Three A’s To Pass Go — Illuvium Fundamental Analysis

Working towards personal goals, whether a dream job, property, assets, money, or acclaim, often requires resilience to deal with unexpected challenges in an uncertain time frame while remaining focused on the goal — you would be familiar with this as life.

For many of the world’s richest, a characterizing feature of their success stories is often perseverance and delaying gratification in an uncontrolled environment with non-linear rewards; often, they would find themselves on the brink of bankruptcy and only through having tried and failed multiple times were they able to reach a desired outcome.

To obtain a sense of achievement, many people look toward video games, which differ from the challenges of real life in several distinctive ways.

Firstly, video games offer a controlled environment where players can engage in fantastical scenarios, overcome challenges, and experience adventures that might be impossible or impractical in real life. The element of escapism is heightened, allowing individuals to temporarily step into alternate worlds where the boundaries of reality are stretched or shattered.

Secondly, the concept of “fun” in games often involves a structured and rewarding feedback loop. Game designers strategically integrate elements such as achievements, level advancements, and virtual rewards, providing a sense of accomplishment that may be more immediate and tangible than real-world achievements. This instant gratification contributes to a unique and intensified form of enjoyment.

Additionally, video games frequently incorporate elements of competition, whether against computer-generated opponents or real-life players. The competitive aspect adds a layer of excitement and challenge that may differ from the competition types found in everyday life.

Moreover, video games’ freedom of choice and consequence allows players to experiment with decisions and actions without real-world repercussions. This experimental aspect of gameplay contributes to the distinctive joy derived from exploring possibilities within a virtual space.

While both real-life and video game enjoyment share common elements, the virtual environment of games provides a unique canvas for the expression and experience of fun, often marked by escapism, immediate rewards, competitive dynamics, and the freedom to explore alternative realities without real-world consequences.

In essence, whether it is the real life or a video game, it is much easier to push through the challenges when you are able to have fun along the way.

In light of the above, we recognize Illuvium as a crypto-gaming project that seeks to become the first AAA game. While multiple cryptocurrency projects are seeking to release a game under the GameFi or play-2-earn model, few are as focused on achieving triple-A status or making a game that is fun on a viral scale. For the bulk of this fundamental analysis, we will only briefly touch on Illuvium, with a core focus on discussing why fun in gaming is important to support the viability of an investment such as Illuvium as we start to see the light at the end of the tunnel (bull market).

This fundamental analysis was published December 2023, and is part of a weekly paid newsletter from the Crypto Consulting Institute as such trade insights are likely outdated. Crypto Consulting Institute provides exclusive market insights, actionable trade signals, and monthly fundamental analyses. For more information on receiving FAs as they are released, visit: https://www.cryptoconsultinginstitute.com/newsletter

Going under the Overworld

In the works since 2020, Illuvium has been under construction by a global team exceeding 40 members, featuring the co-founders Kieran Warwick — a seasoned entrepreneur and early cryptocurrency enthusiast — and Aaron Warwick — an adept game designer. Notably, the Warwick brothers, who happen to be the siblings of Kain Warwick, co-founder of the decentralized finance platform Synthetix, lead the charge in crafting the Illuvium gaming experience.

Illuvium stands as an expansive fantasy combat game integrating non-fungible tokens (NFTs) as integral in-game assets. NFTs, digital tokens symbolizing unique and scarce items like artworks, music, or collectibles, play a pivotal role within the Illuvium universe. In this immersive gaming experience, players are empowered to capture, collect, trade, and engage in battles with creatures known as Illuvials. Each Illuvial functions as an NFT, possessing distinctive attributes, abilities, and rarities that contribute to their individuality within the game.

Illuvium aspires to forge a groundbreaking gaming experience, granting players genuine ownership and control over their in-game assets while reaping the benefits of their accrued value. Diverging from conventional games where players navigate within the confines of developer-imposed rules and limitations, Illuvium bestows upon players the unprecedented freedom and authority to influence both the game world and its economic dynamics.

Illuvium can be accessed through a downloadable desktop app and is complemented by various supporting decentralized applications (DApps), including a yield farm and a decentralized exchange. Within the expansive and diverse landscapes of Illuvium, players have the opportunity to encounter and capture Illuvials, as well as engage with fellow players. Captured Illuvials can be nurtured and trained, integrating them into the player’s team for battles against other players or the game environment.

