Crypto Plays: A Budding Gaming Sector
NFTs exploded earlier this year when the art world caught on to the new medium & prominent auction houses like Sotheby’s lent credence to the blockchain marketplace. Art NFTs & the royalties tied to them are brilliant ways to ensure creators get a cut, but, more importantly, they set the stage for a truly impressive revolution in the way millions of people spend their free time and create value.
Crypto gaming is, at its core, just another set of NFTs confined within a larger set of gameplay rules. The NFTs themselves are largely “collectibles,” frantically traded across player-driven auction-style marketplaces based on their stats, colors, rarity, and speculative power in-game. Before you roll your eyes, note that this is not a small movement, and this is not petty cash. Some of those marketplaces charge over 4% per transaction, with daily volume regularly in the tens of millions (implying daily cash flows in the millions).
For a bit of perspective, Activision-Blizzard (NYSE:ATVI) reported $8.1bn in revenue for 2020 at a market cap of over $60bn, and has been operating for nearly two decades. Axie Infinity (coin tickers AXS & SLP), the largest player in the crypto gaming ecosystem currently, went from virtually no revenue in February of this year to $45mn in cumulative revenue by June, with momentum potentially pulling that revenue number up to $1bn by year-end (per Delphi Digital’s research team; note Delphi Digital is a large holder of Axie Infinity assets) at a market cap of of over $2bn today. Traditional gaming (a la Activision-Blizzard) may not yet be at the level of American football, but it’s certainly surpassed “America’s pastime” of baseball, which opens the door to consider where this new iteration of gaming will take us.
The scale of the attention that crypto gaming is receiving is very significant. Consider the top projects by gas consumption on the Ethereum blockchain. OpenSea, an NFT exchange, occasionally tops the charts, with automated market maker (AMM) Uniswap and stablecoin USDT also making the top-5. But, most notably, Axie Infinity has stubbornly maintained a top-5 position for the last few weeks, and seems likely to remain in the top 10.
This is your kid’s Pokémon. But, this time, in-game currencies and characters are seamlessly connected to a virtual market & exchangeable for USD in relatively simple steps. The original demand drivers of gaming — stimulation, stoytelling, and socializing, are all still there. But now with the extra kick of a summer allowance.
Consider the idea of a “minimum wage,” In the US, we’d consider a fair wage to be somewhere between $7.25 and $15.00 per hour, depending on how you feel on labor politics. Elsewhere in the world, wages are frequently under $2 or $3 per hour. Enter crypto gaming. Axie Infinity, for example, has consistently returned between $20-$40 to players per day (in the form of SLP tokens, as of Aug 2, 2021 at an SLP price of $0.22). To earn that, players can play for anywhere between 1 and 3 hours, on average, depending on their skill and the quality of their characters (the NFT collectibles). That translates to anywhere from $6/hr to $40/hr, for playing a game.
By now, you have certainly asked yourself the question: “Why would anyone pay for this, where is the value, and how is this not a Ponzi scheme?”
To answer this, we have to ask ourselves what it means to have value. Without philosophizing too much, value to an art collector is perhaps not the same as value to you or me. Comparably, value to a gamer may or may not be the same as value to you. Collectibles & experiences have value to someone, but that value is subjective and may go to zero or infinity with time, beyond any reason. Value in crypto gaming is a blend of traditional gaming value (i.e. good items to complete in-game objectives) and access to cash flows (i.e. game assets are used to play the game, which generates tokens, which can be sold for USD). This blend of quantitative and qualitative value is a compelling case for value in the projects.
There is precedent for economic value from gaming — during 2019 and even up till today, Venezuelans have been furiously grinding an age-old game from the early 2000’s, Runescape, and selling the in-game currency and items to other players (sometimes for hundreds of dollars per day). This economy, while vibrant and obviously value-additive for the Venezuelans living in a hyperinflated reality, is expressly condemned by the game’s owners (as is the norm in traditional gaming). The value exists & is not disputed by either the gold farmers or the players buying the in-game gold, but is disputed by the game’s governance, making the market fragmented, illiquid, and a bannable offense. Crypto gaming solves for this directly by enabling easy exchange between in-game assets and external tokens that can be traded for cash, effectively connecting two very willing parties and taking a cut in the middle.
Much of the world quite literally cannot afford to miss playing these games. This is a crucial understanding for forward-thinking investors. Games thrive on community. A game with poor gameplay or a poor value proposition will not last, because there will not be an authentic audience to support it when the value becomes volatile. Having said that, Axie Infinity has legitimate gameplay that is legitimately enjoyed by fans across the space. In addition, the Axie Infinity “minimum wage” is generally at least $20/day for usually around 2 hours of play, on-par or well above the vast majority of the world. As emerging economies increasingly come online during this decade, they will increasingly turn to opportunities like crypto gaming for access to work.
