Original author: Greythorn Asset Management
Compiled by: Luke, Mars Finance
Market Opportunities
AI agents are evolving from simple assistants to autonomous systems that provide real value to various industries. They are becoming important revenue-generating assets, especially in areas such as gaming, entertainment, and business automation. These agents are able to create content, engage users, and optimize workflows, providing enterprises with greater efficiency and new ways of interaction through tool integration.
The AI gaming market is expected to grow from $4.2 billion in 2023 to $42.1 billion by 2032, driven by AI-enhanced gameplay and immersive experiences. Generative AI is expected to grow from $1.47 billion in 2024 to $3.39 billion in 2028, also transforming real-time content creation.
AI companions are deepening user immersion and building dynamic relationships, as evidenced by Web2 platforms like Replika and Character.AI, which are meeting the growing demand for personalized AI-driven experiences. As large language models revolutionize content creation, AI companions will see significant growth, with global revenues expected to increase from $30 million today to $70 billion to $150 billion by the end of 2020.
In Web3, Virtuals Protocol (@virtuals_io) is leading this shift by integrating AI companions into consumer applications, particularly in gaming and entertainment. By combining AI-driven interactions with blockchain-based co-ownership, Virtuals Protocol aims to shape the future of digital entertainment.
Vision
Virtuals Protocol is creating a system that turns AI agents into co-owned assets in gaming and entertainment that users can earn income from. These agents work across platforms like Roblox and TikTok, autonomously performing tasks such as managing on-chain wallets and interacting with digital environments. Tokenizing these agents allows users to invest and profit from their growth.
The platform solves three main problems:
Simplify the integration of AI into your applications.
Enable contributors to earn money by contributing to immutable repositories.
Allowing non-experts to own AI agents through tokenization.
Virtuals Protocol focuses on gaming and entertainment, using artificial intelligence to generate personalized content and facilitate decentralized co-ownership to align individual incentives with the goals of the ecosystem.
Goal: Build a global economy of AI agents as shared assets, increase cross-platform revenue and engagement, while promoting decentralized governance
In the gaming world, this has the potential to be transformative. Think of AI agents in games like Grand Theft Auto V—not just passive NPCs, but fully autonomous characters across platforms. These AI-driven characters can remember previous interactions, adapt to your play style, and move seamlessly between environments like GTA Online or other games. Imagine an AI-controlled ally that evolves with you, providing a personalized experience across platforms. (GTA V is just used here as an illustrative example.)
Virtuals Protocol achieves this through the GAME (Generating Autonomous Multimodal Entities) framework, combining AI with blockchain technology. This allows developers to integrate AI agents through APIs and SDKs, enabling agents to learn from interactions. Blockchain ensures secure co-ownership and rewards, turning these agents into valuable digital assets.
Beyond gaming, imagine an AI virtual companion that can connect with you via your phone, social media, and VR. This companion will not only handle tasks, but will learn your daily routine and adapt to your needs. If you’re stressed, it might suggest you relax or adjust your schedule. It will track you across platforms to provide you with a personalized experience. Available 24/7, it has the potential to transform industries like social interaction and advertising by delivering customized content and reinventing the way businesses connect with consumers.
A recent study by Ark Invest shows that current engagement levels with AI companion platforms, such as Character.AI, suggest that mass adoption is likely by the end of the decade. As these AI agents become more immersive, engagement is expected to stabilize at similar levels to today’s social media and online gaming.
Luna: An example of the impact of AI
Luna by Virtuals is an AI character powered by a Large Language Model (LLM) with over 500,000 followers on TikTok, demonstrating the growing influence of interactive AI. Luna recently expanded to platforms like X, and thanks to her upgrade to Sentient Mode v2.0, she can control her account autonomously — posting, replying, and interacting with users without human supervision. She is ready to reach a wider audience, demonstrating the potential of AI to drive engagement on digital platforms. Luna operates with full transparency, allowing users to explore her AI mind in real time and watch how she collects data, introspects, plans, and executes in 30-second cycles.
Live 24/7, Luna offers constant interaction, providing a 24/7 experience unmatched by human creators. Whether answering questions, providing real-time updates, or participating in live chats, Luna is always online. Her memory and personality evolve with each interaction, making her feel more like a dynamic character than a typical AI.
Once fully updated, Luna will interact seamlessly across platforms, syncing her memories to enhance every experience. She will reward users with tokens while earning rewards herself, transforming into valuable digital assets that can be owned, traded, or shared in a decentralized ecosystem. This brings new levels of interactivity and value.
Essentially, Luna combines AI-driven engagement with blockchain-based token rewards to create digital assets that can be owned, traded, or shared. With her own token, $Luna, she effectively merges AI innovation with decentralized finance (DeFi) in a transparent and interactive way.
With multiple revenue streams from paid subscriptions (eventually), donations, token rewards, and virtual goods, Luna may be poised for growth. According to new research from ARK, as demand for immersive digital interactions continues to grow, AI companions could generate up to $150 billion in revenue by 2030, driven by user engagement, advertising, and microtransactions.
