Blockchain game activity – both in terms of wallets and transaction volumes – increased in January. Unique active wallets (a proxy for users) increased 4% month-over-month. Meanwhile, NFT (both collectibles and games) transaction volumes increased 82% month-over-month driven, in large part, by games like Crabada and collectibles like Bored Ape Yacht Club. Meanwhile, funding activity for blockchain games was white-hot, especially after a slower December. We believe that the fundraising environment will remain strong throughout 2022, although we would not be surprised to see things slow down a bit next month. We dive into these trends and their drivers in more detail below.
Unique Active Wallets
- Per DappRadar, blockchain gaming daily unique active wallets (UAWs) increased 4% month-over-month to 1.3 million in January 2022. This was driven by a large increase in activity in two top 10 games (Bomb Crypto and Sunflower Farmers) and partially offset by declines in Axie Infinity, Alien Worlds, and Splinterlands. While there was a sequential increase in UAWs, it’s worth noting that UAWs (as measured by DappRadar) are still where they were 5 months ago.
- 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, likeAlien Worlds, have been prone to bots which leads to overestimating actual user activity.
Top Games by Unique Active Wallets
- UAWs growth this month was primarily driven by two games: Sunflower Farmers and Bomb Crypto. Sunflower Farmers launched in December 2021 and saw activity increase ~500% this past month. User activity, which included bots, spiked, as players looked to farm the game’s native token SFF, causing Polygon gas fees to skyrocket from under $0.01 to $0.70+! Critics pointed out that the game’s design required users to save their farm’s progress to the blockchain every 30 minutes. As a result, Sunflower Farmers’ development team decided to shut down the game and release a new version (called “Sunflower Land”) in the future, which will include anti-botting features.
- There was less movement in the top 10 games by wallets in January. This month only saw two games – CryptoMines and The Crypto You – fall out of the top ten. They were replaced by Crazy Defense Heroes, a free-to-play P2E tower defense game, and Upland, a virtual world game in which users can earn from and trade virtual properties mapped to the real world. Alien Worlds remains in the top spot with Axie Infinity seeing another month-over-month decline in wallet activity as the price of its in-game token SLP continues to plummet.
- 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 2.6x the number of wallets as the 5th ranked games (compared to 4.3x 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. In fact, it already has over recent months.
- Binance Smart Chain (“BSC”) continued to have the most games in the top 10 during January 2022. However, these three games were lower than the five in the prior month. Many BSC 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. This is why we expect BSC’s share of the top 10 to decrease as more polished games are introduced on other blockchains in 2022.
- According to Cryptoslam, NFT (both games and collectibles) transaction volumes increased 82% month-over-month in January 2022 to $4.3 billion. This increase was primarily driven by popular gaming projects like Crabada, NBA Top Shot, and Sorare, as well as collectible projects like Bored Ape Yacht Club and Doodles. 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. It also only includes data on the following blockchains: Ethereum, Solana, Avalanche, Ronin, Flow, WAX, Polygon, Panini, Tezos, BSC, Theta.
- January 2022 also saw changes in the share of transaction volumes by protocol. Solana passed Ronin as the number two blockchain by transaction volume. It has been quite the three months for Ronin with its share declining from 13% of total NFT transaction volumes in December 2021 (60% at its peak in July 2021) to 3% this month. Meanwhile, Ethereum, Solana, and Avalanche gained the most market share this month. Avalanche’s 300% month-to-month growth in volumes was driven by the popularity of the play-to-earn game Crabada.
Top Games by Transaction Volume
- January’s gaming-related NFT transaction volumes were driven by Axie Infinity, The Sandbox, and Crabada. The titles with the largest month-over-month increase in transaction volumes were Crabada (304%), Parallel Alpha (297%), and WebbLand (131%).
- Crabada is an idle game that has seen exponential growth due primarily to the high returns users can currently earn by playing the game. However, like several other play-to-earn games, this activity is likely unsustainable unless Crabada can attract and retain more users who want to play the game regardless of the financial reward. You can learn more in our podcast episode about Crabada, here.
- Conversely, Axie Infinity and The Sandbox saw the largest month-over-month declines, despite being the top two games this 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 the Philippine minimum wage level when playing the game. This trend has continued since we published our report and is likely a key driver in the decline in Axie’s UAWs and transaction volumes.
- We continue to see consistent turnover in the top 10 games by transaction volume with four new titles: Carbada, WebbLand, Monkey Ball, and PXQuest Adventurer. We expect to continue seeing a fair amount of turnover over 2022 given i) the fact that many games mint NFTs to fund development of the game and ii) the boom/bust tendencies of most early play-to-earn games.
- Fundraising activity grew significantly this month to $901 million or a 558% month-over-month increase. Animoca Brands’ $359 late-stage financing and OpenSea’s $300 million Series C were the largest transactions this month. We believe that we will continue to see month-to-month volatility, but the general trajectory will be higher in the near-term. Fund formation activity remains strong among gaming VCs and developer funds, signaling that blockchain game investment activity will continue to be strong in 2022.
- In terms of stage, seed rounds continue to dominate which is unsurprising given the industry’s novelty. That said, we are starting to see more Series A and later stage funding rounds as blockchain gaming companies look to continue scaling. Game studios continue to attract the most investment activity by deal count. However, infrastructure and service providers (e.g., Phantom) and gaming guilds (e.g., IndiGG) are also raising a number of funding rounds.
