Forte. Our understanding is that these two funds offer funding in exchange for economic stakes (e.g., equity, tokens) in gaming projects. However, the Solana Foundation also has a grant program available for application developers. In short, if you’re building a Web3 game, need funding, and are interested in building on Solana, you may want to click the “Apply Now” and “Get in Touch” buttons on the Solana Foundation and Solana Ventures websites.
To understand what kinds of games are being built on Solana, let’s look at three notable projects:
Star Atlas. Star Atlas is a yet-to-be released open-world, space exploration, grand strategy MMORPG set in a galactic universe. The game will have play-and-earn mechanics and player ownership. Players pilot ships and engage in trade, commerce, and battle with other players over scarce resources. The team plans to build an ambitious AAA game on Solana, which will handle the large amount of anticipated transaction volumes made in-game as players mine resources, trade assets, and pay taxes. So far, the Star Atlas team has sold millions of dollars of NFTs, such as space ships, that will have in-game utility. In addition, the project has priced two fungible tokens (ATLAS and POLIS) that serve as in-game and governance tokens. Star Atlas remains one of the most anticipated projects in all of blockchain gaming, let alone on Solana. At the same time, it is a prime example of a game where we question whether it can live up to the hype. Do check out our interview with Star Atlas’ CEO Michael Wagner for more details on the project.
Aurory. Aurory is a fantasy action play-to-earn Japanese RPG set in two futuristic worlds called Antik and Cryptos. The game features PvE gameplay where you’ll meet mystical creatures called Nefties. The team also plans to build a PvP experience where players can build up teams of Neftie NFTs to battle with other players. Aurory uses the same play-to-earn game mechanics that have made games like Axie Infinity wildly successful. Players can earn tokens ($AURY) and NFTs by playing the game. Aurory’s initial DEX offering for its AURY token raised over $100 million.
Mini Royale: Nations. Mini Royale: Nations (“MRN”) is the first live multiplayer game to launch on the Solana blockchain. The game is a browser-based first-person shooter, and unlike Star Atlas and Aurory, is currently playable. In December, the game’s developer Faraway announced it had amassed more than 2 million registered players and more than 600,000 MAUs. That’s in comparison to other popular blockchain games such as Axie Infinity’s over 2.5 million DAUs and Thetan Arena’s 6 million DAUs. In addition, Faraway recently sold $1.3 million NFTs integrated with the game in under 30 seconds. Owners who hold these NFTs will receive future airdrops, including the game’s upcoming utility token.
Right now, the Solana gaming ecosystem has a lot of momentum. The technology allows players to transact quickly and cheaply. The ecosystem’s active wallet and project counts are increasing significantly. The Solana team is further supporting this growth by providing capital to teams who want to build Web3 games within the Solana ecosystem. Finally, there are several buzzworthy projects yet to be released that could potentially drive further adoption. We would not be surprised if Phantom wallets exceed 10 million MAUs or if Solana increases its NFT market share considerably (from 5% to 10% currently per Cryptoslam) in the next twelve months. Having said all that, it’s early. There are a number of other promising Layer-1 and Ethereum Layer-2 blockchains competing for talented developers and users. While the Solana ecosystem’s future success is far from guaranteed, there is a lot to like, in our opinion. There is room for multiple (big) winners.
#3: What Gaming Projects can Learn from CryptoPunks and BAYC
Over the holidays, it was reported that the rapper Eminem purchased a Bored Ape Yacht Club (“BAYC”) NFT for nearly $500,000. Eminem joins a host of other celebrities, including athlete Steph Curry and late night talk show host Jimmy Fallon, who have recently “aped” into Bored Ape Yacht NFTs. This has contributed to the cheapest-available (or floor price) BAYC NFT increasing dramatically over the past six months.
Meanwhile, the floor price CryptoPunks, another “blue-chip” Ethereum NFT collection, has declined in value since October. More recently, a few long-time CryptoPunk holders chose to sell their NFTs. In December, the floor price BAYC NFT topped that of CryptoPunks for the first time. At that time, the lowest-price CryptoPunk listed for sale on creator Larva Labs’ own marketplace was priced at 52.69 ETH or just over $210,000. At the same time, the floor price BAYC NFT on OpenSea was 53.9 ETH or about $217,000. To many, this flip would have been unexpected a few months earlier. BAYC was launched in April 2021 whereas CryptoPunks are long-established, having originally been minted in 2017.