The game introduces an auto-battler gameplay element, allowing players to strategically organize their team of Illuvials and initiate automatic battles based on their individual skills and stats. The outcome of these battles is influenced by player choices, as well as the inherent randomness and unpredictability embedded in the game world.

Illuvium unfolds a communal storyline shaped by the collective actions and decisions of the players. Divided into seven distinct regions, each characterized by its own theme, culture, and challenges, the game invites players to partake in quests and daily challenges. Furthermore, players wield the power to steer the narrative’s course through voting and participation in governance mechanisms.

The recent launch of the Illuvium private beta has garnered substantial attention, boasting a player base of over 30,000 individuals. Impressively, this figure positions Illuvium’s user count higher than 99.7% of currently active GameFi apps, according to data sourced from DappRadar.

Illuvium, functioning as an open-world exploration, NFT creature collector, and autobattler game, operates on the Ethereum Blockchain. A strategic collaboration with the Ethereum layer-2 solution, ImmutableX, has propelled the game to extraordinary heights, earning it the esteemed AAA rating — an industry benchmark akin to a blockbuster in the gaming realm.

In the course of gameplay, players will have the opportunity to accumulate cryptocurrency. ILV, Illuvium’s native token, can be earned through various in-game activities, including playing, completing specific tasks and quests, and achieving success in tournaments.

The integration of players’ wallets into the game is seamless, eliminating the need to connect an external wallet from another company. This crucial feature plays a pivotal role in Illuvium’s success, making it user-friendly for Web2 gamers who may have faced confusion or skepticism regarding wallet integration and NFT legitimacy. Now, players can effortlessly store their assets while immersing themselves in the gaming experience.

The company is committed to ensuring fair revenue distribution within its community. Notably, a percentage of the proceeds from land sales will be allocated to users who have staked ILV tokens. The company’s DAO will receive 10–15%, and the remaining portion will be distributed among the staking community. Staking options range from one to twelve months. These structured revenue distributions serve as rewards for community participation, with smart contracts facilitating the transparent and efficient distribution of funds.

Why Does Crypto AAA Game Status Matter?

A Triple-A (AAA) game is a high-budget, top-tier video game developed by a major studio or publisher. These games typically have large development teams, extensive marketing campaigns, and high production values. The term “Triple-A” originally indicated the highest level of quality and production values in the gaming industry.

Key characteristics of Triple-A games include:

• High Production Values: AAA games boast impressive graphics, sound design, voice acting, and overall presentation. The goal is to provide a visually stunning and immersive gaming experience.
• Large Development Teams: AAA games involve sizable teams of developers, including artists, designers, programmers, writers, and more. This allows for the creation of complex and detailed game worlds.
• Extensive Marketing Campaigns: Due to the significant financial investment, AAA games are usually accompanied by extensive marketing and promotional efforts. This includes trailers, teasers, press coverage, and sometimes even events.
• Broad Distribution: AAA games are often released on multiple platforms (such as PC, consoles, and sometimes mobile devices) to reach a wide audience. They may also have simultaneous global releases.
• Long Development Cycles: The development of AAA games typically takes several years. This extended timeframe allows for the thorough design, development, and testing necessary to create a polished and engaging gaming experience.
• Innovative Gameplay: While not always the case, many AAA games strive to introduce innovative gameplay mechanics or push the boundaries of technology to set new standards in the industry.

Triple-A games that come to the forefront are Fortnite, Call of Duty, and World of Warcraft that have accrued millions in sales and have millions of active monthly users.

This is important in the case of Illuvium, that the focus on development to be an experience the user considers to be fun.

“Fun” is a subjective and multifaceted concept that describes the experience of enjoyment, amusement, or entertainment derived from engaging in activities, experiences, or interactions that bring pleasure and satisfaction. It is often associated with positive emotions, laughter, and a sense of fulfillment. Fun can manifest in various forms, including playing games, socializing, pursuing hobbies, and partaking in recreational activities. The nature of fun is highly individual, as what one person finds enjoyable may differ from another’s preferences. Ultimately, the essence of fun lies in the positive and gratifying feelings it generates, contributing to an overall sense of well-being and happiness. What it boils down to is that people are willing to spend money it is means they have more fun.