- We expect funding activity to continue increasing over time, albeit with month-to-month variations, as the industry gradually matures and later stage projects require larger funding rounds. At the same time, we are starting to see the hype cycle hit certain blockchain gaming tokens, with Axie Infinity’s SLP and AXS tokens declining meaningfully off their highs. As a result, we may start to see a more fundamentals-driven tone as 2022 progresses, which likely means greater emphasis on play and earn games. 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: Breaking Down the Polygon Gaming Ecosystem
Last month, we took a look at the Solana ecosystem and some of its gaming projects. This month we turn our focus to another blockchain ecosystem that experienced exponential growth over the past twelve months: Polygon.
In the 2021 crypto bull market run, Polygon’s native token, MATIC, was one of the best performing cryptocurrencies, seeing its fully diluted market cap increase from under $200 million to $25.5 billion by the end of 2021. For those keeping score, that is a 100x+ increase in one year! Today Polygon’s token currently boasts the fourteenth largest market cap and is the largest among Ethereum Layer-2 blockchains. Projects like Zed Run, CryptoBlades, Aave, Quickswap, Curve, and Aavegotchi are all built on Polygon. Polygon now supports $9.3 billion of total value, and according to Token Terminal, its total protocol revenue increased from roughly zero in January 2021 to $7+ million in January 2022. Clearly, Polygon has a lot of momentum going into 2022, so let’s take a closer look at Polygon’s history, ecosystem, and outlook to get a better sense of where it goes from here and how teams are best utilizing it.
Let’s start with the basics. Polygon is a Layer-2 (“L2”) scaling solution built on the Ethereum blockchain. Certain Layer-1 blockchains, like Ethereum, fundamentally solve for high decentralization and security but at the cost of lower scalability, which continues to get worse as it attracts more and more users. For example, Ethereum can currently only handle 10 to 30 transactions per second and regularly sees transaction fees above $100 on popular NFT marketplaces such as OpenSea. These rising “gas” fees associated with this so-called “Blockchain Trilemma” have resulted in a whole generation of scalable, decentralized, and secure solutions built specifically to solve this trilemma.
Polygon’s origins revolve around solving this trilemma. The original idea came when the founders noticed scalability issues on Ethereum due to the popularity of NFT collection CryptoKitties. Founded in 2017, Jaynti Kanani, Sandeep Nailwal, and Anurag Arjun started the Polygon network (originally known as “Matic”) to be an easy-to-use Layer-2 scaling solution for Ethereum. The team launched Matic in May 2020 with two components: i) a Proof-of-Stake sidechain variant that they call a “commit chain” and ii) a Plasma-based solution for routing Ethereum-to-Polygon.
In February 2021, the team rebranded from Matic to Polygon and announced that its long-term vision is bigger than creating the number one Ethereum scaling solution. Now, Polygon wants to connect all Ethereum Layer-2 solutions and become the protocol for every Ethereum-compatible blockchain network – the so-called “internet of blockchains.” In order to accomplish this, Polygon plans to create all the tools and infrastructure necessary for any type of Ethereum compatible Layer-2 solution, which include zk Rollups and Optimistic Rollups (see a helpful explainer video on Rollups here). Per Polygon, Proof-of-Stake and zk Rollup implementations are supported today.
Like our analysis of Solana, Polygon is interesting to gaming (and beyond) because it allows for higher transaction speeds and lower costs than Ethereum Layer-1. Whereas Ethereum can handle 10 to 30 transactions per second, Polygon can handle greater than 10,000 transactions per second. Meanwhile, whereas it costs $10 – $200+ to do a transaction on Ethereum, it costs less than $0.50 to do a transaction on Polygon. Simply put, Polygon is faster and cheaper compared to Ethereum.
Polygon also has several advantages over other more scalable Layer-1 blockchains, like Solana, that compete with Ethereum for developer talent and users. For example, whereas Solana uses Rust, Polygon uses Solidity, the same smart contract language as Ethereum. As a result, it is easier for existing decentralized applications to migrate from Ethereum over to Polygon. Second, Polygon is EVM-compatible meaning it supports many of the popular applications (e.g., MetaMask, OpenSea) on Ethereum, even though users need to do some additional configuration.
On the other hand, Polygon has some drawbacks too. Whereas Ethereum currently has over 200,000 validators and the Solana ecosystem is only secured by 1,060 validators, critics point out that Polygon’s Proof-of-Stake chain has weaker security assurances with only 100 active validators pushing state changes to Ethereum for settlement. That said, Polygon’s recently added support of ZK-rollups puts it in a better security position going forward. Finally, the user experience to bridge assets on and off Polygon is cumbersome today. It took us 10+ minutes to bridge assets onto Polygon to even begin transacting on the network. Here’s the five step process:
- Buy MATIC and ETH on Coinbase
- Send MATIC and ETH to our MetaMask wallet
- Configure our MetaMask wallet to work with Polygon network (a multi-step process)
- Bridge MATIC and ETH to Polygon (took 5+ minutes to complete)
- Transact on Polygon
The process would be the same but in reverse (minus step 3) if we intended to convert our assets on Polygon into fiat. Once our crypto assets are on Polygon, we begin to realize the benefits of faster and cheaper transactions.
It is also important to note that users currently have to pay Ethereum gas fees every time they bridge assets to and from Polygon. In our opinion, it will be important for Polygon to eliminate encounters with high gas fees if it hopes to attract mass gamer adoption. We discussed this dynamic last week with our Solana write-up. It’s the same issue but slightly more nuanced. Once assets are on Polygon, faster transaction speeds and lower fees provide a better user experience than Ethereum. But Polygon users still encounter Ethereum gas fees to convert assets over. According to Nonfungible, the average NFT price per blockchain game project was in the hundreds of dollars in 3Q 2021, and we expect this figure to decline with greater adoption. If mainstream gamers deposit fiat frequently but in small amounts, paying transaction fees that are 10% – 100%+ of an NFT’s value, as they often currently are when bridging from Ethereum to Polygon, are unsustainable.
