Vertical Games Marketplaces in Web3

Reading Time: 8 minutes

Hi Everyone. A quick reminder before we jump into this week’s issue — we’re always looking for more brands to sponsor Naavik Digest. If you’re looking to get your brand, product, or event in front of thousands of industry executives, fans, and analysts, please reach out. With that, let’s dive into today’s issue.

Crypto Corner: The $625M Ronin Exploit & The Future of Axie Infinity

In this Crypto Corner episode, Lars Doucet, Anil Das-Gupta and Chong Ahn join your host Nico Vereecke to discuss:

The details behind blockchain bridges and the recent Ronin exploit
What happens next for Ronin and Sky Mavis
The future of Axie Infinity in the wake of one of crypto’s biggest-ever hacks

As always, you can find us on Spotify, Apple Podcasts, Google Podcasts, our website, or anywhere else you listen to podcasts. Also, feel free to shoot us any questions here.

Check Out The Episode

Fractal Raises A $35M Seed Round

*Source: Justin Kan’s* *Announcement Post*

If you’ve been following the web3 space for a while, you’ve probably heard some variation of gaming will “usher in the next 100M users into crypto”. Why? In a nutshell, there’s optimism that gaming can help grow a sustainable and successful crypto project or ecosystem, and that it has inherent longevity and marketplace activity — easy onboarding, provable utility, a dedicated player base. The list goes on. But while gaming has the right ingredients to help crypto break into mainstream, the number of standout projects in the space are still quite limited.

Enter Fractal, a gaming-centric NFT marketplace, which recently announced a $35M seed round. Games and marketplaces make for an interesting combination: recurrent purchasing, low time-to-value, and gaming’s potential to onboard large numbers of users can catalyze high transaction volume, making them the ideal target for marketplace. Meanwhile, as web3 games continues to saturate, marketplaces offer discoverability.

In his announcement for the raise, cofounder Justin Kan writes a similar thesis:

“We will see the biggest games become open economies that support other developers building businesses on top of. I predict that the business model of minting digital assets, building a massive ecosystem, and taking a royalty on those assets as they trade, will be demonstrated to be a very lucrative business model in years to come.”

And yet, NFT marketplaces are still an incredibly crowded field. Can it sustain another player, even in a growing market? If we think about the current landscape, I would bucket it as such:

Multi-game marketplaces like OpenSea or Magic Eden
Vertical game marketplaces like Fractal
Game-specific marketplaces (e.g Forte that helps teams integrate white-label marketplaces)
Ecosystem-wide marketplaces like Axie Infinity on Ronin
Open ecosystems like Zora

Out of all these options, there’s one clear elephant in the room, OpenSea. In March 2022 alone, OpenSea did $3.5B in volume. OpenSea is the clear winner right now. With its move to Solana, there is a bigger opportunity for it to widen its lead. However, despite the company’s rapid growth, lately there has been energy around finding, funding, and participating in verticalized marketplaces that create more intimate and catered experiences for a consumer / creator / industry.

For example, if we were to think about OpenSea’s relevance in gaming, it’s most definitely on the company’s radar as a top priority. They’ve hired a variety of people to lead games integrations and products. At some points in the company’s history, Axie Infinity almost matched OpenSea’s monthly volume, indicating the potential for gaming NFTs. But in its current state the company doesn’t support a lot of “gaming” functionality per se. Sure it indexes across all NFTS on Ethereum / Solana, but the only games-specific functionality it supports is primary drops. I wrote a few weeks back about how a biz dev manager might think about securing and analyzing partnerships – but for a game to partner with existing platforms like OpenSea, the true value is likely in trust and visibility vs. novelty.

Looking at some of the bigger competitors, this is by no means a comprehensive list. Also notice how the same investors pop up multiple times, hedging their bets across a variety of marketplace approaches. Source: *Immutascan*, *Token Terminal*, *Axie Infinity, and Dune Analytics (Solana* | *OpenSea & LR*).

After a brief survey of the various NFT marketplaces, Fractal is the only platform that has functionality beyond primary drops (e.g Magic Eden’s launchpad or OpenSea’s primary drop) into, for example, allowing games to be played on the marketplace itself – to this end, Fractal’s value stems from building games-specific features for web3 like loaning, staking, or fractionalization (and moving faster than incumbents to get there). Importantly, among the hundreds of crypto-native games that are out there and will be released, Fractal will serve as a curation and discovery layer for the best games, empowering game developers to reach consumers. This isn’t to say that Fractal won’t encounter its own obstacles.

