There is Merit to a DAO revenue sharing model — Merit Circle Fundamental Analysis
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Say you own property and want to clear an acre of trees from your land. If you go at it with an axe, it’ll take you a remarkably long time to clear out. If you went in with an excavator fitted with the latest arborist tools, you could clear land in a day versus what you could achieve in a week with an axe.
That hypothetical says a lot about realizing profits in the play-2-earn (P2E) industry.
Merit Circle is an exciting crossroads for P2E and decentralized autonomous organizations (DAOs) revenue sharing models.
These new concepts have received significant interest from our clients at CCI. For this piece, we will spend time exploring just how P2E gaming works, why it is here to stay, and how traditional business models are undergoing a DAOvolution. We will not go overly granular on where Merit Circle is at the minute as the product is at the beginning of its life cycle. Binance published an excellent project summary with a link provided in the references.
For such a new concept, it is pertinent to discuss Merit as proof of concept to demonstrate DAO stakeholders’ profitability through revenue generation. If successful, Merit Circle’s DAO treasury and P2E revenue model could become the standard for businesses and organizations at every possible level.
Merit Circle Key Summary
Your TLDR summary, D.I.S.R.U.P.T. key takeaways. 27/35
Pay-to-play is so 2010. P2E is all the rage.
If you have switched on the market radar at any point in the last six months, you’d have surely noticed the rise of Axie Infinity. When understanding how value manifests in P2E environments, it’s informative to reflect on the first movers in the space. Axie was initially valued below 1c before its meteoric rise to an all-time high of $164.90, currently sitting at $104.10.
Axie infinity involves players purchasing a minimum of three NFTs, or Axies. The primary sources of income are derived from player versus player (PVP), player versus environment (PVE), and breeding activities. The latter flaunts a seemingly infinite number of combinations through experimenting with lineage to create non-fungible value for bred Axies. Players can gradually increase their earning capabilities by upskilling and obtaining higher tier NFTs throughout the game.
We will explore this idea further, but it is essential to reflect on the implications of the play to earn concept sweeping through nations with low socioeconomic status and hyperinflation.
In countries like Venezuela and the Philippines, players can make a 1-month salary from a week of gameplay.
But how did Axie Infinity become so popular and sustain such growth?
This brings us to a fascinating consideration around value capture in the NFT space. For many P2E games, anyone can start from scratch (although you must have a minimum of 3 monsters to play Axie Infinity).
However, the consequences of starting from scratch tend to mean you have limited P2E potential. You can do what some refer to as “grinding”, or in other words, investing an inordinate amount of time compounding earning potential through the gradual acquisition of in-game NFTs.
But if you are well off and have the means to purchase these NFTs, you can immediately buy Axies off the market, giving you a higher P2E potential right out the gate compared to a player with zero capital input or in-game assets. This need of those that can afford it to ‘get ahead’ facilitates secondary market NFT sales.
Players who manage to generate P2E revenue may pursue two simple binary options.
Either cash out the $AXS/$SLP earnt within the game or reinvest those earnings into acquiring higher-level NFTs. In the most basic sense, it’s the choice between cashing out or compounding. When we start to think of it in these terms, we can very quickly begin to see similarities with the game theory that manifests in DeFi.
Choosing to compound increases the price floor of the token and the broader ecosystem.
NFTs can only be purchased with $AXS tokens, an economical design emerging P2E games have quickly embraced for their native tokens. As the price increases, so does the floor price of the NFTs along with the underlying collateral. However, we can start to see that it can become prohibitive within this model very quickly.
This brings us full circle to Merit. Why is it a good idea?
Firstly, early adopters have more NFTs than they can poke with a stick. It is difficult for many to find the time to utilize them all to maximize their revenue-generating potential, so what would it look like to rent those NFTs out?