Nevertheless, the broader Polygon ecosystem is growing rapidly. On the demand side, the number of Polygon Proof-of-Stake active addresses (a proxy for users) has grown 350%+ from 66,000 in June 2021 to more than 500,000 in January 2022. And games are playing a prominent role in this activity. According toDappRadar, games represent three of the top five applications by active wallets on Polygon over the past 30 days.
Shifting to the supply side, the image below showcases what the Polygon ecosystem looked like in May 2021, according to The Block Research. At that time, there were hundreds of projects listed including blue-chip ones that originated on Ethereum like OpenSea, Curve, and Aave. This underscores how Polygon has been able to take advantage of its EVM compatibility. As one of the first readily available L2s, Polygon has been able to attract Ethereum projects looking for a scaling solution. This lower barrier to adoption for existing Ethereum developers is a key differentiating factor between Polygon and other Layer-1 solutions like Solana.
Today, the Polygon website lists over 3,000 projects, of which approximately 100 are games. The most successful game to date is Zed Run – a digital marketplace that lets players buy, breed, and race NFT horses for cash prizes – which has seen over $130 million in all-time transaction volume (26th highest NFT project by all-time transaction volume) according to Cryptoslam. Do check out our Zed Run Deconstruction linked here.
To further accelerate the growth of gaming and NFT projects, Polygon set-up Polygon Studios in 2021. In addition to providing developers with support and tools, Polygon Studios announced a $100 million fund in July 2021 that is intended to grow the number of blockchain games on Polygon’s network. Shortly thereafter, Polygon announced an investment in Decentral Games, a developer focused on play-to-earn games. Decentral Games has used Polygon as a scaling solution since 2019 and recently partnered with Atari to create Atari Casino in Decentraland. Just this past month, Polygon announced the hiring of Ryan Wyatt, Youtube’s Head of Gaming, to lead Polygon Studios as CEO. Polygon’s Marketing Lead, Shreyansh Singh, stated the company’s strategy in a recent interview with GamesBeat: “We don’t want to be a VC. This is not our strength. We will incubate some products and teams that want to build projects. Maybe we can get them an external license and support them. We are here to support the entire ecosystem. We want to add value and bring the next 100 million users [to Polygon].” In short, Polygon is looking to attract developers and scale its gaming ecosystem by providing both capital and talent.
To understand what kinds of games are being built on Polygon, let’s look at three notable projects:
Zed Run. Zed Run, the core project of Virtually Human Studios (VHS), is a top-10 blockchain game in terms of transaction volume. It allows users to own digital horse NFTs that can be traded, raced, and bred. If a horse wins a race, its owner receives crypto winnings. So far, the Zed Run platform has seen over $135 million of transaction volumes and secured partnerships with major brands including Atari, Stella Artois, and NASCAR. In July 2021, VHS secured a $20M funding round led by venture capital firms TCG and Andreessen Horowitz. Again, we analyzed the current state of the game and challenges facing the development team in our recent Zed Run Deconstruction report.
Sunflower Farmers. Sunflower Farmers is a play-to-earn farming game where users seek to build farming empires through various tasks, including mining, crafting, fishing, and fighting. The game revolves around planting sunflowers (and other plants) and then harvesting them a short time later at a profit. Players can earn Sunflower Farmers’ native token (“SFF”) by planting and harvesting these crops. Users can also harvest other items (e.g., trees, mine gold, etc.) to unlock additional items that help earn more SFF. The game launched in December 2021 and saw activity reach more than 350,000 accounts by January 2022. User activity, which included bots, spiked, as players looked to farm SFF, and caused Polygon gas fees to skyrocket from under $0.01 to $0.70+. Critics pointed out that the game’s design required users to save their farm’s progress to the blockchain every 30 minutes. As a result, Sunflower Farmers’ development team decided to shut down the game and release a new version (called “Sunflower Land”) in the future, which will include anti-botting features.
Arc8. Arc8 is a collection of mobile games launched by Animoca Brands’ hypercasual gaming subsidiary, GAMEE. The beta version of Arc8 launched in September 2021 and had over 1.3 million registered users at that time, according to Animoca Brands. DappRadar shows a much lower number of active wallets (~60,000) over the past 30 days, but Arc8 still ranks as the third most used gaming application on Polygon. The app is available for both iOS and Android devices with over a dozen hypercasual games. Some of these titles include Pirate Solitaire, Samurai Hold‘em (a poker game), and ATARI Asteroid.
Right now, the Polygon gaming ecosystem has a lot of momentum. The technology allows for new projects with smaller dollar in-game items to transact quickly and cheaply. As one of the first Ethereum Layer-2 scalability solutions, Polygon has attracted existing Ethereum projects as well, and the ecosystem’s active wallet and project counts are increasing significantly. Anticipated future projects to release on Polygon include The Sandbox, Crypto Unicorns, and Galaxy Fight Club. The Polygon team is further supporting this growth by providing capital and talent to teams who want to build Web3 games within its ecosystem.