Why did this happen? In a previous article, we laid out a framework for how NFTs accrue value. While this is an initial pass and new drivers (e.g., composability) will certainly be added over time, we think it’s instructive and helps level-set the discussion. More specifically, in-game NFT item value can be further broken out into:
Desirability / Hedonic value
- Provenance: A record of item ownership, used as a guide to authenticity and/or quality
- Aesthetics: The look / feel / theme / art style of the item
- Community hype: The wisdom of the crowd around an item’s value
Utility / Functional value
- Proof of ownership: Trackable, traceable, and verifiable database records of item ownership
- In-game utility: What the item can be used for when interacting with the game
- Liquidity premium: A form of value that is built into the return of an item asset that cannot be cashed in easily or quickly
- Future earning potential:
- Future applications of the item, such as tangibility, composability, or interoperability
- Future valuation of the item, which is driven by scarcity and speculation
Yes, BAYC is trending with celebrities and its Desirability / Hedonic value (driven by community hype) is growing. But Yuga Labs, the creator of BAYC, has also taken a different strategic approach to driving up Utility / Functional value than Larva Labs, the creator of CryptoPunks.
For example, BAYC holders have also received subsequent free Bored Ape Kennel Club and Mutant Ape Yacht Club NFTs, each valued at five figures or more, exclusive merchandise, and access to an October concert featuring Beck, Chris Rock, and The Strokes during NFT.NYC. Along these lines, in September 2021, BAYC tweeted out an image for its “Roadmap 2.0”. As you “start sailing down the river,” there’s a yacht party that refers to the NFT.NYC concert. Further along, a bored and a mutant ape stand together to announce the long-awaited release of 3D ape avatars. There are also two potential blockchain game collaborations, one involving BAYC and The Sandbox and the other likely referring to the BAYC play-to-earn game being developed in partnership with Animoca Brands. To conclude, the roadmap journey reveals the future release of the Bored Ape Yacht Club DAO.
In addition, Yuga Labs grants BAYC holders commercial rights to their individual ape illustrations. Now, music producer Timbaland and major label Universal Music Group have launched separate virtual bands based on Apes. Arizona Iced Tea has used its Ape for marketing, and other holders have made merchandise. Simply put, Yuga Labs has clearly communicated its future plans and prioritized BAYC NFT holders by providing as much utility as possible.
Conversely, the creators of CryptoPunks have not as actively engaged its community recently and the rules for holders to license their NFTs are unclear. On the Larva Labs website, the Terms and Conditions page for CryptoPunks does not touch on copyright or commercial usage. Some CryptoPunks holders are frustrated with Larva Labs’ lack of communication, licensing guidance, and community engagement. One prominent holder, Punk4156, sold his namesake CryptoPunk for over $10.25 million due, at least in part, to frustration over Larva Labs and the project’s future. That being said, in August 2021, Larva Labs signed with United Talent Agency (“UTA”) for media representation, suggesting its NFT projects CryptoPunks, Meebits, and Autoglyphs may appear across other types of media, including film and television. However, it remains to be seen how/if CryptoPunks NFT holders will also benefit.
In our opinion, providing users with utility will grow in importance as the supply of NFTs inexorably increases. At the same time, there are clearly trade-offs to giving up more value to the community. As a result, the CryptoPunks vs. BAYC case study provides potential lessons for blockchain game developers and investors:
- NFTs that provide users with greater utility are more highly valued, all else being equal. As discussed above, BAYC is currently executing against a roadmap (additional NFT airdrops, game, IRL events, DAO, token, etc.) that is designed to provide its holders with additional value beyond owning a digital asset. From a gaming perspective, it is worth considering how NFTs will provide value to holders. Will they “only” be cosmetic, will they provide in-game benefits, or will they also provide holders with other utility? The creative surface area for “utility” is large, and the more a project is willing to explore what extra utility could mean, the more likely it is to stumble on enhancements that grow its underlying demand and value.
- Clearly communicate the roadmap to users. This one seems obvious, but Larva Labs appears to be struggling with it right now. Users want to see future catalysts for their NFTs so that they’ll increase in value. BAYC laid this out in their Roadmap 2.0. Of course, the risk is that a project fails to execute against its plans like BAYC has in the past few months. If BAYC fails to deliver, its roadmap’s credibility will erode.
