At the market level, NFTs are emerging as a new asset class and mainstream intrigue has well and truly arrived. Currently, interest is predominantly concentrated in Collectibles (~$300bn) and Art (~$50-$100bn), but the future of NFTs will be much more than just collectibles — verticals with inherent utility, demand and liquidity, with trillion dollar potential, such as in games (~$100bn). There were $98B of in-game items sold in 2020 from long tail markets of heterogeneous items; however, very little monetary benefit of these items sold went to the players. That is the story now unfolding — as we at Fabric Ventures are witnessing first hand in several of our other investments (Axie, YGG, Sorare, Blackpool — co-created with Stake Capital). NFTs for gaming allows real user owned economies to emerge, massively increase the CLV, align incentives so that games can become similar to cooperatives in being owned by users and enable both entirely new revenue streams and distribution methods.
These emerging game models have already demonstrated significant take up by users; in January 2021 Axie Infinity generated $100k in revenue, by August revenue was up to $350m, all driven by an in-game economy that fell beautifully into place. However, this has not come without challenges, all of which can ultimately be a material hindrance to a network’s growth: users & creators will expect zero gas cost when trading as their activities scale. Compared to exchange costs that we are familiar with, which are predictable and align incentives, gas costs remain massively unpredictable, creating challenges when building a business involving the minting and trading of NFTs.
A quick glance at Etherscan.io, the Eth live gas tracker, reveals the top “gas guzzlers”. Despite Axie’s success, the Ronin Bridge, used to send funds to Axie’s chain, sits (at the time of writing) in the top 10 of Eth gas guzzlers; although there is an infrastructural need for token community ownership — to align creators, traders and investors — useability for scale is still lacking, generally, across the sector.
So, what solutions are available to keep the cost of gas down? Scaling can be solved both at Layer 1 and Layer 2. Even in Layer 2, there are different approaches to scaling the network, by offloading work to another layer that is built on top of Layer 1, be it roll-ups, state channels or sidechains. It is our belief roll-ups offer unlimited scalability w/o compromising security and other solutions are less suitable for NFTs, due to withdrawal games, challenge periods, and security concerns; due to Ethereum’s security, network effects (developers, users, capital), ecosystem support, and composability, we believe it to be a highly attractive incarnation of an open, shared infrastructure. The fact that it has retained so much market share across sectors like DeFi and NFTs, despite the obvious frictions, is also a testament to its staying power and attractiveness.
In Sydney based Immutable, we found a team steeped in building blockchain games that are becoming increasingly broadly adopted. A team that built one of the first ever multiplayer competitive blockchain games — GodsUnchained — and built the first ever ZK rollup for NFTs. A team that knew the pain first hand, and via their game development had evolved an engine platform — Immutable X — to support their and other developers in overcoming these scaling challenges with user friendly developer APIs, built on Ethereum. Immutable isn’t just a scaling solution — they are a new ownership layer for NFTs, and a developer platform to make building NFT applications accessible to anyone. Immutable’s ecosystem and developer tooling, driving network effects of liquidity and project interoperability, will always be a compelling value proposition on top of its chosen leading ZK Rollup partner, Starkware.
We look forward to the journey ahead both with Immutable and in backing several new emerging developers who are building on Immutable X, whether these be game or other vertical applications leveraging NFTs. Welcome to the Fabric Family!