CEO and co-founder of Merit Circle, Marco van den Heuvel, explored this concept through the Axie 420 Scholarship program. By lending out his Axie NFTs to players starting at the beginning, he could increase their earning potential compared to if they just decided to go it alone. By initially offering players 60% of revenue generated from the loaned NFTs and keeping the remaining 40% as profit. This idea quickly evolved into players receiving 70% of profits, with 30% allocated to the Merit Circle DAO treasury.
The second reason is an opportunity to lift people out of poverty with this asset lending and revenue model. I highly recommend viewing the brief P2E documentary linked in the references to see just how Axie Infinity scholarships are changing the lives of low socioeconomic participants in the Philippines. But lending NFTs with high P2E potential to those below the poverty line revives the idea of “equality of opportunity”. Merit Circle breaking down the cost barriers to entry for low socioeconomic players gives them a fair-go and continues to profit $MC stakeholders.
Third, you may have just read everything to this point, and not a single bit of it made sense. You may also have zero interest in playing games, which is fine. But by investing in Merit Circle, you have a stake in the DAO treasury that accumulates from the 30% of profits from scholars and decide on the utility of treasury investments into existing or emerging P2E opportunities, along with pursuing yield from other financial instruments. Effectively, you are investing in an index fund. The success of emerging P2E’s directly benefits the growth of the treasury that benefit $MC stakeholders.
Finally, this is a community-led DAO. You may have noticed there is not much information on the team, and this is because the team is growing exponentially in a decentralized manner. Onboarding more team members will be an ongoing process as new P2E opportunities become accessible to scholars. The team will constantly be onboarding managers and gamers to pursue these emerging P2E opportunities with some significant partnerships in the works.
Competition fosters innovation while collaboration drives decentralization.
The partnerships Merit Circle are forming deserve attention and are the organization’s primary focus in their formative stages.
We, of course, have Axie Infinity in the breeding and battling of monsters that have shown success. Cyball is a skill-based game in which character traits develop over time with an interesting NFT lending function Merit Circle can leverage. Nyan Heroes will enable sub-games with P2E mechanics to be custom-built within that Metaverse. Vulcan Forged is a gaming incubator with four games currently in beta. Sipher will have a lending model implemented in their game. Also, the use of NFTs is stamina based and can only be used ten times per day. For investors with multiple NFTs that are underutilized, there is potential for scholars to break into the game. UFO Gaming seeks to bridge traditional games onto the blockchain and integrate P2E mechanics, effectively converting assets in these digital worlds into NFTs that can be purchased. Fancy Birds is a P2E adaptation of the popular mobile phone gaming app from 2013, Angry Birds. Big Time is creating a triple-A RPG game. Genopets is looking to reward your real-world movements, or physical activity, with XP that enhances the performance of NFTs in the metaverse. Syn City is a mafia-themed metaverse rife with P2E opportunities. MixMob is a trading card strategy game. Sidus heroes will be a triple-A P2E MMORPG where every item in the Metaverse is an obtainable NFT. The Elfin Kingdom is a Pokemon inspired metaverse that integrates GameFi and DeFi mechanics. Of course, possibly Merit Circle’s most anticipated partnership is Illuvium, a decentralized gaming studio. Their first release is a self-titled fantasy RPG in an open world.
BlockchainSpace and Dept Agency will assist in building out the infrastructure to enable scholars to profit and borrow digital assets from the ever-growing list of P2E opportunities solidified through partnerships. PathDAO, Rainmaker and Yield Guild Games also operate on a similar DAO revenue model, they have all agreed to share NFT assets and develop infrastructure with Merit Circle for their various shared scholarship ventures.
Merit comes from working smart, not hard.
From a high level, how does Merit Circle work?
