Authors: Teng Yan & ChappieOnChain, Chain of Thought; Compilation: Golden Finance ziaozou
1. Summary of this article:
● The competition for the release platform for AI Agents has begun, with everyone wanting to become the 'OpenSea' for Agents. The Virtuals Protocol is a strong contender.
● The Virtuals Protocol provides a framework for creating, owning, and expanding tokenized AI agents.
● We delved into the smart contracts of Virtuals and discovered a complex system of permissionless contributions and value creation.
● The AgentFactoryV3 smart contract is the core of this framework. Under this framework, token holders can benefit from the income of AI agents while also being incentivized to make meaningful contributions to the ecosystem.
● Every AI agent on Virtuals is dynamic, capable of evolving its voice, visuals, data, and models through the DAO.
● For developers building AI agents, choosing the right platform is crucial - Base positions itself as the preferred center for consumer-centric AI agents.
The Virtuals Protocol has recently become a hot topic in the field. It initially started as an unassuming gaming guild (Path DAO) and has now evolved into a platform for creating and managing AI agents.
The timing couldn't be better. Consumer obsession with platforms like Truth Terminal and GOAT is exploding, and Virtuals is right there, perfectly poised to seize the wave.
At the height of the AI meme coin frenzy, VIRTUAL and its offspring LUNA are at the center of the frenzy.
However, let's pause for a moment. While speculation is interesting, it raises a deeper question hidden behind all these memes and bold dreams: What does it really mean to 'own' an AI agent?
A more accurate statement would be: What do you really own when you purchase a token of an AI agent?
Is there a real value creation mechanism that distinguishes them from meme coins?
This is the problem we aim to address. So we delved into the smart contracts driving the Virtuals protocol.
We want to understand what it truly means to possess something that can influence the success of AI agents, how the protocol enables participants to actively engage in shaping its development, and whether this tokenized AI agent economy is genuine.
We have discovered the following.
2. AI is often a multi-billion dollar business
As early as 2014, my (ChappieOnChain) mission was to find products with product-market fit suitable for chat applications.
One unexpected - and extremely pleasant - discovery we made was that even the simplest chatbots (barely more advanced than their predecessor ELIZA) can attract a small group of users.
These rule-based bots keep the conversation going, driving astonishing levels of engagement.
Through in-depth market research, I found that the product with the best product-market fit is one developed based on 'IF this, THEN that' chatbot programs. It's called Talking Tom.
Talking Tom is not just a cute cartoon cat. Tom is a master of interactive design. Through clever scripting and rule-based behavior, Tom has captivated children around the world, generating substantial revenue through in-app purchases: gifts, animations, clothing, and all that you can think of.
However, despite its tremendous success, people like us cannot reap any benefits from this digital phenomenon. Talking Tom belongs entirely to its creator, while the rest of us can only watch (or purchase another set of digital outfits).
Fast forward ten years, and the game has completely changed.
Today, the rise of large language models (LLMs) has broken the limitations of scripted bots, creating context-aware dynamic interactions that attract a wider audience.
If we combine this with the tokenization of blockchain, suddenly, the impossible becomes possible: ownership, contributions, and investments in AI agents as digital assets.
3. The Agent Market Race Has Begun
We are now witnessing the emergence of an entirely new competition reminiscent of the NFT craze.
Everyone is vying to become the OpenSea of the AI agent boom in 2025.
At the peak of the NFT craze in January 2022, OpenSea raised $300 million in funding at a valuation of up to $13 billion. Just six months earlier, it had raised $100 million at a valuation of $1.5 billion. In six months, the valuation grew eightfold.
Not surprisingly, a similar gold rush has emerged in the AI agent space, with players like MyShell, Virtuals Protocol, and Creator.bid all competing for the top spot. New players pop up every day, such as Vvaidotfun.
The things we want to do are very similar: create and tokenize AI agents, primarily for entertainment use cases.
The Virtuals Protocol caught our attention because:
● Transparency: Their smart contracts are public, in the spirit of Web3. This allows anyone to delve into their codebase. So we did just that.
● Traction: They have deployed a live AI agent (LUNA) that has caused a sensation. There is also an on-chain venture capital agent (SEKOIA), supported by investment from Canonical Ventures' Anand Iyer.
● Market Leader: At the time of writing, the market cap of Virtuals' VIRTUAL token has exceeded $500 million, leading the pack.
4. Introduction to Virtuals Protocol
The core of the Virtuals Protocol is a framework supporting the creation, ownership, and growth of tokenized AI agents. This includes:
● Creation: Designing new tokenized AI agents based on 'fair' criteria.
● Profitability: Token holders can benefit from the revenue generated by AI agents - such as in-app purchases, subscriptions, or other monetization streams.
● Contribution: The system encourages permissionless contributions, allowing anyone to enhance the performance of AI agents and share in their success.
● Distribution: Expand the influence of agents through social media channels, turning them into viral digital assets.
Let's break down the various parts of this process, along with the smart contracts behind the scenes.
