Must-Have Meta-Analysis for Anyone Getting Involved
Intro
GameFi, a shorthand for the emerging market of Gamified Finance products, seems to ebb and flow in popularity each time a major product launches that fits the dominant narrative at the time. Gamer/investors interested in entering the space this year would do well to consider the successes and failures of recent and ongoing projects. Understanding the recent history of the space is crucial to making wise investments, so let’s consider the recent history.
Last Year in Retrospective
2021 (First Wave): Axie Infinity (AXS)’s popularity explosion last year should be credited as one of the major catalysts that brought GameFi to major news outlets and the ears of some mainstream gamers. Axie pushed the play-to-earn (P2E) model, every gamer’s dream: quit your job, buy a house, and play your video game. The game’s P2E model can’t sustain that level of income in the West, but it catalyzed a big wave of interest in GameFi. I think this first wave was all about generating retail interest and that is really important in hindsight, as I will explain.
2021 (Second Wave): Fall’s dominant narrative was undoubtedly the “Metaverse.” Between Facebook rebranding and the launch of an enormously popular metaverse-themed ETF, mainstream outlets filled with talk of the trillion dollar investment opportunities of the Metaverse. Enter Decentraland (MANA) and Sandbox (SAND), exploding in market cap and vying for dominance as the OG player in the metaverse space where businesses will pay a premium for advertising space. This time earnings were part of the picture, but instead of daily income they were framed as a kind of gold rush for Metaverse land, prime digital real estate. This time the projects drew not just retail but also investor eyes, everyone frothy for “the next Axie.”
2021 (Third Wave): I think the rise of DeFi Kingdoms (JEWEL) to a one billion dollar valuation in and of itself constituted a third wave of interest in GameFi projects, and also some really important movement along the sliders. The previous giants in this space all ran on Ethereum. All along there have been game developments on other blue-chip chains, and some are successful, but this was the first time it happened on an upstart blockchain. DFK ran it to $1bn on Harmony (ONE), which to me guarantees it’s basically fueled by interest from investors, bridgooors, and venture capital eager for cross-chain expansion. I don’t mean that as a pejorative; retail has a major role to play, but it’s powerful to see that a P2E game can thrive basically without it.
I think this is key to unlocking the true power of gamified finance. The average crypto investor is younger and trendier than the average TradFi investor and we grew up with video games. DFK is simple and fun, relies on text-based RPG mechanics instead of N64-reminiscent polygons, and provides a pretty seamless integration of earnings into gameplay. GameFi at its core is supposed to be about turning gamers into investors by building a personal stake in the project’s economy, but maybe the shortest path now is for it to remind investors already in the space that they are also gamers. Projects that resonate with the millennial crowd on CT won’t be the only successful GameFi projects, but they will be successful.
An Explosion of Genre
The next GameFi wave is on the horizon. Numerous high quality teams have open beta scheduled for Q1 ’22, and investment interest feels right on the cusp of its next cyclical surge. Variety is coming. Six months ago if you googled play-to-earn you’d find basically Axie and a bunch of other Ethereum NFT card-battlers like Splinterlands. This year, more projects will cross the $1bn threshold, and not only will many of them run on alt-chains, many will eschew the NFT auto-battler model of yesteryear in favor of shooters, puzzle games, betting and management sims, RPGs, etc..
The GameFi space is about to grow so fast that triage is going to become extremely important. This space is a double-edged sword by design. Gamers may profit from the project’s earnings model, but when a “team” costs $600 or $6,000 instead of $60, it comes at the price of substantial personal exposure. We are all investors in our games, and that puts so much extra pressure on game design. Successful projects need both good gameplay and good tokenomics in order to sustain growth. The in-game economy has to be healthy internally and in conversation with larger macro-scale economies. If the game’s econ falters, it risks losing both its players and its investors.
This landscape frames the GameFi status quo. Appraising a GameFi project at this moment in time, I assert, is a unique animal totally unlike valuating either a gaming project or a DeFi project. It’s not enough to have a game that doesn’t suck or a tightly designed roadmap, S-tier GameFi projects must top both lists. Additionally, projects seem to catch fire at different times in their development cycle based on when the word gets out, so navigating this space necessarily means comparing games that are fundamentally apples and oranges, some with finished products and some with just alpha footage. To find the diamonds in the rough, we need a fresh and independent framework for comparing different games. I think it pays to look at some of the existing models and what makes them successful or unsuccessful to a prospective investor.
Crabada (CRA): A Lesson in Simplicity, But With a Hidden Barb
Crabada is an idle NFT-battler on Avalanche (AVAX) blockchain, with strong Axie Infinity influences. In Crabada, you purchase teams of Crabs, which idly engage on mining expeditions, rewarding in the game’s earnings currency Treasure Under the Sea (TUS). The crabs are cute, the game is low effort, and the game’s play-to-earn model is simple and intuitive.
This model’s supported Crabada’s growth to a $71M valuation from its governance token CRA alone, which says a lot considering it has almost no use cases yet. I have mixed feelings about these two-token economies all basically descended from Axie’s, but there are some positive examples of revenue diversification in P2E platforms using multi-token economies, so I’m willing to suspend disbelief for now.