“There are three roles: Gamer, Manager, DAO contributor. Merit Circle functions as an index fund for the Play-to-Earn industry. Our current balance sheet consists of numerous highly valuable assets spread out across multiple games. Each strategy we embrace, whether that’s a scholarship model, land plays or a financial investment, we aim to make profit to enlarge our DAO’s treasury. We allow everyone to become a Merit Circle DAO contributor by purchasing the MC token and thereby receiving your stake of the DAO. Each contributor will benefit directly and indirectly from the growing value of our DAO’s treasury, resulting in a growing floor price for the MC token. Anyone who contributes to our DAO can plant their flags in the Metaverse and share in the entire industry’s growth passively. Merit Circle does the job. You do the earning.” — Merit Circle
Since receiving seed investments and raising over $100M in the Copperlaunch reverse auction before $MC went to market, some of the funds raised have acquired high-quality NFTs for upcoming games and provided seed investor funding for some of these projects.
The NFTs get loaned out to scholars, and they do not own the treasury assets at any point but can utilize it through the scholarship system. When scholars play on behalf of Merit Circle, they borrow the NFTs and implement the P2E strategies taught to them by highly knowledgeable managers. Their role is to teach profitable strategies to gaming scholars. Anyone can apply to become a scholar or a manager. If you have a particular interest in building your NFT portfolio, your 70% share of profits will go much further than trying to build a position from scratch. As a manager, you may find fulfilment in fostering adoption, developing vault strategies and bringing more users into the ecosystem.
How has the DAO performed to date?
“DAO have a broad investment mandate so as to enable our sizable cash position to be as productive as possible for the DAOs benefit” — 99.98% approval
“Stake MPT in Maple Finance, to be eligible for receiving MPL governance token rewards” — 95.23% approval
“Develop an overarching platform that will house all the functionalities required to scale and sustain all the current gaming activities for Merit Circle.” — 99.93% approval
“Gro protocol propose to help Merit Cicle DAO manage $2.5MM of the treasury fiat position through their risk tranched stablecoin PWRD, which offers deposit protection while generating yield.” — 80.31% approval
“A venue to de-risk early-stage token and NFT investments at the time they become liquid” — 99.8% approval
Tokenomics come full circle
· Price: $5.50
· Market Cap: $234,776,438
· Max Supply: 1,000,000,000
· Circulating Supply: 42,592,000
· Community Incentives — 29.44%
· Team & Advisors — 20%
· DAO Treasury — 18.40% (a position in the entire DAO’s treasury will consist of MC tokens)
· Early Investors — 14.06%
· Liquidity Rewards — 10%
· Public distribution — 4.10%
· Retroactive rewards (Axie420 period) — 4%
$MC Vesting Schedule:
· “Community Incentives — No cliff period, 36 months vesting — tokens can only be allocated based on approved governance proposals
· Team & Advisors — 12 months cliff period followed by 42 months vesting
· DAO Treasury — No cliff period, 36 months vesting — tokens can only be allocated based on approved governance proposals
· Early Investors — 6 months cliff period followed by 36 months vesting
· Liquidity Rewards — 12 months cliff period after claiming.
· Public Distribution — No vesting
· Retroactive Rewards — 10% distribution after TGE, remaining part 18 months vesting”
“Bear Market Proof” — is there any Merit to the concept?
A topic of immense interest that transcends what is capable with P2E is the tokenization of businesses and how they realize profits through token appreciation.
If you believe that you make the best coffee in town, imagine opening a café.
You have friends and family that want to be a part of your bringing your business venture to life. They purchase your $CAFE token. You may also widen your net and market your startup to attract outside investors. The proceeds from that raise form a DAO treasury (starting capital for the business) and initial liquidity of the token.
Operational costs get deducted from the DAO treasury over time. However, net profits generated from the café go back into the Café DAO treasury. If your business is successful, the revenue entering the treasury will exceed operational costs.
Your friends and family can then vote on how to utilize the treasury. They may wish to expand the business and open a second café. They may want to use the treasury to invest in financial instruments to generate an ongoing yield. Or, as token holders, they may like to see the treasury used to purchase the token and then burn it.
What’s the benefit of this?