5. Creating a brand new AI agent
Creating AI agents in Virtuals is very simple.
The platform has a launchpad release platform called fun.virtuals, clearly inspired by pump.fun. You just need to fill out some basic information to define the agent's purpose and personality.
But simple doesn't mean chaotic. If anyone could instantly launch an AI agent, the platform would be overwhelmed, and inference fees would spiral out of control. Virtuals has deployed a very effective mechanism to maintain high quality while allowing open access.
(1) The journey of transformation
After creating the agent, a bonding curve will be initiated. This curve defines the token economics of the agent, starting with a total supply of 1 billion FERC20 tokens (short for Fun ERC20).
Before an agent can interact with the world, it must reach a market cap of $4200, and the bonding curve only accepts VIRTUAL tokens as payment. At this stage, buyers are not purchasing the final AI agent token, but rather FERC20 tokens.
These can be seen as placeholders or stakes in the potential of the agents. Once the target of $4200 is reached, the agents will be activated, but only within the Virtuals Forum.
When the AI agent reaches a market cap of $420,000, the real transformation occurs, and Virtuals refers to this milestone as 'red-pilled.' At this point, the agent undergoes a series of critical changes:
● AI agents can interact and transfer on X.
● Like a butterfly emerging from its cocoon, it has transformed:
- The total supply of AI agent tokens is the same as FERC20 (1 billion)
- Create a UniswapV2 liquidity pool using AI agent tokens + VIRTUAL trading pairs.
- Tokens of AI agents + VIRTUAL tokens retained in the bonding curve are sent to the UniswapV2 pool.
- Depositing agent tokens + VIRTUAL LP tokens has a 10-year lock-up period.
Finally, FERC20 token holders can redeem their tokens for AI agent tokens via the 'unwrap function.' This process utilizes the newly created Uniswap pool and burns FERC20 tokens.
The entire system strikes a delicate balance between accessibility and quality control. By linking creation to milestones and market value, Virtuals ensures that only truly attractive agents can enter the broader ecosystem.
(2) The role of Virtuals
However, Virtuals is not just a new agent token paired with the Uniswap V2 pool.
Real innovation lies in the system allowing token holders to benefit from the income generated by AI agents while incentivizing them to make meaningful contributions to the ecosystem.
The core of this framework is the AgentFactoryV3 smart contract, which creates several key components: Agent Token, NFT, veToken, DAO, Token-Bound Account (TBA).
● Agent Token
Agent tokens are standard ERC-20 tokens with some additional features: Tax.
Tokens can enforce tax rates for swap exchanges. The protocol converts the tax into VIRTUAL tokens and sends them to designated recipient addresses. Then, these VIRTUAL tokens are used to buy back and burn agent tokens, creating demand and a deflationary supply. In this way, token holders can indirectly benefit from the agent's trading volume/attention.
● NFT
The role of NFTs is to anchor AI tokens, storing all key addresses related to their functionality. Notably, it includes the creator's address, granting the creator privileges such as proposal approval and the ability to migrate agents to future protocol versions.
But the truly magical aspect is the second type of NFT: contribution NFTs.
These NFTs are directly linked to the four core attributes of AI agents - model, data, voice, and visuals. Anyone can propose enhancements to these elements. Validators assess contributions and allocate points, and if a suggestion is accepted, the contributor receives agent token rewards.
One prominent feature of Virtuals is its IP contributors, which is where it gets really interesting.
Imagine someone creating a Joe Rogan AI agent, training it through his podcast and other content, and starting to monetize it. Then, the real Joe Rogan can (through his committee) find Virtuals and request a share of the swap revenue generated by that AI agent. If approved, the smart contract will programmatically allocate a percentage of the revenue to him.
This setup allows IP owners to benefit from their intellectual property without direct involvement. With economic incentives, will this make it easier for established creators to integrate into this ecosystem? Time will tell, but the potential in this area is immense.
● AgentveToken
You can stake agent tokens/VIRTUAL LP tokens to earn AgentveToken. These veTokens provide voting rights that can be delegated to validators. In turn, validators play a key role in the ecosystem by reviewing contributions to AI agents. By delegating to effective validators, token holders can share rewards from accurately verified contributions, creating a consistent incentive system.
● DAO
This DAO is not a typical governance structure.
This is an operational mechanism dedicated to improving the core attributes of AI agents (datasets, models, voice, and visuals).
When an update proposal for an AI agent is submitted, validators receive two anonymous versions of the proposed update and participate in a rigorous evaluation process, scoring each version through 10 rounds of interactive testing. This approach ensures contributions are performance-based, better supporting the continuous improvement of agents.
● Token Bound Account (TBA)
The token-bound account is an Ethereum address controlled by the AI agent itself, allowing it to take autonomous actions on-chain.
These five components together form a highly collaborative and well-functioning ecosystem designed to incentivize innovation while coordinating the interests of creators, contributors, and token holders.
(3) Taking LUNA as an example
Let's take LUNA as an example.
LUNA is not just the token you use to tip AI agents. It is a token whose value increases the more you interact with the agent.