Having said all that, it’s early, the user experience needs improvement, and competition is coming. There are a number of other Layer-1 and Ethereum Layer-2 blockchains competing for talented developers and users. Just recently, Bright Star Studios, the maker of the highly anticipated blockchain game Ember Sword,announced it would migrate development from Polygon to Ethereum Layer-2 competitor Immutable X. In addition, Ethereum itself is expected to become more scalable once it moves from Proof-of-Work to Proof-of-Stake consensus (expected to release in 2022 but we’ll see). As a result, while Polygon has momentum and is aggressively pursuing growth, it still needs to improve the product and attract projects that achieve sustained success.
#2: YGG – The Rise of a Decentralized Asset Investor
Blockchain gaming’s momentum going into 2022 has arguably been driven by the success of one key game, Axie Infinity. The game has nearly $4 billion in lifetime secondary transaction volume and roughly 3 million daily active users – truly impressive metrics. As we detailed in our Axie Infinity Deconstruction, the majority of the game’s userbase is made up of “scholars,” who borrow in-game items that they then use to play Axie Infinity and earn tokens. These tokens can be cashed out for fiat currency, acting as an important source of income for scholars.
Gabby Dizon, Beryl Li, and the Owl of Moistress (a third anonymous founder) created Yield Guild Games (“YGG”) to lend these in-game items to their community. In 2020, the COVID-19 pandemic caused nearly 7.3 million people in the Philippines to lose their jobs. The YGG founders saw the potential of blockchain games to help people earn income in difficult times. Do watch this video to see the initial impact of play-to-earn games in the region. Since then, YGG has grown its community and AUM, diversified its business model and geographic footprint, and raised capital from top Silicon Valley venture firms. Simply put, YGG’s ambitions are much greater than providing scholarships.
Let’s dive into YGG’s current state and what the future may hold for the pioneering play-to-earn gaming guild. First, we’ll cover YGG’s structure, tokenomics, and business model. Then we’ll discuss how it’s going so far, and, finally, we’ll consider what guilds like YGG could ultimately become.
Structure, Tokenomics, and Business Models
Yield Guild Games’ organizational structure is fascinating but quite complex. It reflects the founding team’s vision to build a decentralized organization that is able to function efficiently via effective incentive systems. Along these lines, YGG is structured as a Decentralized Autonomous Organization (“DAO”), which seeks to distribute decision making authority amongst various community members. To facilitate this, Yield Guild issued a governance token (named “YGG”) in July 2021, allowing token holders to vote on various issues affecting the guild. Expected decision topics include technology implementations, product and project launches, token distribution, and governance structure. That said, certain decisions are still centralized today. For example, the DAOs assets are currently managed by the three co-founders with approval from two required to move assets from the treasury. In the future, the intention is to decentralize capital allocation decision making via token holder vote.
In terms of how the DAO’s tokenomics work, there are five main categories of token holders: 1) Founders, 2) Advisors, 3) Treasury, 4) Investors, and 5) Community. Per Yield Guild Games’ whitepaper, it intends to issue 1 billion governance tokens in multiple phases, with the community receiving the largest share at 45%, insiders (founders, advisors, and investors) collectively receiving ~42%, and the treasury receiving ~13%. Similar to stock option vesting programs, YGG’s founders and advisors’ tokens are locked up for 1 to 2 years, incentivizing them to stick around to build for the community. However, YGG is explicit about its decentralization ambitions. It expects that the community will eventually replace the early team and make the decisions necessary to manage the DAO.
That said, many DAOs struggle with community participation. As we noted in our recent Gaming DAOs deep dive, the ten largest DAOs by treasury size display a massive disparity in voter participation. While these DAOs are mostly uninvolved in gaming, we observe what is basically an “all-or-nothing” pattern emerging.
In an effort to stimulate participation, YGG has established subDAOs to host specific regional and/or game assets and activities. For example, there can be a subDAO dedicated to India, or a subDAO dedicated to Axie Infinity, or a subDAO dedicated to Zed Run, and so on. Each subDAO has its own community manager (responsible for growing and managing the community), native token, and wallet with subDAO token holders voting on governance issues related to their specific subDAO. The goal is to design an effective reward system and ensure that a region or game’s community members feel a sense of autonomy, increasing their engagement. In turn, the community’s focus and active participation allows YGG’s assets to be managed more efficiently (e.g., generate more yield).
At the same time, assets in the subDAOs are acquired, fully owned, and controlled by the YGG treasury through a multisignature hardware wallet. We understand how this structure likely protects the guild from potential security risks in the near-term. However, it could become an issue as subDAOs grow and want greater control over the assets that they interact with. The YGG treasury also plans to hold an undefined percentage of all subDAO tokens, so the YGG DAO will likely still have a major say in how its subDAOs operate. It will be interesting to see how this dynamic evolves over time.
Shifting to Yield Guild Games’ business model, we count six ways the guild makes money now and in the future:
- Scholarship Programs: This was YGG’s initial service. Effectively it involves lending in-game assets to people who can’t afford them in exchange for revenue share agreements. YGG lends these in-game assets to “scholars” at a typical earnings split of 70% (scholar), 20% (community manager), and 10% (YGG).
- Rent on Virtual Land: YGG has purchased virtual land in several blockchain games, including Axie Infinity and the Sandbox. The guild envisions earning rent from third parties (non-guild members) that want to use the land, but it’s still mostly speculative and we remain skeptical.
- NFT Investments: YGG gets involved in blockchain games early and owns NFTs in several games. These NFTs can increase in value as the game economy grows. For example, as of October 2021, YGG had seen meaningful appreciation in the value of NFT investments (in-game items and virtual land) in several games.