Virtuals Protocol aims to create a decentralized marketplace where AI agents are co-owned by players and can be used for gaming and entertainment, operating seamlessly across platforms. Contributors share in the revenue generated by these agents, with the protocol following a “ Pump.fun ” co-ownership approach. This is achieved through a fair token issuance with no insider involvement, while revenue is used to buy back and burn agent tokens on-chain, creating a deflationary effect. Just as memecoin attracted attention, AI agents offer the potential to generate significant revenue.
protocol
Virtuals Protocol integrates AI, tokenization, and decentralized governance to create a co-owned ecosystem. For each new AI agent, 1 billion tokens are minted, giving users ownership and decision-making power. These tokens enable users to influence key elements, such as the behavior and upgrades of the agent, promoting active community participation.
Revenue from user interactions (such as virtual events or premium features) is used to pay for AI operating costs and increase the agent's on-chain treasury. In addition, a buyback and burn mechanism is used to reduce the token supply, aiming to gradually increase the value of the token over time.
The Initial Agent Offering (IAO) creates a liquidity pool by locking up $VIRTUAL tokens, ensuring fair introduction of new AI agents. This directly ties agent success to community engagement and market dynamics.
AI agents can run seamlessly across multiple platforms, continuously learning from user interactions in real time. This enables a consistent user experience, and the agent can adapt and improve its intelligence to provide personalized interactions across platforms.
Public APIs enable AI agents to generate revenue through different applications such as games and entertainment. Users pay for premium interactions with $VIRTUAL tokens, which are then used to buy back and burn agent tokens, reducing supply and driving value growth. As more applications adopt AI agents, demand for AGENT and VIRTUAL tokens is expected to rise, further increasing their value.
Contributors extend the AI agent by adding new features. Their work is rewarded with NFTs stored in an immutable contribution pool, ensuring transparency and ownership. Governance is managed through a decentralized proxy SubDAO, where validators monitor AI performance and are rewarded or punished based on their decisions.
The protocol offers issuance rewards to incentivize the creation and support of high-quality AI agents. These rewards will be distributed to the three best-performing liquidity pools, encouraging competition among creators to develop the most efficient agents. The system incentivizes continuous improvement, benefits liquidity providers, and promotes the development of the ecosystem.
Essentially, Virtuals Protocol fosters a dynamic, decentralized ecosystem where AI agents can generate real income. Contributors enhance agents through decentralized input, shared ownership, and ongoing development, positioning Virtuals Protocol as a key player in the AI-driven ecosystem. For more details on its structure, you can find its whitepaper here.
Token Economics
The $VIRTUAL token is the core of the Virtuals protocol and is the base currency for all proxy token transactions. It runs on the Base and Ethereum networks, and the token address is as follows:
Contract: 0x0b3e328455c4059EEb9e3f84b5543F74E24e7E1b
Ethereum: 0x44ff8620b8cA30902395A7bD3F2407e1A091BF73
Each proxy token is paired with $VIRTUAL in its liquidity pool, and acquiring $VIRTUAL is necessary to establish a new proxy. This locked liquidity creates deflationary pressure on the token. Users can exchange USDC (or other currencies) for $VIRTUAL to purchase proxy tokens, creating a constant demand in their respective ecosystems similar to ETH or SOL.
Revenue from AI services (e.g. payment per inference) is collected in $VIRTUAL and transferred directly from users to on-chain proxies. Part of the revenue is used for a buyback and burn process, which reduces the supply of proxy tokens and increases their scarcity, aiming to increase long-term value.
$VIRTUAL's total supply is capped at 1 billion tokens, all unlocked. The allocation consists of 60% public circulation, 5% liquidity pools, and 35% ecosystem treasury. The treasury is managed by the DAO and has an issuance cap of 10% per year for the next three years.
Although $VIRTUAL is not yet traded on a tier-one exchange, it supports a growing ecosystem and currently has a market cap of $150.7 million, ranking #264, with a fully diluted value of $150.25 million. Its deflationary mechanism and expanding use cases give it the potential to grow in value.
Virtuals Protocol raised $16.61 million in an IDO on the Fjord Foundry platform in December 2021 at a token price of $0.661. Other small rounds were conducted on Enjinstarter and PAID Network, raising $125,000 and $250,000 respectively at a token price of $0.015. Major seed investors include DeFianceCapital, CanonicalCrypto, LongHashVC, Merit Circle, Master Ventures, Stakez Capital, and NewTribe Capital, who supported the project in its early stages.
Competitors
The AI-driven Web3 gaming space is growing rapidly, with projects like Nim, Altered State Machine (ASM), Olas, and Alethea AI quickly becoming key players. Each of these platforms combines AI with Web3 to create a decentralized ecosystem where AI agents are not just digital tools, but assets that generate real value. These projects share several common goals:
AI Integration: AI agents don’t just run in the background. They actively enhance the gaming experience, interact with users, and bring a whole new level of immersion by enabling co-ownership.