Applications providing access to Luna charge inference fees, currently supporting payments in VIRTUAL tokens. This revenue will be used to buy back LUNA tokens through the VIRTUAL/LUNA pool. The purchased tokens are then burned, reducing the total supply and creating a deflationary effect.
Luna also has a tipping feature. Users can tip in LUNA to trigger animations or other actions. These tips go directly into Luna's on-chain wallet, controlled autonomously. This autonomy brings interesting user interactions, with some trying to coax Luna into giving them airdrops with sweet talk.
Additionally, when users exchange VIRTUAL for LUNA, they can also earn tax revenue. While there is currently no tax on swaps, future governance could enable this functionality, adding another layer of revenue for the ecosystem.
Every AI agent in Virtuals is dynamic and constantly evolving. The agent models can change and their databases can expand.
The core of AI agents consists of two fundamental elements:
● System: A coordinating mechanism that facilitates contributions, promotes growth, and ultimately drives AI agents to achieve their established goals.
● Creative Spark: Imaginative visions breathe life into agents, steering them on unique paths and defining their roles within the ecosystem.
When you own an AI agent token, you possess both of these powers. Its value depends on the creativity it attracts and the system's ability to maintain growth.
In this way, holding agent tokens means benefiting from the continuous integration of innovation and utility.
What is the level of decentralization of Luna?
Virtuals scores full marks in this regard. While running agents requires active server maintenance, all essential data is stored on-chain or in IPFS. This means that if the servers go offline, Luna's operations can continue without centralized supervision.
In our view, this combination of decentralization and autonomy makes the Virtuals Protocol particularly special compared to other AI agent platforms.
All VIRTUAL tokens are now in circulation, with no further unlocks. The total supply of VIRTUAL is 1 billion. At the current price of $0.50, this equates to a circulating market cap and FDV of $500 million.
● 60% distributed to the public. Virtuals was previously Path DAO (game guild) before transforming into its current form. Back in December 2023, the exchange rate of PATH tokens to VIRTUAL tokens was 1:1.
● 5% reserved for the liquidity fund.
● 35% of the tokens are in the ecosystem treasury, controlled by the DAO, with a maximum annual issuance of 10%, requiring governance approval.
The Virtual token plays another very important role in incentivizing the best AI agents. 60 million VIRTUAL will be sent to the top 3 agent token/Virtual liquidity pools.
Currently, about 45% of the tokens are on Base, while 55% are on Ethereum (the largest holder is the ecosystem treasury). There are over 58,500 VIRTUAL holders, widely distributed.
As of November 18, a total of 1,877 agent tokens have been issued on Virtuals, costing a total of 1.905 million VIRTUAL (equivalent to $950,000) to create agent tokens. The number of agent token holders exceeds 21,200.
6. Our Thoughts
(1) The depth of Virtuals far exceeds our initial imagination
When we first started exploring AI meme coins on Virtuals, we thought what we saw should be simple tokens with no utility or value accumulation mechanism. But we were wrong.
Virtuals astonished us with its complex system of permissionless contributions and value creation.
As more Crypto AI infrastructure and tools emerge, the development potential of Virtuals becomes more apparent - facilitating agents to interact seamlessly on-chain.
What excites us the most is:
● Wallet usage. No other AI agents on Virtuals can truly use wallets (requiring a market cap of over 126 million). When this happens, we expect to see:
- AI agents that use on-chain tools to produce custom content (think NFTs, meme coins, or even predictions about the US elections).
- AI agent partnerships, aiming to merge communities to purchase other tokens.
- Breed offspring and launch their own AI agents. This has already happened!
● Prompt-to-earn. If interactions with AI agents can reward users with valuable prompts, enhancing their knowledge base or ability to interact with others, this will create an engaging flywheel effect. This could provide a user experience that is difficult for centralized platforms to compete with.
(2) Choosing the right platform is important
If you are a developer of AI agents, it is crucial to choose a platform that allows you to create novel and engaging user experiences. You can easily create a meme coin on pump.fun. Interestingly, it is loosely associated with AI agents on X, but that connection is at best tenuous.
From a technical standpoint, Virtuals provides the infrastructure to make these connections meaningful and effective. The team has an ambitious vision to set standards for communication among all AI agents on-chain. We always like to make a big splash, don't we?
(3) Base is becoming a center for consumer AI
Virtuals is built on Base, which is rapidly becoming a powerful ecosystem centered on consumer AI agents. Base has over 50 teams building AI agent projects, offering composability, strong branding, excellent AI SDKs, and growing network effects.
You also want to showcase your skills in places where other innovators are developing, as that is where user liquidity naturally gathers. While some chains heavily rely on speculation and gambling, Base is becoming the preferred platform for significant innovations in the field of AI agents.
One last point: at the end of the day, a platform is just a platform.
Their potential is unleashed by the creativity and ingenuity of the creators behind them. The success of Virtuals ultimately depends on nurturing a vibrant developer ecosystem that encourages creators to use its tools to create interesting, innovative, and engaging AI agents.
