Written by: IOSG Ventures
Looking back at 2023 so far, high financing and outstanding performance have been seen in GameFi-related projects (currently GambleFi is also categorized in the GameFi field). High financing mainly focuses on gaming platforms and GameFi tracks such as game Layer 3 infra construction. The most notable ones are the large casino pump.fun and the booming Not and Telegram mini-games that have attracted countless participants since the beginning of the year. This article will analyze the defensive investment logic behind such investment phenomena and our attitude towards it.
1. Overview of GameFi Market Financing
Source: InvestGame Weekly News Digest #35: Web3 Gaming Investments in 2020-2024
Looking at the investment volume and project numbers in the GameFi field from 2020 to 2024 each quarter, even though Bitcoin has already broken through the 21-year high this year, the data over the past year appears relatively sluggish and conservative in both total volume and number. In comparison to the same high in Q4 of 21, where there were a total of 83 investment projects amounting to $1,591M, averaging $19.2M per project; this year in the Q1 that broke the previous high, there have been a total of 48 projects with a cumulative investment of $221M, averaging $4.6M per project, a year-on-year decrease of 76%. In terms of amount, overall investment behavior is showing a conservative defensive posture.
2. An in-depth analysis of three market phenomena over the past year, underlying logic, transformations, and uncertainties.
2.1 Phenomenon 1: Gaming platforms evolve from pure platforms to new user acquisition channels.
"The evolution of game infra into a user acquisition channel, aside from having strong survival capabilities and long life cycles, is why they are favored by VCs."
Among the 34 GameFi-related projects that secured over $10 million from June 2023 to August 2024, 9 were gaming platforms, and 4 were game Layer 3 projects. From BSC to Solana, from Base to Polygon, even self-built Layer 2 and Layer 3 platforms are flourishing. Even with a significant decrease in total financing, 38% of high-investment projects are concentrated in gaming infra, which has strong survival capabilities and long life cycles. Platforms will not be disproven by the trends, and are also low-risk defensive investment choices.
Source: PANTERA
Additionally, for leading game ecosystems, funds that heavily invest in prominent gaming platforms like Ton's ecosystem tokens are not limited to one. Ronin is also a secondary top choice for several VCs. The appeal of the Ton ecosystem and Ronin to VCs may stem from the gradual evolution of platform roles. The nearly one billion users on Telegram have attracted new users to Web3 through mini-games like Not, Catizen, Hamster, etc. (Not has 30M users, Catizen has 20M users with 1M paying users, and Hamster has 0.3B users), or new user groups flowing from Ton's ecosystem traffic to exchanges after token issuance, bringing new blood to the entire crypto world. Since March of this year, Ton has announced over $100 million in ecosystem incentives and multiple rounds of league prize pools, but later on-chain data shows that Ton's TVL has not significantly increased with the explosion of mini-games. More users are primarily converted directly to exchanges through pre-recharge activities. On Telegram, CPC (Cost-Per-Click) can be as low as $0.015, while the average customer acquisition cost for a new account on exchanges is between $5-10, with the cost per paying user exceeding $200 on average, at around $350. The customer acquisition and conversion costs on Ton are far lower than those of exchanges. This indirectly confirms why exchanges are scrambling to list various Ton mini-game tokens and memecoins.
The existing user base of Ronin provides many more customer acquisition opportunities for individual games. This can be seen from games of high quality, such as Lumiterra and Tatsumeeko, migrating to the Ronin chain one after another. The user increment and new user acquisition capabilities that gaming platforms can provide seem to have become a new favored perspective.
2.2 Phenomenon 2: Short-term projects dominate the market and become new favorites, but user retention ability is questionable.
"In a secondary market with poor liquidity, many games' flywheels and profit effects have been forcibly castrated, turning perpetual games into one-time games. In the current poor macro environment, these short-term projects are closer to VCs' risk-averse defensive investment choices, but whether users' long-term retention capabilities match VCs' expectations and forecasts remains questionable."
Take a look at Not (short-term project) economic model.
Source: PANTERA
The active users of Not have declined continuously since the token was launched, dropping from an initial 500,000 to 200,000 five days after TGE, and stabilizing around 30,000. The user decline reached 94%. If we refer to user data, Not is indeed a short-term project. Recently launched projects like Dogs, Hamster Kombat, and Catizen have attracted substantial interest from the market and VCs. Why are these fully circulating short-term projects so favored?