$ILV Tokenomics (As of 13.12.2023)

Price: $94.47

Market Cap: $618,128,300

Circulating Supply: 6,104,733

Total Supply: 9,610,839

$ILV inflation set to continue through until July 2025, with ongoing distribution of tokens to take place through $ETH buybacks from gaming proceeds for $ILV stakers and distribution of in-game rewards.

Based on circulating market capitalization, 51% of existing Illuvium is locked up in DeFi staking. Rewards undergo 12-month vesting and are locked as $sILV2 tokens.

Based on Illuvium’s financial reports, they have a sufficient runway to continue development until January 2025, not withstanding the likelihood of a bull market having commenced prior to this time that would likely grow Illuvium’s development runway.

There are several revenue distribution mechanisms displayed above. Stakers ILV-LP tokens and unutilized $ETH are staked on Sushiswap for yield that returns to $ILV stakers. Sales through the Illuvidex (Gaming NFT marketplace) send a commission to the DAO. $ETH is swapped for $FUEL — the synthetic in-game currency that can be obtained from in-game activities, and used to make in-game purchases. Finally, token holders receive positive appreciation through the sales of land.

Note, that Illuvium has indicated an intention to share profits from merchandize sales, and seek to advance the Illuvium Universe (Lore) into a television/movie franchise to further share profits with users. These efforts are ongoing and the direction of expanding the Illuvium universe outside of gaming is at the discretion of the DAO.

The future of crypto is far from boring — Discussion

Long-time subscribers of the CCI newsletter are likely up to speed on the virtual economic mechanics that can make play-2-earn viable from previous fundamental analyses such as Merit Circle and TCG2.

We already understand the basic premise that players may wait to buy characters, land, items, etc to progress in the game off the secondary market rather than grind.

What is seldomly discussed is the need for these games to be fun; as such, discussing the broader cryptocurrency landscape from conception until the present is required to give a richer context to inform our investment thesis.

If you reflect upon the previous bull market that saw anything related to gaming go irrationally parabolic, you would likely have made two observations:

1. That a lot of terrible, copy/paste, boring games, were released with minimal effort to try to capitulate on the hype. These often resulted in rug pulls.
2. Developing promising games with high potential, such as Illuvium, takes many years to build and cannot be actualized during the relatively brief window of a bull market. Moreover, blockchain gaming is nascent and it is difficult to meet deadlines that a Web2 game would be able to achieve within the realm of a new technology.

If our prospectus is short-term, and we are ruthless on capitulation, you may seek to take advantage of a gaming crypto (at your own risk) based on low market cap, marketing and hype; seeing as these three elements are often more pertinent in the short term if you are disciplined enough to take profit and run. High risk, high reward.

If our prospectus is mid to long-term on crypto gaming, then we need to accept that a game that will stand the test of time has to grow and evolve to onboard and retain users constantly. Ultimately, short of a game that compels a user to spend, the revenue promised to investors will not be realized.

To give you context, a popular massive multiplayer online role-playing game known as World of Warcraft (WOW) was released in 2004. It still operates and continues to expand its universe to this day. Within this game, users purchase map expansions of the WOW franchise, items to level their characters up faster, and unique items or skins that are unavailable through grinding (spending more time on the game to realize a greater effect). Similarly, the highest-grossing mobile game is Honor of Kings which has amassed $13B in revenue over its lifetime. These purchases occur mostly in the form of what are called “micro purchases”. Users are presented with “discounts” or “special offers” to enhance their character stats, or obtain items that can only be purchased. These purchases may cost as little as $2, or as much as $200; each user makes a purchase without considering the cumulative costs of taking up these offers over time. In other words, users are having so much fun in the moment that they make multiple purchases over time that can often amount to a significant sum of money.

Why we had discussed fun at the beginning of this fundamental analysis and now, is that real life is non-linear in terms of rewards. On a psychological level, many are not cognitively equipped to delay gratification in order to achieve a desired outcome. Moreover, while there are socioeconomic and cultural variants, in the pursuit of goals the majority have to overcome similar challenges. Alternate worlds that do not impose these constraints are appealing, users have fun through a sense of accomplishment through these games.

This is important, because if you are to invest into a game with the view that it will lead to returns in the future, then we need to understand the source of revenue that grows that investment.