Your $CAFE token may launch at $1. Any interested investors who want a stake in the treasury and a say on investing revenue may be interested in holding your token. Over time, as cash revenue from the business purchases your $CAFE token, that increases the token’s value. From the business’s profits, the token may now be worth $1.20. Investors have now realized a 20% gain, not from any speculative market activity but the revenue generated by the business that has purchased tokens and removed them from the supply forever. Business owners will rightly have a % vested share of the total token supply and will realize profits in this way. If that allocation of founder tokens is deemed unfair, investors will vote with their feet.
For those that wish to realize profits, they can cash out. Those who see this as just the beginning may hold their tokens and participate in decision-making to compound more revenue into the token.
This also has the profound effect of being highly inclusive. If you love the coffee and want to see the owners do well, you might vote with your investments by building a position in their business. If the customer service is constantly lacking or you’re not “vibing” with the staff, you can exit the investment as quickly as you entered it.
Stock prices have been an indicator of consumer confidence since before we were born. But this metric has never been scalable to small businesses and entities that are not publicly listed on a stock exchange. Business tokenization and subsequent DAOification flip the system as we’ve known on its head.
This brings us to a pertinent consideration, is this a resilient market model?
Merit Circle Treasury Report for December 2021
Short answer, yes. But there is always a caveat.
With $ETH or $BTC as primary collateral in the liquidity pool, we can expect some degree of resilience in the token price for a business pegged to these assets. Keep in mind the standard constant product market maker model involves staking two tokens with matching inputs by market value on each side. Price movements of one asset impact the price of the corresponding asset. Stable coins ($UST, $USDC, $DAI, etc.) indeed could insulate the price of the business token, so long as inflation in the $US dollar is not running rampant, which is undoubtedly a risk worth consideration in these uncertain times.
If investors continue to see value in actively taking a stake in a business treasury and the token price is not over-inflated by venture capitalists or ‘pump and dump’ speculators, then the token price will be largely unaffected by a bear market. Should a bear market come along, the DAO can decide whether to insulate the treasury into stable assets and sacrifice short-term yields.
If we pivot back toward how this is relevant for Merit Circle, we can take a close look at their treasury.
“Merit Circle has a bigger non-native treasury than MakerDAO, Aave, Sushiswap, and Uniswap combined.” — Merit Circle Medium.
The implications of having a non-native treasury are straightforward. If you have a treasury full of your native token, you eventually need to sell it to fund your activities. There will inevitably be unwelcomed sell pressure on the native token, which is far from ideal and is not sustainable for the long-term operations of the DAO. Generating revenue in non-native tokens, whether in the form of seed level investments into P2E games, accruing stablecoins or highly liquid assets like ETH or BTC, utilizing idle holdings in financial instruments to generate non-native yield — all have positive implications on the growth of the treasury and insulates the price of $MC.
There will be many keeping an eye on Merit Circle. Should they demonstrate their token revenue model is sustainable going into the future, this could very well scale to any revenue-generating business.
DAOification, A True Meritocracy — Discussion
In the real world, we grapple with big existential ideas that shape the journey we take together toward a better world.
The problem is that solutions are often grounded in ideology with programmed biases and assumptions. “Power corrupts, and absolute power corrupts absolutely”. Despite being more connected through the internet than ever before, it has made it more challenging to determine authentic consensus in an increasingly centralized world.
The system is broken, but it is not beyond repair. Decentralized and permissionless blockchain infrastructure is how we fix it. The people need an immutable way to achieve consensus instead of relying on centralized entities to call the shots or tell the people how things should be.
Consensus, built on a constitution of ethics, should be decided by DAOs. If ConstitutionDAO’s journey and their $PEOPLE token is anything to go by, there is a hunger for self-determination and decentralized digital sovereignty.
Evolving our thinking toward respecting the authority of the DAO will lead to existing structures that we perceive as unjust becoming replaced by mechanisms that achieve true consensus. Decisions made out of malice are scarce in the DAO. They never knowingly vote against their interests, and if they do, it impacts the value of their investment. DAOs require maturation, which involves DAO participants experimenting with ideas and refining proposals to optimize outcomes. Consensus grows around good ideas.
A DAO becomes a sustainable movement when generating real-world profits through their treasury.