Personally, I think the biggest existential risk for a games marketplace is that the games that have the potential to drive the most volume are the most likely to build their own in-game marketplaces. This will happen via Forte Labs, Mysten Labs, or otherwise, circumventing the need for a third-party host. The thought here is a few-fold: players would rather stay in-game rather than have point of purchase elsewhere, and developers would rather not have a third-party take rate and have games loops where secondary market behavior is seamlessly incentivized. And while this is a step beyond the verticalized marketplace that Fractal offers, it also isn’t to say the two are mutually exclusive either. Marble Jiang at Multicoin — who led the Fractal seed — had a well-thought rebuttal to the open ecosystem risk:

“While large game developers may have theoretical resources to build their own community kingdom, the upside of being on an open platform is huge. The cross-selling opportunities, based on on-platform engagement (some are on-chain), for games within the amusement park is a huge advantage. Other platform-wide incentives include leaderboards and other competitive ranking tools. These crypto-native features are simply not possible in traditional games; it is a major step forward from today, where all user bootstrapping and community building happens within a closed ecosystem around a single Web2 game. Games that keep evolving and engaging with users in innovative ways via the infrastructure that Fractal provides will continuously climb up the ladder and gain the best visibility among users. Fractal exists to reward developers who create the most engaging games, and to give back to communities who spend their time and energy within those games in a Web3-native way.”

Sound a bit like Steam? For what it’s worth, Steamworks, which is Steam’s tools and services for developers, is still a main reason why developers like to distribute with Steam despite the high take rate. I wouldn’t be surprised if Fractal’s UX increasingly merges toward something similar as games marketplaces exist today to attract more developers. There has to be a strong pull for a game to want to partner with an NFT marketplace, which could span distribution, visibility, custom-game features, or more.

To date, Fractal also has had the luxury of choice: they’ve only accepted 5% of applicants and have 20+ mints in pipeline. Curation is a necessity for these marketplaces because of the push and pull of generating volume and partnering with quality projects — but Fractal has also taken a stricter partnership approach. I expect them to become more of a Steam-like experience, balancing volume and curation (e.g 98% of released titles in 2021 were indie on Steam) over time. There’s a lot more to unpack here but I’ll keenly be observing each competitors’ feature releases to see if any are applicable to games.

Ultimately, I’m excited by what Fractal can do for web3 games, but cognizant of the competition / taking a big enough piece of the ever-growing pie to warrant venture scale returns. The company aims to build the best game-native features out of its peerset. Others will likely imitate it. More so than any bullishness one can have on the market, this is a team bet. Justin Kan has assembled a stellar cast that will cook up something good, and arguably, there’s no one better to tackle the job. (Written by Fawzi Itani)

📚 Content Worth Consuming

How Wooga’s Switchcraft Aced The Soft Launch (DoF): “When we soft-launched it was during the time of massive uncertainty stemming from Apple’s privacy changes. It was unclear how to do performance marketing effectively when the changes took place and how to measure campaigns. Overall we were unsure if our learnings during the soft-launch would be transferable to our global launch. This uncertainty kept the investment into marketing at a minimum. On Google Play, we initially faced some technical issues with open beta and couldn’t get the campaigns running. Once in touch with Google, we received technical support and other great feedback. We even set up a call with the Play representatives and our game team to talk about how the user experience can be improved in our game.” Link

Games Industry M&A in 2022 and Beyond! (GameMakers): Miniclip, Drake Star Partners, & FunPlus weigh in on the current state of mergers & acquisitions in the games industry. Link

P2E as Base Layer Protocols for Games (1kx): “Through token incentives and community ownership, we are able to unbundle the role of a publisher through a bottom-up set of contributors, players, and guilds which instead drive worldbuilding, product development, and governance. By bringing these responsibilities out into the open, we are no longer dependent on a single company to achieve the goals of the entire ecosystem but can leverage open-source contributions from anyone on the internet. Instead of thinking about P2E as standalone games or ‘apps’, we believe P2E ecosystems are about building self-sustaining virtual nation state economies that community members can trust, collectively operate, own and build on top of.” Link

Unity Gaming Report 2022 (Unity): “The gaming industry is booming. As the field grows more crowded, we want you to have the insights you need to succeed. In the Unity Gaming Report 2022, you’ll discover the latest trends to help you make more informed decisions”. Link

Examination of web3 Gaming Guilds (Derek Lau): Play-to-earn games have led to the uprise of a phenomenon known as “guilds”. These aren’t the traditional guilds that you see in MMORPGs where players team up in a clan to take on other players or monsters. These are more like businesses that create a model of investment and participation between games, investors and players. Guilds were popularised by Yield Guild Games, who were the first to identify that there was a gap in the market between players who wanted to play and earn, but couldn’t afford to buy NFTs, versus investors who had capital or NFTs but lacked the time to play games. A model was born called ‘scholarships’, where a guild would lend NFTs to players in exchange for a share of the profits. Fast forward less than a year, and there are now probably 10,000+ guilds in existence of various sizes. According to BreederDAO, the top 25 guilds have raised $500m+ and facilitate 100k+ scholars, with over 900k+ unutilised members on their ‘waitlist’. What this means is there is massive demand and opportunity for games to collaborate with guilds. Guilds are fascinating from the perspective of both investors and players.” Link