- VC / Seed Investments: YGG has made seed investments (equity, fungible tokens, SAFTs) in play-to-earn games (e.g., Illuvium), publishers (e.g., Carry1st), infrastructure providers (e.g., Ignite Tournaments), and third party guilds (e.g., Merit Circle). They have made these investments alongside top VC firms. Unlike VCs, YGG offers these projects access to not only capital but perhaps more importantly its growing community of users as well as learnings from being early leaders in the space. YGG will make money as these investments appreciate in value.
- DeFi Investments: YGG’s whitepaper lists other potential trading activities with Treasury funds that read like a DeFi crypto hedge fund. “YGG’s value is derived from the following…% of APY token rewards generated from the Treasury’s farming activity.” Per YGG’s white paper, its three founders manage Treasury investment activity for the time being, so it’s incumbent upon them to invest the Treasury’s funds wisely.
- Other revenue: YGG’s whitepaper lists other potential revenue streams including esports prizes, sponsorship deals, merchandise sales, and (interestingly) subscription fees (presumably to be a member of the guild).
Putting all this together, Yield Guild Games is a DAO composed of subDAOs. While decisions are somewhat centralized today, the plan is to progressively decentralize decision making to token holders over time. In many ways, the structure reminds us of the United States’ representative democracy with the YGG DAO acting as the federal government and its subDAOs resembling the various states that each contribute in its own ways. At the same time, Yield Guild Games’ business model resembles something akin to a publicly traded diversified investment management firm like Blackstone (except of course for YGG’s gaming focus). It has a private credit arm (scholarships), a (virtual) real estate arm, a tactical opportunities arm (DeFi and NFT investing), and a venture investing arm. Delphi Digital put together a helpful visualization of YGG’s organizational structure and various activities (copied below).
How’s it Going So Far?
Yield Guild Games has seen impressive growth over the past twelve months. As mentioned earlier, YGG’s initial business model was to serve as a scholarship program for people to earn income playing blockchain games. Its number of scholars has grown exponentially from just over 300 in July 2021 to over 7,400 in January 2022.
Yield Guild Games’ AUM has grown significantly as of its last published Asset & Treasury Report dated September 2021. Between July and September YGG’s AUM were reported to have grown from $416 million to $846 million. Nevertheless, the broader crypto market sell-off has taken no prisoners with the YGG governance token declining from $8 in September to below $3 as of January 2022.
We depict the progression of YGG’s treasury values in the table below. We estimated AUM as of January 2022 by adjusting the disclosed fungible tokens to their current market value and keeping other assets (NFTs, SAFTs, etc.) fixed from September, which is likely a conservative assumption. If our estimates are directionally accurate, YGG’s AUM has more than re-traced its gains between July and September. We also note that YGG’s governance token makes up ~90% of the Treasury’s value.
Next, we analyzed YGG’s NFT AUM by NFT project as of its September 2021 report. Unsurprisingly, its largest position is in Axie Infinity NFTs (Axies and land) at 35%. YGG also has meaningful exposure to Ember Sword NFTs (33%), Guild of Guardians NFTs (18%), and Star Atlas NFTs (6%).
Finally, we looked at concentration by project regardless of asset type (e.g., fungible token, NFT, SAFTs, etc.) as of September 2021. For example, AXS, SLP, and Axie Infinity NFTs equal YGG’s total exposure to Axie Infinity. We ignored the YGG governance token for this exercise. YGG’s largest position is Axie Infinity (32%), USDC (22%), Ember Sword (9%), ETH (7%), and Guild of Guardians (5%).
According to NFTBank, Yield Guild’s Axie Infinity scholarship program has generated over $12 million in revenue with YGG spending $1.2 million on NFT items. After YGG’s 10% revenue cut, the guild looks to have earned back its total Axie investment in under 1 year and still has over $4.5 million of Axie NFTs in inventory. An impressive ROI! Even so, YGG’s relatively large exposure to the Axie Infinity economy is somewhat concerning going forward.
We have covered Axie’s game economy sustainability issues in our Deconstruction. The oversupply of SLP remains an issue and has impacted YGG’s scholars’ earnings in recent months (as shown below). Importantly, the prices of AXS, SLP, and Axie NFTs all continue to fall. As a result, YGG’s larger positions in projects like Ember Sword and Guild of Guardians, both scheduled for release in 2022, become even more important to its near-to-mid-term success. YGG has strong financial backing, plenty of liquidity (over $13 million of USDC as of September 2021), and stakes in several highly anticipated projects. That said, YGG enters 2022 with less certainty in where growth in its primary revenue driver (scholarship income) will be derived.
Where’s YGG Headed?
Yield Guild Games is clearly an ambitious and innovative organization. It has demonstrated this from its initial insight and execution of its scholarship program to its novel structure and entry into a variety of digital asset investment strategies.
In doing so, it has helped scholars to earn a new source of income. For blockchain games, it has provided a supply of early users, seed capital, and a wealth of experience and knowledge about the industry. For investors, YGG allows access to a Web3 gaming index of sorts with the ability to get micro-exposure via investments in various subDAO tokens and the ability to stake tokens in specific guild investment activities (a program called YGG Vaults).