Source: Starli
From the past P2E games where one could earn money, simple game level designs, auto-chess models, Pixel's farming and logging for coins, to Not's explosive click-to-earn, these projects under the GameFi title are gradually simplifying or even shedding the game layer. When the market willingly pays for these, is it that people's acceptance is increasing, or are they becoming impatient and restless? Since the essence of most GameFi is a method of replacing mining nodes with interaction to mine, why bother with the cumbersome game steps and modeling costs? It would be better to take the costs originally needed to develop the game and use them as the initial cake for this Ponzi mine, with both parties benefiting.
Not's economic model differs from the traditional GameFi flywheel model, as it features fully circulating one-time unlocks, eliminating the need for early cost investments. Users can exit completely once they receive airdrop tokens, relieving VCs from the burden of multi-year lock-ups. The model has shifted from a continuous mining game to a short-term version more akin to memecoins' full circulation. Moreover, similar to the value added by platforms in acquiring users, the simplified cash realization game mechanics have attracted new Web2 users to participate in Web3, with new users cashing out after receiving airdrops shifting to exchanges. The user traffic brought to the ecosystem and exchanges may also be another reason VCs are optimistic about such projects.
The essence of the flywheel cycle and the reason why short-term projects are more in line with the current market are that the investment returns in the later stages are questionable.
Once complete P2E (Play-To-Earn) games had a full economic cycle, and whether this economic cycle's flywheel can run depends on whether players can calculate an acceptable ROI (Return on Investment). In P2E games, ROI = Net Profit / Net Spend, put into P2E games means future expected earnings (value of mined resources) / NFT costs (costs of mining machines). Therefore, in P2E games, the participants' earnings calculation formula is:
ROI = Value of Future rewards / Acquisition Cost of NFT.
Setting aside wear and electricity costs, the greater the calculated ROI, the stronger the players' incentives. How can we maximize ROI? Let’s break down the formula.
Source: Starli, IOSG Ventures
Path 1: Value of Future Rewards increases.
Value of Future Rewards = Quantity of Future Rewards * Price of Future Rewards.
V = P * Q
Future earnings value = Quantity of future earnings * Price of future earnings.
When the value of returns increases, either the quantity of returns obtained increases, meaning an increase in token rewards; or the price of returns rises, meaning an increase in token prices.
When viewed within the economic system of Web3, the output settings of almost all tokens show a converging trend, akin to Bitcoin's halving cycle. As time progresses, token output will decrease while mining difficulty increases. Perhaps more expensive mining machines or rarer NFTs will yield higher returns, but they also increase additional costs. Therefore, without changing the quality of the mining machines, an increase in the quantity of returns does not make sense.
The greater possibility is the rising price of future returns, meaning the price of the coins players mine is steadily increasing. The secondary market has ample buying, so there won't be a situation of oversupply; buying pressure consumes all sell orders while still trending upwards. In this way, the numerator in ROI can increase.
Path 2: Lower NFT costs.
When the denominator in ROI decreases, the ROI naturally increases, meaning that the cost of acquiring NFTs as mining machines decreases. If the price of NFTs traded for project tokens falls, it could be due to either decreased demand for that NFT while supply increases, or a decrease in the price of that token as a medium of exchange and standard of measure, leading to an external drop in NFT prices.
A decrease in demand naturally results from the weakening profitability of the game, leading players to seek opportunities in other games with higher ROIs. Other fiat settlements such as Ethereum and Solana are affected by market dynamics, and when mainstream coin prices decline, altcoins are inevitably not faring well either. Therefore, NFT prices and token prices will show a positive correlation. Thus, the numerator increasing and the denominator decreasing cannot exist simultaneously; their increases or decreases are synchronous and may even have a certain proportional interaction.
This also means that the most likely way to achieve a larger ROI is through the expected increase in the price of returns, with NFTs rising in tandem but at a rate less than or equal to the increase in token prices. The ROI can then stabilize or slowly increase, continuously incentivizing players. In this scenario, new funds entering as a Ponzi scheme act as amplifiers, and only during a bull market when token prices rise can the P2E game's flywheel start to run. When the ROI stabilizes or even gradually increases, players will continuously reinvest their earnings, creating a snowball effect; injection exceeds withdrawal, with Axie being the most successful example of this flywheel cycle.