In the Axie ecosystem, this has created the “Scholar” system, wherein “managers” (generally Western/US players/investors) purchase game assets & allow a Scholar to play an account using those. Entry-level game assets are generally around $1,500, prohibitively high for most people in emerging economies, but the managers split the cash flows with the scholars (usually 50/50) to monetize the investment at very high ROIs (dependent upon the price of the produced currency, SLP in this case). This has created a new digital economy around “play-to-earn,” and both investors and players are seeing new value created here. (Note: Axie released a substantial economy update on Aug 9th that may impact the ROIs listed here, results from current scholar gameplay are still pending.)
Local economies have started supporting game assets as currency. This is not to be brushed off — this cements the role of the game within the community, further boosting its population and value to players. As far as we are aware, this is the first example of a crypto gaming good gaining any amount of local traction as a medium of exchange.
Games are a growing portion of mindshare for a young population that will inherit $30tn. Millennials, per Morgan Stanley, stand to inherit $30tn USD over the next few decades, and they have proven time and time again that they tend to invest on the basis of beliefs (see the success of the massive ESG movement, despite “dinosaur company” snubs just months prior). The digital ecosystem is rewarding and natural to this audience, and the Axie Infinity experiment has demonstrated that the economic play/work-to-earn model can be effective at scale (Axie has 1,000,000 daily active users, around 1/4 that of mainstream favorite and 17-year veteran, World of Warcraft).
Speaking of ESG in investing… the focus has overwhelmingly been on the “E”, environmental, from an investment standpoint, principally because Scope 1–3 emissions & carbon offsets are relatively straightforward to calculate compared to other metrics. From an internal corporate standpoint, the emphasis falls on the “G”, governance, through diversity initiatives. But the “S”, social, is very difficult to quantify and even harder to invest behind. Having said that, the social benefits are hard to deny when a platform enables 1) new jobs at any education level at international scale, 2) access to a financial ecosystem chock full of tools that are traditionally out of reach for the under-capitalized or unbanked, and 3) communities for global networking where race, religion, and creed are not primary factors of interaction, and your capital history does not count against you.
Axie is not alone, and may not be the final winner. The crypto gaming ecosystem winner will be the one that keeps a delicate balance between community, gameplay, and play-to-earn value, and investors should look to community trends, reception of new content, and momentum on social media for accurate readings into the gaming zeitgeist. Many of these games are very early in development and require an experienced player to suss out the differences and compare versus historical winners and losers in traditional gaming.
Unique tokenomics could distribute in-game cash flows back to token holders.
Illuvium is the first example of a AAA-style (i.e. “looks like a major publisher made it”) project that aims to grow into a decentralized autonomous organization. Crucially, when in-game transactions are made, those sums are effectively distributed to current ILV stakers via a series of swaps, vaults, and liquidity pools. Note that in-game transaction fees may be as high as 5%, which would imply very substantive cash flows on a playerbase similar to Axie’s.
Interestingly, Illuvium aims to implement a form of “active staking,” wherein staking participants that meet certain in-game activity milestones have the option to roll over their staking rewards into the next cycle, thereby avoiding gas fees for claiming rewards this cycle and potentially improving their yields. This is a powerful combination when considered alongside ILV payouts for other in-game activities a la Axie-style, and is likely to cement gameplay as a tool with real economic value within the ILV ecosystem. Retail-sized investors looking to get the most out of their ILV investment will be incentivized to both play the game and participate in staking, which may set the stage for good community momentum. (Note: Guild of Guardians, not discussed here, also utilizes a similar active staking gameplay incentive system.)
Gameplay is going to be a defining factor. Point-and-click games reminiscent of the late 90’s are not going to attract the kind of massive populations that innovative smash hits like Fortnite can. While many of the projects mentioned here are early in development, and ILV has no public demo playable yet, we spoke with the team at ILV who generously shared their take on the project.
“Illuvium will elevate crypto-gaming because we built the game to be enjoyable, not just a mechanism to play and earn. Illuvium is truly addictive, exhilarating, and showcasing some of the greatest graphics ever seen in mainstream gaming, let alone crypto. Even if it’s their first go-round on a blockchain, gamers will recognize that this game is for them.”
- Kieran Warwick, CoFounder of Illuvium
Baseball was America’s favorite pastime. But the decade starting in 2000 saw interest in baseball start to share mindspace with Pokémon as millions of kids, and millions of parents armed with credit cards, saw value in the collectibles, the gameplay, and the socialization. Those were real cash flows built on subjective value secured only by a strong community movement. Crypto gaming is this decade’s Pokémon. And, with an economic model for work built on top of gaming’s trifecta of stimulation, storytelling, and socialization, it’s a reasonable bet that we’re still in the early innings.
About Floating Point Group
FPG is an MIT-born startup accelerating the growth of the cryptocurrency economy to redefine finance. Our platform offers seamless access to the cryptocurrency markets for complex cryptocurrency trading operations by making it orders of magnitude easier and safer to fund exchange accounts and settle trades. FPG is backed by Tribe Capital, Naval Ravikant, and a group of successful tech entrepreneurs and asset management executives.
This communication should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any asset in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. The writers & employees of FPG may hold digital assets or make markets in the projects or digital ecosystems discussed.