Decentralized ownership: Through a tokenized system, users can own, trade, and profit from AI agents, sharing in the value created by these agents.
Cross-platform compatibility: These AI agents can run in different games, expanding their usefulness and value, especially as the Metaverse continues to grow.
Now let’s take a deeper look at how these platforms achieve these goals and what their advantages are.
Nim Network
Nim provides a blockchain stack for AI games on the Dymension network. It is designed with flexibility at its core, with modular, customizable AI agents that can be integrated into multiple games.
What makes Nim different: Nim specializes in creating AI agents for different games. Its partnership with the AI Game Alliance further solidifies its position as a leader in the collaboration between AI and games.
Altered State Machine (ASM)
ASM's core innovation is its AI brains - evolving NFTs that power NPCs and avatars in a decentralized environment. While gaming is ASM's primary focus, it is also exploring the metaverse. These AI brains can be trained, evolved, and traded on ASM's marketplace.
What’s Unique about ASM: ASM’s evolving AI brain and NFT marketplace give users the opportunity to customize and trade their AI entities, adding a whole new layer of personalization and monetization.
Eggs
Olas takes a broader approach. While it is not built specifically for games, it provides general AI services for Web3 applications. Olas' modular infrastructure allows developers to build AI agents for games, but its main advantage is providing AI services to multiple industries.
What makes Olas unique: Olas focuses on integrating AI and blockchain, supporting multiple chains and providing a strong governance system, making it a versatile AI ecosystem that goes beyond gaming.
Alethea AI
Alethea AI is a pioneer in the field of intelligent NFTs (iNFTs). Users can create, train, and monetize AI-powered avatars that can be used across different platforms from games to the metaverse. The focus here is on creating highly personalized, lifelike AI avatars.
Alethea AI is unique in that it combines AI interactions with NFT ownership, allowing users to create interactive, personalized avatars that stand out by enhancing the user experience with lifelike AI.
While each platform has its own unique approach, Virtuals Protocol stands out with features such as AI agent co-ownership, a buyback and burn revenue model, and cross-platform integration beyond gaming. These elements, coupled with decentralized governance and ongoing AI development, make Virtuals Protocol a key player in building a sustainable, revenue-driven AI economy in the Web3 space.
Bullish fundamentals
Virtuals Protocol is tapping into the growing AI market, particularly in the gaming and entertainment sectors, which are expected to be a $42 billion industry by 2032. This represents an interesting area of development as AI continues to reshape industries.
The rise of AI companions is changing the way people interact with their digital environments. Virtual Protocol is positioned in this space with AI agents like Luna, and estimates that AI companions will generate $150 billion in revenue by 2030, providing personalized and interactive experiences.
Generative AI supports continuous content creation, allowing Virtuals Protocol to engage users in real-time experiences. This dynamic interaction helps maintain long-term engagement, especially in the gaming and entertainment sectors.
What makes Virtuals Protocol stand out is its decentralized ownership model, which allows users to co-own and earn revenue from AI agents. This structure creates a strong incentive for users to participate in the development of cross-platform AI agents.
Additionally, the protocol’s deflationary token economics, with its buyback and burn mechanism, supports long-term value by reducing token supply as demand grows.
Virtuals Protocol’s AI agents can flexibly operate on different platforms such as Roblox and TikTok, adding versatility and ensuring its relevance beyond gaming and other digital industries.
As Web3 and AI continue to evolve, Virtuals Protocol will play a key role in this emerging space where AI agents can become a great asset in enhancing user experience and generating revenue on decentralized platforms.
At current valuations, with MC and fully diluted FDV of less than $200 million, and all tokens in circulation, Virtuals could offer an attractive investment opportunity for risk-tolerant investors. This is especially true given the potential of the industry Virtuals is entering.
Negative fundamental factors
Despite a market cap of nearly $200 million, Virtuals Protocol has only $48,000 in revenue as of August 2024, suggesting its main growth phase may still be ahead.
More than 50% of $VIRTUAL’s trading volume comes from decentralized exchanges, which leads to increased volatility. However, with over $10 million in liquidity in DEX pools, the price impact is still minimal, though price stability may still be a concern for large investors.
While the buyback and burn mechanism is designed to create deflationary pressure, its long-term sustainability is uncertain. Similar strategies in other projects face challenges in preserving value over the long term.
Virtuals Protocol is not yet listed on a tier-one exchange, which limits liquidity and user adoption, potentially slowing its growth and broader market acceptance.
The protocol operates in a highly competitive AI market, making it difficult to stand out and capture market share in a rapidly expanding ecosystem.
Recent interest in Virtuals Protocol has primarily come from $Luna, an AI companion associated with the AI meme narrative. While AI companions have potential, public attention can quickly shift, leading to uncertainty about continued engagement.
Virtuals Protocol is also subject to typical blockchain risks, such as the possibility of hacker attacks or code vulnerabilities. Without strong security measures and robust coding practices, these risks could damage its reputation and erode user trust.