So far, YGG has overcome one of the toughest parts of any new venture: starting. It bet on the right game – Axie Infinity – out of the gate, used early momentum to raise significant capital, and is using that capital to build a more diverse and complex organization. With Axie Infinity’s economy now struggling and more blockchain games releasing, the challenge becomes picking the next winners and diversifying YGG’s revenues and AUM. Also, with the rise of other guilds, YGG is put in a position where it must think about building long-term competitive advantages over others. A first mover advantage certainly helps, but YGG must stay on its toes in today’s rapidly shifting landscape; properly navigating the hype versus substance in blockchain games is critically important, especially when running a fairly concentrated portfolio. Nothing is guaranteed. 2022 promises to be a fascinating year for Yield Guild Games, and we’re eager to see what’s in store for the entire guild industry.
#3: An Introduction to Gala Games
Gala Games was founded in 2019 by Eric Schiermeyer, who previously co-founded Zynga and was the CTO of Intermix Media (developer of MySpace). Gala Games’ vision is to create a decentralized blockchain gaming platform where users can own their in-game assets. Its goal is to make the blockchain invisible to gamers and use simple game mechanics in order to make adoption easier.
The Gala Games team has a strong background in making traditional games; for example, its team includes former executives from Zynga, EA, and others. This is in contrast to other blockchain gaming teams that may have strong backgrounds in DeFi but haven’t previously shipped any game titles. The Gala Game’s story also has some other interesting points of differentiation. First, the company has built everything to date without taking any venture capital funding – quite rare in the sector. Second (and also rare), Gala Games has not released a whitepaper that lays out its vision, roadmap, game mechanics, and tokenomics. Instead, Gala started with an actual product, Town Star, and then issued NFTs and node licenses (which funded future development).
At the same time, Gala Games also has things in common with other blockchain gaming platform players like Sky Mavis, Immutable X, and Mythical Games. For example, Gala Games started by developing its own blockchain games but aimed to eventually become a platform for 3rd party blockchain game studios – something akin to Steam’s platform for PC games. This strategy allows Gala to develop its ecosystem to best serve developers. This includes attracting building out scalable infrastructure and a large userbase.
With regards to scalable infrastructure, Gala Games is building out proprietary solutions to support the ecosystem. This includes “Gala Nodes” that power games on the platform. These decentralized node license holders receive rewards for providing their computing power. Node operators are also responsible for circulating GALA into the ecosystem as well as other game-related tokens. This process is called a “distribution.” There are currently around 20,000 player-run nodes (of the total 50,000 nodes available) powering the ecosystem with a single node license priced at 483,000 GALA or roughly $95,000. We note that the node price has more than tripled since October 2021!
Another key component to the ecosystem’s infrastructure is Gala’s proprietary blockchain, called “GalaChain.” Currently, games on the platform operate on Ethereum and Binance Smart Chain (“BSC”). For users, Ethereum’s high gas fees are an issue. While BSC’s transaction fees are significantly lower than those on Ethereum, the user experience can be quite cumbersome for users based in the U.S., because Binance aims to avoid US regulations.
Like Sky Mavis’ introduction of Ronin, the introduction of GalaChain will facilitate fast transactions with much lower gas fees. Gala Games recently announced a partnership with Ethereum Layer-2 scaling solution Polygon, which will allow GalaChain to connect to an EVM-compatible blockchain with significantly lower fees. Another core reason for developing GalaChain is to more appropriately serve the needs of game developers by providing them additional functionality. Jason Brink, Gala Games’ Chief Marketing Officer, addressed GalaChain’s design and implications in a recent Reddit post:
“The core to this effort is the GalaChain, which is our own hyperledger fabric-based mainnet. You can think of the entire Gala Games ecosystem as a wagon wheel with GalaChain at the center, and each of the spokes of that wheel being a separate L2 or Baselayer solution. From GalaChain, you should be able to mint to BSC, Flare, Polygon (I still wish they were called Matic), NEAR, and a couple others we are talking to.
The reason we are putting GalaChain at the center, rather than just using another solution (like Polygon or Flare) to track assets is because there is a lot more to what we are doing than just tracking the ownership of in-game assets. GalaChain has a LOT more functionality that makes it perfect for game development needs…from the perspective of triple-A game developers. There isn’t anything else out there that will do what we are working on.
GalaChain itself is under heavy development and we will be spinning up a testing group with some of our top users so that they can get in and start experimenting with it and making transactions. Once GalaChain is up and stable, it will replace the “Treasure Chest” within the ecosystem. THEN we will begin to integrate the other baselayer and L2s.”
The Gala Games platform has a utility token known as GALA, which is an ERC-20 token. This is the main digital asset on the platform and can be earned in two ways: 1) receiving it as a reward for operating a Gala Game Node or 2) buying it on the secondary market. GALA can be used to purchase items in the Gala Games Store and holders may have additional functionality in the future, including the ability to make governance decisions. However, today the GALA token doesn’t really appear to function like a governance token. Instead, most governance decisions are currently made by the Gala Games team and Node Operators. For example, Founder Node operators recently voted on two new games being introduced to the ecosystem in exchange for 4%-8% of these games’ total NFT supply. It’s worth noting that Gala Games’ titles (like Town Star with Town Coin) use different tokens for in-game rewards. Town Coin can also be used to purchase Town Star assets on the Gala Games Store. But its utility looks to be more concentrated to the success of Town Star, because it does not directly act as a medium of exchange for other games on the Gala Games platform and is not expected to have any long-term governance rights.
The GALA token has a fixed maximum supply of approximately 50 billion. Etherscan show 7.5 billion GALA in circulation as of this writing. This suggests that roughly 80%+ of additional supply is still to come online, which will put pressure on GALA’s price in the future. According to the company’s documentation, 17 million GALA is distributed daily with 50% going to Founder Node Operators and 50% going to the “Gala Games Conservatorship”. However, each year, on July 21, the distribution of GALA is set to be halved. For example, beginning on July 21, 2022, the daily distribution of GALA will be 8.5 million instead of 17 million.