Merit Circle have taken up the cause to democratize gaming and level the playing field for new entrants to the market.
Lending underutilized digital assets to enable those living in lower socioeconomic areas to make a living while profiting from the DAO is a game-changing concept. The social and economic implications cannot be understated. We have already begun to see a network effect with around 3 million active users on Axie alone.
DAOs and NFT-enabled P2E mechanics make this possible.
However, for those who cannot conceive NFTs as more than digital art, there will naturally be a resistance toward understanding how P2E mechanics can be sustainable.
A clear example I like to give to simplify the complexity of digital economies emerging in the Metaverse is by reflecting on Gala Games flagship MMORPG, Mirandus.
This game has yet to be released, but land quickly sold out with some jaw-dropping price tags, but let us pretend that you purchased a plot of land out the front of a dungeon.
You spend time improving your in-game characters skills in blacksmithing. To complete a dungeon for a reward of 1000 coins, the player needs a minimum quality of weapons; otherwise, claiming the prize will be near-on impossible with skill alone. This creates demand for a service. As a blacksmith, you may spend around 100 coins to purchase or play the game to gather materials. Not everyone can create weapon NFTs unless they focus their character builds and spend time developing the necessary skills, but upon forging an NFT sword, you may sell it to the player for 500 coins. It is in the player’s interest to engage in this commerce. The net result if all goes well is that you have just profited 400 coins from your commerce, and the customer achieved a net profit of 500 coins once they cleared the dungeon. This inherent game theory manifests through the P2E in weird and wonderful ways that have an eerie resemblance to real-world economics.
Now we take this a step further by contemplating non-fungibility. If you own a piece of land out the front of a dungeon, you can rightly assume you will get a lot of customer traffic to your store and make more sales. Being able to provide an economical service for other players gives your land value. If you consider for one moment what the value of your land would be if it were in the middle of a desert with absolutely no dungeons or P2E opportunities nearby. You’d make more money selling NFT tumbleweeds. The lack of traffic to your store limits the potential non-fungible value of your virtual land. In principle, there is no difference between owning a hectare of property in Sydney CBD versus a hectare of land in the middle of Australia. The former will be considered far more valuable than the latter based on access to resources and economic opportunities.
This non-fungibility manifests in fascinating ways. Snoop Dogg has been a well-known cultural figure for many years. Over the past year, he has become highly active in the NFT space, making big purchases. One of which was virtual land in The Sandbox metaverse. The plot next door to Snoop sold for $450,000. By Snoops presence alone, the corresponding virtual land took on a non-fungible value. It is a speculative price tag but shows how non-fungible value can manifest on a sentimental level beyond the economic opportunities of P2E.
The possibilities for value to manifest at scale in a digital world is as infinite as your imagination can take you.
That brings us to what the future holds for $MC.
The gaming market has been growing year on year. In China alone, over 665 million users are playing games, which may explain the recent government mandate to limit how long citizens are permitted to play each day.
In surrounding Southeast Asian nations, the trend toward gaming enabled by mobile devices is growing exponentially. Vietnam has seen the fastest adoption of mobile devices globally, allowing them to build the future on blockchain technology instead of rebuilding the past with antiquated systems.
The most effective way to retain knowledge is to share it with others. The scholarship program creates a positive feedback loop where a scholar may wish to take on the responsibilities of a manager. They then have a salient opportunity to grow into experts while testing their strategies to maximize returns with up and coming scholars.
To determine whether Merit Circle will be a profitable and long-term position depends on how you would answer the following questions.
Do you hypothesize the adoption trend of mobile devices and gaming will continue?
Do you believe that low socioeconomic communities will adopt P2E at a grassroots level?
Do you not have the time or willingness to pursue P2E opportunities on your own steam?
Finally, and most importantly, do you believe that P2E is here to stay and will remain viable heading into the future?
If you answer ‘yes’ to all four of these propositions, then Merit Circle is an ideal long-term hold for you.