- Consider allowing users to commercialize their NFTs in some manner. BAYC has granted its holders commercial rights to their NFT illustrations. This has various trade-offs and complexities. On the pro side, it unlocks some degree of composability and has resulted in more experimentation than Yuga Labs could execute on its own. This helps attract more interest in the project and retains existing holders who are able to generate more earnings and see the values of their NFTs rise over time. On the cons side, Yuga Labs is ceding some control over their projects’ direction to the community, which is likely to cause heartburn for some traditional game publishers. In addition, it also can lead to worse unit economics for game developers. If holders receive unlimited rights to commercialize their NFTs, then the development team loses that potential value. Of course, this con is mitigated in two ways. First, the development team can carve out commercial rights in a more even fashion. Second, if the value of the NFT collection increases materially in value due to favorable commercial rights, the developer will see an increased share of income when the NFTs are traded, all else being equal. We also expect to see some projects experiment with royalties.
The NFT gaming space is nascent, and understanding how to drive digital asset value is crucial. Yes, BAYC and CryptoPunks are veblen goods (the opposite of what will drive NFTs in games mainstream) and these projects started as PFPs (profile pictures), but they’ve grown into much more over time. We believe game companies can learn a lot from these projects’ currently diverging paths. Clearly communicating future plans and providing holders with increasing utility matters. But, as always, there are trade-offs. As more NFT-driven projects experiment with new utility models in the coming months, we look forward to sharing more insights with all of you.
Other Key Developments
- Binance and Animoca Brands launched a $200M fund for crypto gaming startups. The funds will be used to support decentralized gaming projects.
- Solana Ventures, Forte, and Griffin Gaming will invest $150M in blockchain games. The fund will invest in Web 3 game makers creating decentralized games using the Solana blockchain.
- Gala Games, C2 Ventures Start $100M Fund to Invest in Blockchain Gaming. The fund will invest in projects being built with blockchain technology.
- Play Ventures launched Play Future Fund with $75M in commitments. The fund is focused on blockchain based games.
- Nansen raised $75M in early-stage funding led by Accel. The funds will be used to expand the features on its blockchain analytics platform, which helps users protect their crypto assets such as Ethereum, Polygon and Binance Smart Chain.
- SPACE secured $7M in funding for arts and commerce virtual projects.
- Rainmaker Games raised $6.5M to build a play-to-earn gaming platform. The funds will be used to help the company further build out its platform that services gamers, guilds and developers.
- Mystic Moose raised $5M to build game metaverse Planet Mojo.
- Dynasty Studios raised $5M to build blockchain games that appeal to mainstream gamers.
- Deadmau5 and Richie Hawtin raised $4.5M to build ‘the leading music metaverse’. The company aims “to transform the way artists connect and engage with their fans through gaming experiences”.
- Rumble Kong League, a new Web 3 sports game, raised $4.5M in funding. The funds will be used to build out its play-to-earn basketball game.
- Moonray PBC raised $3.5M to build an NFT marketplace as it continues to develop its multiplayer action-RPG Moonray.
- CyBall raised $1.8M for an NFT-based soccer game with the funding used to scale the development team.
- Polygon partnered with GameOn Entertainment to build new NFT games on Polygon’s platform.
- Bright Star Studios raised from new investors following in-game land sale.
- FaZe Clan partnered with MoonPay on crypto and NFTs for esports.
- BlackPool raised $6M to deploy into gaming economies. The funds will be used to buy NFTs and utilisz them as intended in games to generate yield.
- Twitch co-founder Justin Kan launched Fractal, a gaming focused NFT marketplace for the Solana blockchain.
- Solana game Mini Royale: Nations reached 2M Players After NFT Launch. It is the first online game to run on the Solana blockchain and feature live, simultaneous multiplayer action.
- Ubisoft partnered with Aleph.im, a decentralized storage and computing network provider, on blockchain games. The partnership will be used to bring NFTs to Ubisoft’s game Tom Clancy's Ghost Recon.
- Zynga teamed up with Forte to take blockchain games to the mainstream. The partnership is expected to drive faster game development cycles.
- Vempire DDAO will debut a Roman era game Hack and Slash in The Sandbox.
- Jam City unveiled a blockchain division and its first NFT game Champions: Ascension.