We could not find a clear breakdown of the GALA token supply by constituent. Nor could we find much information on the Gala Games Conservatorship, which is presumably a treasury controlled by Gala Games / management. The lack of transparency here is somewhat concerning, in our opinion. If our assumptions are accurate, it suggests that half of the GALA tokens will be held and freely tradable immediately (there is no lock-up schedule) by insiders. For comparison, Enjin, a competing blockchain game platform, plans to distribute 10% of ENJ’s (Enjin’s native token) total supply to the development team and advisors. Therefore, the GALA community and 3rd party developers will be putting a great deal of faith in the Gala Games’ team, its commitment to the project, and its openness to external feedback. For the latter point, Gala Games’ Eric Schiermeyer reportedly lashed out (portions of the alleged exchange posted below) on Discord when some community members criticized an NFT mint, in which Gala insiders received 100 NFTs without presumably disclosing this.
Simply put, the economics and governance of the Gala Games ecosystem does appear quite a bit more centralized (with no clear plans for “progressive decentralization” beyond Node operator voting) than other blockchain games and platforms. Nevertheless, GALA performed quite well in 2021, increasing from $0.01 in February to $0.45 by year end. GALA has fallen, amid the broader crypto sell-off, and currently sits at about $0.20.
Gala Games has two live first party games on the platform right now and many more in the pipeline. That said, we can’t find data on how Gala Games projects are performing using third-party services like DappRadar or CryptoSlam. This is likely driven by the company’s unique infrastructure described above. Here are a few examples of Gala’s current and future releases:
Town Star. Gala Game’s first release, Town Star, is a competitive farming game with many similarities to Zynga’s Farmville. Players grow crops, gather resources, and create materials to build even more. This can result in a small farm becoming a town full of activity. The game is free-to-play (at this time), but requires spending money to unlock the earn component. Players can earn TownCoin, Town Star’s in-game token, by completing daily challenges. However, you need to purchase at least one Town Star NFT and hold GALA tokens in your wallet in order to begin earning TownCoin. Right now, players can earn hundreds of dollars per day playing Town Star, which may not be sustainable long-term as more users look to capture the opportunity, driving up the supply of TownCoin. Town Star is playable via desktop browser and has over 10,000 daily active users, according to Jason Brink at Gala.
Mirandus. Mirandus is an unreleased open world MMORPG in development by Gala Games. The game’s digital assets are owned by users. Mirandus will have a complex economy where each user depends on others. For example, adventurers will need food, armor repairs and some potions before they go on their next adventure. The blacksmith will need wood from the woodcutter to make a hilt, while the butcher needs meat from the farmer. And so on. Virtual real estate is also a key part of Mirandus. The five largest cities in the game world are called citadels. Owners of these NFTs have the right to create and lead their own faction, charge taxes on trade and so on. An NFT for one of the citadels reportedly sold for $1.6 million in January 2021. Mirandus has not announced a release date, but some users do have access to the pre-alpha. Jason Brink at Gala Games suggested the alpha could arrive in late 2022 or early 2023.
In addition to first party titles, Gala Games also aims to attract talented third party developers to release games on the platform. To support this effort, Gala Games announced a $100 million fund in partnership with C2 Ventures to invest in blockchain game studios. In addition to capital, Gala and C2 will provide developers with support on NFT pre-sale strategies, token design, in-game economies, marketing, distribution, and more. Titles in development include Legends Reborn (card strategy game), The Walking Dead: Empires (MMORPG), and Last Expedition (FPS).
In summary, Gala Games has an ambitious vision to build a leading blockchain gaming platform. It has chosen to be both 1) a game studio led by a team with a successful track record of shipping traditional games, and 2) and an infrastructure provider capable of supporting and distributing a variety of third party games and digital assets. This approach is inherently riskier and will require more capital, but it potentially allows for a higher moat with significantly more upside. It’s too early to tell whether Gala Games will be successful in its approach. Town Star has some traction but its userbase is still quite small relative to top blockchain games like Thetan Arena and Axie Infinity. The competitive environment is intense with other platforms from the likes of Sky Mavis, Immutable X, Mythical Games, and others competing for talented developers and users. Nevertheless, we believe that there can be multiple winners. In the end, upcoming first party releases, like Mirandus, and third party releases incentivized by its investment fund will make-or-break Gala Game’s ecosystem over the next few years. We look forward to digging deeper into the company’s games as they increasingly launch.
Other Key Developments
- Animoca Brands raised $359 million at over a $5 billion valuation to continue funding strategic acquisitions and investments, product development, and licenses for popular intellectual properties.
- Phantom raised a $109 million Series B round and released an iOS crypto wallet app.
- Fan Controlled Football raised a $40 million Series A to grow its league that empowers fans to make the key decisions for their favorite team, including calling all the plays in real-time.
- Carry1st raised a $20 million Series A extension led by a16z. The firm will use the funds to expand its content portfolio and grow its product and engineering team.
- nCore Games raised $10 million as the Indian gaming firm gears up to launch web3 offerings.
- BreederDAO raised $10 million, from a16z and others, to produce NFTs for web3 projects.
- Lootex raised $9 million to work on its planned metaverse marketplace that would potentially allow gamers to trade and buy items across multiple blockchains.
- Spring Games has raised $7 million. MaxiBoom, The esports game offers expensive prizes to players in skill-based tournaments that run 24 hours a day.