Becoming the first triple-A game in cryptocurrencies will be a big deal. Illuvium have a large team of over 100 contributors building out the world, survived the bear market, and will likely continue to spend funds into perpetuity in order to continue to produce new offerings to attract new users.

Axie infinity, at the time of its release, was not by any stretch a Triple-A game, but was proof of concept with an attractive but evidently unsustainable revenue model that users flocked to.

To this end, Illuvium is a cut above the rest in terms of a crypto game. It has not been rushed. The development timeline is well into the future with the view of continued expansion, and Beta availability on the Epic Games Store, with 180M active users, is the first step in the right direction towards creating awareness in a new user base. As it currently stands though, it does not rival Web 2 games with huge followings and millions of dollars of sales taking place everyday. Many gamers would take a game that is fun over a game that costs them money, over a game that is boring they can make money through play-2-earn activities. As such, fun and making money gaming, are largely inseparable, and for any viable crypto gaming investment it has to be funded by a user base that will spend money because its fun.

The next caveat that we need to be across is that “gaming crypto” is a broadly encompassing notion for cryptocurrency investments that includes a standalone game (like Illuvium), gaming studios (like Merit Circles rebrand to Beam), gaming publishers (like Gala Games), gaming/NFT infrastructure (L1, L2, Subnet, Web 2 Game Plug-Ins). Liquidity fragmentation needs to be considered in terms of what slice of the pie Illuvium will obtain.

Based on bull market hype alone, we may see Axie Infinity having reached a 10.5B market cap, albeit with demonstrably poor tokenomics that facilitated a supply squeeze on inception that saw price go from $0.12 to $164.90. Illuvium reached an all time high market cap of approximately $1.17B, with a supply of less than 1M tokens. Circulating supply is now six times at launch when $ILV hit an all-time high of $1911. Effectively, for token to return to all time high, it would need a market cap of approximately $7B, not withstanding reduced circulating supply from $ILV stakers and tokens retained within the game over time from purchases. In terms of whether it can shoot past all time highs, we would look toward $AXS as a potential benchmark.

However, if we look at it for what it really is on a longer time frame, Illuvium needs to be have as much awareness and player bases of traditional Web 2 AAA games to maintain a sustainable model. It is a niche universe. While the team seem to be building into perpetuity, and the DAO will likely commission additional games to be developed in different genres, it remains unlikely that Illuvium will significantly blow the top off its all time high anytime soon.

Illuvium has taken a step in the right direction seeking to develop into a mobile game application. As South Park satirically puts it, making money in mobile phone games requires a concept referred to as a “freemium” game — free, but not really.

Users are placed on the precipice of having minimal fun playing a mobile game while having opportunities to enhance the fun of what would otherwise be a free experience, by paying money for add-ons and extras. While it may be unbecoming to reference South Park for a fundamental analysis, it is fundamentally true in terms of the psychological mechanics behind games that you can obtain for free and be enticed to spend to enhance the experience.

Why is this important? Because as arguably unethical as it is by design, for Illuvium to be a game that builds a large user base, and onboards people who spend money that is ultimately converted into $ILV, it is in the investor’s interest that this model can be achieved — as it has proven to be insanely profitable.

Illuvium, while having a unique story and lore, is not a unique game. Role-playing games are a dime a dozen. Illuvials obviously resembles Pokemon, or even Axie Infinity to a fair extent. Illuvium Zero is another take on Farmville. Where Illuvium could create a sustainable model is through the interoperability of these inspired game types that interplay with one another. How this will lead to greater revenue distribution in practice is yet to be seen. But in essence, Illuvium once exceeded the market cap of some of the largest gaming companies in the world with nothing to show for it at the time. That screams bubble, and is demonstrably unsustainable.

To their credit, as mentioned, they have persevered through the bear market, they have enough funds for another full year of operations, and the DAO may bring value to the revenue generating process.

Indeed, Illuvium’s long-term vision includes different games, merchandise, and potential TV shows, with plans for a mobile arena in the next 12 months, focusing on getting Arena working on mobile and the Overworld in a polished state before exploring other game possibilities, with a monumental asset library and a big upcoming project possibly related to a Netflix series. While that all sounds bullish on the surface, caution should be exercised so as not to put the cart before the horse on this endeavor as a game first needs to be successful before it takes on a life of its own. To this end, Kieran Warwick has noted in AMA’s that the team has a monumental asset library and plans to focus on making the Overworld arena successful before considering other game options. Moreover, Kieran hints at a big upcoming project that is bigger than partnerships, possibly related to a Netflix series, and expresses excitement about the potential impact on the community, which if well-timed, could capture a hype-based pump.