Source: Starli, IOSG Ventures
Source: Starli, IOSG Ventures
Looking back at the games of this cycle, most seem to have experienced a brief FOMO before launch, then plunged to the bottom after FG, with all tokens unlocked through airdrops becoming selling pressure. After cashing out and leaving, they seek the next opportunity. Without subsequent ROI, reinvestment of funds, and the flywheel cycle, diamond hands bear all the short-term burden. P2E has become less heard of, while P2A has quietly gained traction. Play to airdrop is a frightening concept, as this title seems to label games as one-time events. The purpose of cashing out is merely to sell airdrops upon launch for profit, rather than continuously seeking to earn within this game ecosystem. Despite the changing times, the selling behavior remains consistent, but in the current weak secondary market, altcoins have been severely challenged. The secondary token prices cannot drive the flywheel; without strong market makers to support, many games' flywheels and profit effects have been forcibly castrated, transitioning from loops to short-term models. Looking back at the performance of Catizen and Hamster post-TGE also indirectly corroborates that the economic model was designed for the short term, with no need to run the flywheel later, thus lacking the necessity for price support. For such projects, whether mid-to-late stage Token Funding is a significantly profitable deal remains questionable.
The flywheel cycle requires a more refined economic model and cost investment, while short-term projects only require expectations of airdrops, as the tasks are completed once launched. The subsequent economic model can be cut back. The airdrop expectation is essentially profiting from the liquidity gap in the primary and secondary markets. We can think of these short-term projects as a form of fixed deposit until reinvestment in the economic system, where players invest the costs of NFTs or pass cards, giving the funds a time cost to stay until the token is issued and they earn profits from airdrops.
Such projects do not require cross-cycle running times and uncertain economic cycles, and do not entirely depend on market conditions and FOMO sentiment. With a brief and dazzling lifecycle, the fully circulating unlock model also alleviates VCs' concerns about lock-ups, allowing for faster exit times. In a poor macro environment, these short-term projects align more closely with VCs' risk-averse defensive investment choices.
User long-term retention ability is questionable.
Whether it's Not, Catizen, Hamster, or Dogs, they have all brought a wave of new user growth to exchanges like Binance. However, how many long-term users truly remain within the ecosystem or exchanges? Does the value of the newly added users match VCs' expectations and investments?
Source: IOSG Ventures
Let’s take a look at Catizen, as one of the hottest mini-games in the Ton ecosystem, it saw its active users drop from 640,000 before token issuance to just 70,000 in a single day, with subsequent user retention data showing even more gloom. From a long-term user perspective, despite no changes in game content, over 90% of users immediately withdrew in the absence of airdrop expectations, leaving around only 30,000 users retained. Does this level of user retention meet investors' expectations and achieve the goal of user acquisition? Even if users who obtained airdrops shifted to exchanges and brought a wave of immediate user growth, after cashing out their airdrop, would these users abandon Catizen in the same way? When the product itself becomes a viral campaign, with short-term projects aimed at user acquisition, even if it brings a wave of incremental growth to the ecosystem in the short term, can the truly retained users meet the expectations of the ecosystem and exchanges, justifying this investment? We remain doubtful.
2.3 Phenomenon 3: Top-tier VCs layout casinos to earn from rakes, but do they lack expectations for token issuance and value capture?
"Infra projects and secondary trading are closely related to the macro market; when the overall market is strong, funds are more willing to stay in the market to capitalize on various hot trends. In an environment where there is no strong buying and selling desire in the secondary market, relying on rakes from casinos and pump.fun has become a more prudent and conservative defensive choice for VCs. However, where will the customer acquisition come from? Platforms and tools lack expectations for token issuance, and rake underperforming GameFi project investments also deserve consideration."
Multiple casino projects have begun to emerge, accounting for 15% of the high financing related to GameFi 2024. It seems that in this fast-paced crypto world, since memes and pump.fun can both be reasonably accepted, games of all sizes no longer need to subtly don a GameFi disguise and can boldly appear before everyone.
On February 12 this year, Monkey Tilt, led by Polychain Capital with follow-up investments from Hack VC, Folius Ventures, etc., provided a betting site and online casino backed by large funds. Myprize, which announced a total of $13 million led by Dragonfly Capital and joined by major VCs like a16z on March 24, is even bolder, with sexy dealers openly dealing and live streaming options on its homepage.
Source: Myprize
Pump.fun, the casino platform earns from rake and cash flow logic.
When the market cools and becomes unpredictable, with elections undecided and the U.S. repeatedly delaying interest rate cuts, in this garbage time, coupled with the emergence of coins like BOME (Book of MEME) and other hundred-fold and thousand-fold coins, people's gambling tendencies are significantly stimulated, leading more money to flow onto the chain and into pump.fun in search of the so-called next 'golden dog.' Notably, the timing of pump.fun's emergence coincided with the ongoing fluctuations after Solana's rise.