- Gaming guild IndiGG raised $6 million to boost play-to-earn gaming in India.
- Binance Labs led a $5.5 million seed round for Heroes of Mavia, a play-to-earn MMO strategy game. Heroes of Mavia will use the funds to develop their game, attract top talent, and grow the community
- Ancient8 raised $4 million. They will use the funding to create a Decentralized Autonomous Organization (DAO) for all community members to easily learn about developments in GameFi and build more GameFi tools.
- Lit Protocol (Lockable Interactive Token) has raised $2.2 million and will use the funds to build out its decentralized network which enables NFTs to act as access keys.
- Brave Browser, the free and open-source web browser, passed 50 million monthly active users at the end of 2021.
- Samsung announced a partnership with Decentraland to open its flagship 837 store in Decentraland’s virtual world.
- GameStop shares rose more than 20% after it was reported that the retailer will reportedly create an NFT marketplace.
- Crypto investment firm Mechanism Capital is launching a $100 million fund focused on the play-to-earn (P2E) gaming industry.
- The Sandbox announced a $50 million accelerator program to invest in start-ups developing experiences in the Sandbox’s ecosystem.
- Virtually Human Studio (VHS) announced the acquisition of extended reality and virtual production studio Spectre Studios.
- Forte announced the acquisition of N3TWORK’s platform. The combined company will work to accelerate the adoption and growth of blockchain games.
- Amy Wu joined FTX to lead FTX Ventures, a $2 billion fund to invest in web3 companies and tokens.
- United Esports and the Dfinity Foundation, have created a blockchain game development contest with a $10 million prize pool.
- Mythical Games acquired Polystream, whose technology makes it easier to hop from one virtual world to another.
- Sega’s CEO said that the company will not introduce NFTs into games if players “perceive them as simple money making” schemes.
- Loop Games is allocating $100 million to develop and market its blockchain gaming platform called pethereum.io.
- Research firm Interpret released a study of console and PC gamers that found that 56% of players are interested in earning NFTs through gaming.
- The Sandbox announced a partnership with Warner Music that will see the companies create a music-themed world in The Sandbox.
Content Worth Consuming
Gaming DAOs: A New Way of Coordinating Gaming Communities (Naavik): Link
- Decentralized autonomous organizations (DAOs) started making waves in 2021, but their impact in gaming has thus far been overshadowed by the rise of NFTs and the advent of “play-to-earn” business models.
- In 2022 and beyond, DAOs will have a meaningful impact on the way gaming organizations operate, fundraise, build communities, and even develop new games.
- In this piece, we will explore the fundamentals of DAOs, their appeal as an organizational structure, their current uses in the games industry, and their future outlook. Along the way, we’ll also explore some of the operational challenges that DAOs will need to overcome and dive into some case studies of the most prominent DAOs working in games today.
Infrastructure & the Future of a Decentralized Web (BITKRAFT):
- Web3 is an effort to fix the economic, social, and political problems of Web2. In order to realize this vision, Web3 needs infrastructure across storage, computation, indexing, and other services.
- A key challenge is improving Web3’s infrastructure without compromising on its benefits (e.g., greater user security and control). We’ll explore the potential benefits of Web3 for users and creators, and how decentralized infrastructure may support core parts of the web in the coming years.
- Compute power is required to support rendering, transcoding, motion capture, and a variety of other applications and services. In Web2, tech giants, like Amazon and Google, bundle these services in addition to providing content to users (e.g., Twitch and Youtube). Web3 companies seek to unbundle many of these services.
No Mercy / No Malice: Web3 (Scott Galloway): Link
- What is web3? It’s a hazy/vague term describing a crypto-powered internet, and a font of yogababble.
- The advertised decentralization of power out of the hands of a few has, in fact, been a re-centralization of power into the hands of fewer. The top 9% of accounts hold 80% of the $41B market value of NFTs on the Ethereum blockchain.
- The potential to establish monopoly power, to own the rails (i.e., to centralize), is increasingly what VCs fund, and that’s the true protocol for web3. Web3 acolytes claim DAOs (decentralized autonomous organizations) are superior to traditionally organized corporations, but many early efforts have fallen short.
Games Trends to Watch in 2022 (Newzoo): Link
- Play-to-Earn will become a more viable business model. The idea of gamers making money from playing games is nothing new. Historically, such monetization attempts from players have been against publishers’ terms of service. Companies were unwilling to moderate and regulate player-to-player trading, both financially and in terms of development.
- However, things are changing. Hype around NFTs and success stories such as Axie Infinity mean many AAA publishers—and their shareholders—are striving to legitimize play-to-player trading.
- Still, game publishers are stuck between a rock and a hard place: many shareholders and investors want to see NFT strategies as they see it as “the next big thing”; however, gamers in the AAA space negatively react to the technology—at least, right now.
Lessons on Designing Effective Virtual Game Economies (Terry Chung): Link
- For a virtual in-game economy to maintain economic equilibrium — the relative stability of its core currency and items — it must balance the rate of asset issuance with the rate of asset consumption/demand.
- Charge players for small quality-of-life upgrades or for the use of public goods as a token sink. This taps into a player’s desire for accomplishment and her desire to avoid unnecessary time expenditures.
- Crafting can act as both an item and a currency sink. Players use lower-level items to create higher tier items/consumables/cosmetics which consume component items and at times in-game currency. This is driven by a player’s desire for mastery, curiosity in discovering new items and experiences, and creativity in finding new combinations.
Big thanks to Jimmy Stone for writing this report!