But let’s take a look at what the charts are telling us.

A long-awaited correction occurs after a magnificent run by $BTC and $ETH that saw a drop in the former’s dominance, leading to an alt-run. While $BTC bleeds, we can expect contagion to roll through to alts until we have confirmation of a higher low on $BTC.

Looking at the $ILV chart for what it is, we have seen a change of character (CHoCH) on the 4-hour chart with lower-low and lower-high structures forming. Bulls need to see $ILV find support on the January 2023 close of $90.42 to maintain structure on weekly frames. I would not enter a short-term position until this level is retested, given the risk/reward to your position should be more manageable. Should we find support, I would look toward extending fib targets up toward the previous higher-low of $472.92 that was demolished by the market contagion of the Russia/Ukraine conflict in March 2022. Should you manage to enter the January 2022 close successfully and we consolidate a higher-low on the weekly, suitable short-term take profit targets of $122.97, $166.09. The golden pocket $213.94 would likely play out with a higher-high, higher-low structure. Conversely, for the bears, you may be inclined to open a short with the view that the January 2023 open is retested if $BTC unravels. However, unless we see a significant FUD event it is unlikely $ILV will retest that stubborn monthly support level at $37.77, given the fundamentals of having game releases and the recent Epic Games announcement with a mobile game now in the works.

Regarding risk management for bulls, below $70.23 (January 2023 open) would likely be the best place to cut the trade. A risk/reward ratio of 3.72 between stop loss and first take profit target is an acceptable risk, if you can manage it with dollar cost average entries before hitting stop loss. Conversely, all bets are off for bears if we correct the structure by breaking $116.49.

As usual, all bets are off if $BTC has a major correction. Alts will bleed.

For mid/long-term traders, dollar cost averaging bids down toward $37.61 and extending fibs to all-time highs would be the ticket. Based on fundamentals, there is minimal doubt that $ILV will retest previous all-time highs. The monthly support level has held up well throughout the bear market and has not budged. Your take profit targets would extend toward all-time highs, but on a higher time frame, aiming to take profit in the golden pocket following confirmation of a break of $678.40 would likely ensure risk has been properly managed to reinvest in any potential dips before retesting all-time highs, and potentially breaking out into blue-sky territory.

To wind it up, as far as an investment thesis for Gaming cryptos is concerned, the promise of a game, even a Triple-A game such as Illuvium continuing to expand is a viable investment should it become a household game where users have fun, and are compelled to continue to spend on the game. However, we need to consider the reach of the game and the likelihood that it can exceed being a Triple A game in name only by achieving a user base that rivals some of the massive game franchises that exist. Without achieving that, it is difficult to sustain a long-term investment thesis for Illuvium — however, it is highly likely that it will be a top-performing gaming crypto in the next bull market as it is highly likely to retest previous all-time highs, even if it has to 6x its all-time market cap to get there. After that, it runs the risk of being pigeonholed by alternative gaming cryptos that are not just a standalone game or universe but offer critical infrastructure to onboard already successful web 2 games, game publishers, and gaming infrastructure that is interoperable.

All this aside, the future is bright for gaming cryptos, and if you were to pick a standalone game/universe as an investment to let run in the next bull market, there is little doubt that $ILV will deliver a return.

References

Illuvium Whitepaper, https://docs.illuvium.io/illuvium-whitepaper/

The Blockbrain, ‘Illuvium Financials (August 2023)’, https://theblockbrain.io/research/projects/illuvium/illuvium-financials/

Youtube, The Value Thinker, ‘ILLUVIUM | The first Web 3 AAA Game | Is it worth it?’, November 19th 2023, https://www.youtube.com/watch?v=KwwpY5aIjK8

Youtube, Artemis Crypto Gaming, ‘EPIC Launch Inbound: AMA W/ Co-Founder Grant Warwick | Illuvium’, 22nd November 2023, https://www.youtube.com/watch?v=LvompJr_Q84