What is the biggest casino in Web3? Many might already have the answer in mind. Exchanges like Binance and OKX offer perpetual futures contracts with up to 125x leverage, while smaller exchanges offer 200x or even 300x leverage. Compared to the A-share market, which has a daily maximum fluctuation of 10% and the ChiNext with 20%, with tokens having no price limits and combined with 100x leverage, it only takes less than 1% price fluctuation to lose all the principal invested.
Both price increases and decreases in contracts can be participated in either through long or short positions. Essentially, ultra-short contracts are just betting on the size of the time between entry and exit, with payouts ranging from 5x to 300x. Exchanges earn substantial profits from trading fees, holding costs, and forced liquidation fees. The logic is the same; casinos typically earn from rake or the kill rate when acting as a house.
If infra projects and secondary trading are closely related to the macro market environment, when the macro environment is clear and the market is rising, funds are more willing to stay in the market to enjoy significant gains from various hot trends, yielding considerable returns and lower risk coefficients. However, in the current unpredictable market, funds seem to be flowing towards casinos and PvP, using high leverage to gamble for returns that cannot be reached in the present. High leverage amplifies gains and inevitably amplifies losses. In the current market, where fluctuations are frequent, the rakes earned by exchanges and platforms may appear more objective than in a one-sided market.
In the current unpredictable market with enhanced user gambling tendencies, funds and enthusiasm seem to be flowing towards casinos and PvP. The rake earned from casinos and tool-type products has become a stable income with demand and increment, aligning with the defensive investment logic of earning from rake. However, revenue from rake in casino or platform-based models also has certain issues.
Lacking expectations of token issuance and value capture.
For platform-type projects like pump, even if they become phenomenally successful and rake in huge trading volumes, they still lack expectations for token issuance. Whether considering the token itself, its necessity and practicality within the ecosystem, or from a regulatory perspective, as long as no tokens are issued, there is no risk of being targeted by the SEC for securities violations. Similar casinos or platforms lack genuine expectations for token issuance.
On the other hand, without expectations for token issuance, the logic of rake and casinos is more applicable during sideways fluctuations and cannot predict future hotspots. Rake relies on the on-chain meme or gambling hype and activity, serving as a middle tool that satisfies demand rather than being the demand itself, lacking true value capture. Recent actions by pump.fun to sell SOL for cash (as of 9.29, approximately $60 million worth of Solana tokens had been sold, accounting for about half of its total revenue) show that in the absence of token issuance expectations and value capture, pump.fun has created significant selling pressure while relying on the prosperity of $SOL.
Although pump.fun will undoubtedly bring many positive impacts to the entire Solana ecosystem, such as increased trading activity, attracting new users to the Solana ecosystem during meme summer, stable demand and buying for $SOL, and seeing an influx of purchasing power as $SOL rises, meme players gradually evolving into long-term holders and ecosystem supporters of $SOL, boosting the overall ecosystem's prosperity, and driving up premiums. However, problems also exist; taking from the public but selling to the public, collecting $SOL as fees and then dumping these sell orders into the market. The closer total sales approach total revenue, the more neutral pump.fun's impact on Solana's price becomes, resembling a stabilizer, and may even result in negative premiums (only sell orders with no buy orders). During the growth phase, the positive impact of pump.fun on the Solana ecosystem is extremely powerful, potentially showing geometric growth; but once sufficiently mature and in a plateau phase, fixed selling pressure (acting as fee revenue) minus the diminishing positive impact may showcase greater selling pressure.
In summary, similar gambling platforms are bound to underperform GameFi projects that genuinely capture value. Additionally, most VC investment returns are from rake dividends, with equity exits being unrealistic and lacking a token issuance expectation. They can only wait for the next round of mergers or acquisitions to exit, which is a long and arduous process.
3. Summary: Casinos and platforms may underperform GameFi, as short-term projects see declining retention, maintaining a cautious attitude towards past defensive investments.
Whether it is to attract existing users to new games or to rely on the user base to convert new Web3 user increments, one of the main roles and value directions of gaming platforms seems to have evolved into a new user acquisition channel. However, for projects relying on such platforms to convert users through short-term projects as their true value, the long-term retention rate of users has yet to be proven by time and data. Gambling platforms seem to underperform in a bull market without expectations of token issuance and value capture, compared to GameFi that genuinely captures value and has product-market fit (PMF). We remain cautious about defensive investments in the past market and are more eager to find products and high-quality games that have yet to gain consensus at the current stage, with few investors. Such games can convert future willing buyers into higher retention rates, higher in-game spending, and on-chain activity due to their quality, which will ultimately translate into higher token value.