Content Worth Consuming
The Third Wave of Gaming (Ran Mo’s Blog):
- Behind the glizzy headlines and speculative market of blockchain gaming lies the very real and substantive evidence of a new business model. This evidence is fully on display with Axie Infinity and its Smooth Love Potion (SLP).
- A player-owned game economy is not a new idea. In the hopeful days of the late 1990s, when the term “metaverse” was last in vogue before it's more recent revival, various games experimented with such concepts.
- The bigger story is that these games are giving ownership of the game economy back to the players. For the first time in a long time, players can freely earn, own, trade, and exchange value with one another, independent of a central publisher node. It lays the foundation for more complex virtual player-to-player interactions, that may in time, and with other innovations around UGC, form the complex virtual societies that so many have dreamed about for so long.
Designing For An Interoperable Future (Naavik): Link
- I frequently encounter “interoperability” in my research. This term is often referenced as a key reason why NFTs are so groundbreaking. Interoperability, or in other words, the ability for disparate systems and products to interface seamlessly (either at present or in the future), is a complex topic with many contextual nuances. Yet the importance of digital interoperability cannot be overstated.
- It’s not hard to see why interoperability is a worthwhile pursuit for gamers. Being able to take earned or purchased digital assets from one game to another -- and even out of the game entirely -- provides players with much more value and ownership than today’s free-to-play models do. The ability to bring digital ownership from one context to another is a prerequisite for bringing digital style, digital prestige, and digital identity along with it.
- However, the case for developers and publishers to pursue this vision is less clear, at least in the near term. While embracing interoperability will eventually become table stakes in a world where a fully-fledged Metaverse has taken hold, in today’s gaming industry the incentives are not so straightforward.
Rethinking “gamification” for DAOs (Water & Music): Link
- Immediately upon entering the Web3 rabbit hole, one realizes that it’s hard to talk about crypto without also talking about gaming — specifically a highly financialized form of “gamification” revolving around microtransactions and “play-to-earn” (P2E) incentive design, whereby players win real tokens with real financial value for specific behaviors or achievements.
- The reality of these P2E games is that, to borrow the words of Mechanism Capital’s Eva Wu, “financial incentives are currently bootstrapping player interest” much more than interest in the core narrative or mission of the game itself. This isn’t good or bad — it’s amazing, in fact, for people who can make a living from it — but it’s ultimately an incomplete picture of what a “game” can really be, and what Web3 can learn from gaming from an incentive design perspective.
- To connect this discussion back to the importance of desired outcomes driving feature sets, not the other way around — how can we expand our understanding of “gamification” in tokenomics and DAO design to include not merely pushing overly quantifiable, financialized objectives, but rather incentivizing more emergent, non-objective processes of search and creativity, especially in culture- and knowledge-based communities?
The Financialization of Fun: Crypto Gaming Thesis (Mechanism Capital): Link
- Axie and its dozens of clones imply that perhaps fun isn’t what’s key for a crypto game to grow, but rather gameplay mechanics that reward players with real-world earnings.
- Crypto games that are centered around earning as opposed to gameplay are quicker to market since token incentives bootstrap and maintain the interest of players and speculators.
- The first few iterations will see developers try to force P2E concepts, tokens and NFTs into very traditional-looking games. However, it is believed longer term, we’re going to see developers use crypto to unlock entirely new gameplay mechanics. At the end of the day, crypto is a huge sandbox for games to experiment with.
Duskbreakers: a Play-to-Mint (P2M) NFT Project (Metatheory Inc): Link
- Duskbreakers is an interactive world-building experience powered by gaming, comics, and animation. In the Duskbreakers Play-to-Mint, you will ride the space elevator to the Dusk, an enormous, dormant alien spaceship filled with world-changing technologies.
- NFT projects to date have worked hard to ensure that access to the project is both provably fair and interesting for participants. With that in mind, we wanted to take things one step further and ensure that “fun” was a primary element of our mint. We believe that Play-to-Mint is a potentially superior process for certain applications and is particularly well aligned with the search for utility in the NFT space.
- In addition to adding some flavor to the mint experience, Play-to-Mint is an attempt to combat bots, as leveraging a game allows us to use traditional and well-tested anti-cheat mechanics from games to combat botting of the mint.
Big thanks to Jimmy Stone for writing this report!