Crabada’s basic model is solid and the team plans to add new battling and staking functions this year to diversify and add depth to the crab breeding metagame, which is reminiscent of Pokemon. The game has a lot going for it, quite aside from the fact that it has maybe the most proven earnings model in the West of any P2E grinder. The crabs make ROI within a month or two at steady valuations, which is super healthy for investors.
I have only one real issue with Crabada: I can’t afford it! You cannot play the game without crabs, there are a finite supply of crabs, and the price for a floor team at the time of writing is over $7,500. Crabada is still growing but at this rate it will fall victim to the same problem of scalability as other NFT-battlers. As the value of the game’s ecosystem increases, so does the barrier to entry, making it affordable at first but doomed to price out new users and stagnate its player base unabated. New users are essential to maintain buying pressure on crabs and keep the TUS feedback loop intact. GameFi projects need to solve this problem if they are going to survive long-term.
Thetan Arena (THG): Why Solid Tokenomics Are So Crucial
Thetan Arena is the first play-to-earn MOBA, built on Kardia chain. As a fan of the genre, I’ve been following the project for a long time. The gameplay is light, smooth, and reasonably fun, kind of feels like a cheap HoTS/Awesomenauts cross-over. It follows a pretty typical MOBA structure, Elo-based ranked ladder, a few game modes, etc. Open beta launched simultaneously on mobile and PC clients, with cross-play active, and from minute one the game ran smooth on my PC. Mobile gaming is a gargantuan market in and of itself. In a space built on early adoption bonuses, this seems like a winner, right?
Anyone who’s beta tested in the retail gaming space can tell you this story has a catch, even without the added complexity of a blockchain environment. Turns out Thetan Arena’s gameplay is pretty good because Heroes Strike is also pretty good, and the parent company Wolffun Games just imported a clone of its existing product into a P2E economy.
I actually don’t inherently have a problem with that. Animoca Brands is (transparently) adapting its mobile game Crazy Defense Heroes for blockchain, using the off-chain product to build interest. Unfortunately, in Wolffun’s instance, the play-to-earn economy they airlifted the game into is so awful it has effectively torpedoed the entire project.
It should be clear from the fact that the in-game hero marketplace uses BNB that this is a smash and grab. Playing matches in the arena earns Thetan Arena Coin (THC), with wins earning more than losses. Each hero has daily and lifetime limits on THC earnings, effectively being consumed after an hour or two of dailies for three to four weeks. This makes heroes in the Thetan Arena economy effectively 30-day BNB bonds with an hour or two a day labor surcharge to fully unvest. If that sounds unappealing, it should, and the long-term effect is to turn the game’s earnings loop into more of an earnings whirlpool on a never-ending downward spiral.
THC is the game’s P2E currency, so there is constant selling pressure, but the only buying pressure comes from the ability to mint new heroes for THC. This is foreseeably ineffective: there is only buying pressure when the price of THC is so bottomed that players believe a hero’s net THC earnings will significantly exceed the token’s price depreciation over a 30-day period.
R/R is too low and the game’s loop is easily broken. Importantly for us as prospective investors, Thetan’s reasonably acceptable gameplay and functioning mobile cross-play have been totally insufficient to prop up its asymmetrical internal economy. Tokenomics alone are committing Thetan Arena to a slow, painful death.
Binamon (BMON): Rug Pulls Are A Price Manipulation How-To Guide
Binamon, an NFT card-battler / P2E grinder hybrid built on BSC, is a small-time GameFi project and an obvious rug pull. The game is a twin to Binemon (BIN), another project from developer-dictator Nicolas Veiga Palacios. Gameplay and tokenomics are both low budget, low effort, and poor quality. However, after a year in which rug pulls snatched almost $8bn from investors, I think it pays to consider the hallmarks of the project and what, if anything, it does well.
Most of the games discussed work on a two-currency model, imported from Axie. Binamon is no different really, with BMON, BNRG, and other sub-currencies. Although the earnings tokens live healthy lives, the governance token (CRA for Crabada, THG for Thetan Arena) have limited or no use cases. The P2E feedback loops don’t absolutely require a second coin, so why even have one at all? There are only a few perks to the two-coin model as I see it, but they are really perky.
Price Manipulation: Low-cap projects typically euphemize these as “buybacks.” Essentially it means the project can manipulate the external value of their currencies by adjusting the internal pair. When the earnings token dips, putting the ecosystem at risk, devs can infuse it with capital from the governance token, sacrificing the value of the one to save the other. Or in the case of a rug like Binamon, “buybacks” help the P2E token recover value after the devs pump and dump on their investors.
Multiple Revenue Streams: Alternate token functions let GameFi projects attract liquidity to the project by partnering with NFT teams and other games, allowing staking, swaps, and revenue sharing, while limiting downstream impacts on the game’s earnings loop. This makes sense for long-term sustainability, I think; since the earnings tokens are unlimited or dilutive, tight tokenomics around the governance token let a project earmark capital for specific content and provide an “end-game” for vested capital without disrupting established gameplay elements. Below is an example of Crabada’s strategic allocation.
Conclusion
I hope this discussion has provided clarity on some of the most essential hurdles for all P2E projects to cross. I am beyond excited for 2022, as there are a lot of games in the pipeline with new, innovative, and fun elements packed in. Considering each in turn, in conversation with past projects, has left with a short list of upcoming GameFi teams I am watching like a hawk. I think, from this vantage, it is easy to differentiate the ponzis from the projects with bright futures. Stay tuned for more analysis!