Are there risks?
While the information on the team is limited to Linked-In and Twitter, their passion is not in question as their legacy work with Axie 420 scholarships speaks volumes on what motivates them. Given they are a DAO structure, they will form a more coherent mission statement over time.
Success in one P2E game does not automatically translate to success in every other venture their scholars are playing. One game may be more profitable than another at any given time. Resources will constantly have to be rebalanced, i.e. scholars may be encouraged to play a game that is more profitable than another.
There is bear market resilience, but there is only so much a treasury can utilize to protect its token price before liquidating yield-generating assets.
There is minimal risk of price dumping from early investors or stakers. Rewards go into a one year escrow from the time of harvest, and time-locked stakers will have to wait up to two years to receive all of their rewards. Team tokens unlock after twelve months.
This may be alarming for a token that does not have a treasury to back it, but this is of little concern to Merit Circle. Twelve months is a convenient lockup period as vesting cliffs for seed investments made by the DAO treasury will become redeemable around the same time. The DAO may vote to rebalance unlocked holdings to protect the price from exit liquidity or incentivize long-term holders. Or, they may not be concerned by the price being impacted in the short-term at all and are content with continuing to grow the treasury.
Further, it will take time before Merit Circle gets anywhere close to its maximum profit potential. Blockchain adoption is still ongoing, which scholarships play a significant role in facilitating through P2E. Many of the games Merit Circle are partnered with are still in development. Given that this is a fast-moving field, there is no end in sight for onboarding new partnerships.
As a result of the vesting unlocks for both investors and DAO treasury investments, the short-term price action is difficult to predict. Worst case scenario $MC will be price neutral until vested tokens have been liquidated after a couple of years, best case scenario is the growth of scholarship opportunities goes exponential and incoming revenue outpaces exit liquidity.
Whether $MC is the right investment for you depends entirely on your investment horizon, but if you believe that the P2E market is only going to grow from here, then $MC is a solid long-term hold.
But in the event you do not wish to invest, Merit Circle is one to watch to get exposure to up and coming early-stage P2E projects that have been thoroughly vetted. This is a project that you should keep an eye on as a proof of concept for where the space is headed for both P2Es and revenue-generating DAOs.
Binance Research, https://research.binance.com/en/projects/merit-circle
Coindesk, ‘Axie Infinity Finds Ready Players in Hyperinflation-Racked Venezuela’, https://www.coindesk.com/markets/2021/11/23/axie-infinity-finds-ready-players-in-hyperinflation-racked-venezuela/
Decrypt, ‘Someone Paid $450K to Be Snoop Dogg’s Metaverse Neighbor’, https://decrypt.co/87524/someone-paid-450k-snoop-dogg-metaverse-neighbor
Merit Circle Medium, https://medium.com/@meritcircle
Merit Circle Substack, https://meritcircle.substack.com/
Merit Circle Substack, ‘Treasury Report December 2021’, https://meritcircle.substack.com/p/2-treasury-report-december-2021
Merit Circle Core Team Roster, https://meritcircle.gitbook.io/merit-circle/future-operations/structure/dao-contributors
Merit Circle’ Treasury Mechanics’, https://medium.com/@meritcircle/merit-circle-treasury-mechanics-f742656ce7e0
Merit Circle Website, https://www.meritcircle.io/
Merit Circle, ‘Extending Team & Advisory Cliff by 6 Months’, https://medium.com/@meritcircle/extending-team-advisory-cliff-by-6-months-a729ca7dc407
Mordor Intelligence, ‘GAMING MARKET — GROWTH, TRENDS, COVID-19 IMPACT, AND FORECASTS (2021–2026)’, https://www.mordorintelligence.com/industry-reports/global-gaming-market
Similarweb, Axie Infinity Website Traffic, https://www.similarweb.com/website/axieinfinity.com/
Youtube, ‘PLAY-TO-EARN | NFT Gaming in the Philippines | English’, https://www.youtube.com/watch?v=Yo-BrASMHU4
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