TLDR

While the future of Web3 game is promising, there have been signs of defects in the token financing of many companies and projects. Equity investment or mixed investment may be a possible solution, but concerted efforts is also irreplaceable for a fair market environment.

Market Status and Forecast

In the second half of 2021, the concept of Web3 games/metaverse began to emerge, and its superior short-term profitability conquered the capital and traditional game developers. More and more VCs are looking for early-stage, high-quality projects in the market. For the last 5 months of this year, leading VC institutions have invested in 170 Web3 games and metaverse projects, with a total amount of 6.13 billion USD

The proportion of investment in Web3 games remains prominent during the bear market. For example, a16z launched two Web3 game funds in May and ended up with up to 5.1 billion US dollars raises. Such investment behavior represents the optimistic side of the Web3 game market.

As implied in the concept of ownership in blockchain, most Web3 games will have open economies where in-game assets can be traded on secondary markets without permission. Traditional in-game virtual items are estimated to be $50bn industry — this number mostly includes primary sales as trading secondary game items are typically forbidden. The black market for secondary game items was estimated [1] to be $5bn in 2015.

According to Vida Research, traditional gaming will converge into Web3 gaming, which will accelerate the industry’s growth as a whole and the open economy nature of Web3 games will attract speculator/financial capital, thus cumulatively increasing the game NFT market size to above $100bn.

Current flaws

At present, most of the Web3 financing methods in the market are token financing, including seed rounds and private rounds. Only a small number of them conduct equity financing and strategic investment. For project parties and potential users, it is true that token financing has some advantages, such as value distribution to holders, revenue rapid realization, etc.

However, token financing also has several drawbacks, especially for Investors.

Chaotic distribution of implicit revenue

As defined by the Web3 Index and FutureMoney Research [2], revenue can be divided into Explicit and Implicit. The latter is commonly found in x-2-earn and Web3 games, Which is similar to Supply-side Revenue in Defi, but even closer to Token Sale. Participants use this protocol in order to obtain speculative income from Token, contribute “income” in the form of ETH or SOL, get Token and sell them at a profit in the future.

There are two typical examples, LooksRare charges the user’s transaction fee denominated in ETH [3], and Stepn charges the fee denominated in Sol. This implicit revenue is essentially another public token sale, which will greatly increase the liquid supply of capped governance tokens, For investors, it generally takes 1–3 years to unlock the token linearly, so it is almost impossible to share this part of the profit and even reduce investor’s own investment return.

This part of the income will be taken away by the project party alone. LooksRare does this, while Stepn is slightly better as they announced a buyback plan in the first quarter, unfortunately, there is no follow-up. Buyback is the most common type of value return to token holders (including early investors).

Risk from disclosure of additional issuance income

Under Gamefi’s dual token system, the Utility token is an important income to reward players. There is no upper limit and it is generally not repurchased. The starting point of this design is good, and it is helpful to maintain the stability of the game economy, which is not affected by investors.

On the other side, it also brings the Trojan horse. The project party may trade the utility token repeatedly through multiple addresses to make huge profits. The centralized rule-makers are not required to disclose the direction of the Utility token to the community or investors.

Although the governance token is designed for deflation, the secret profit of the utility token will continue to take away the value of the entire game economy, and investors will be kept in the dark this whole time.

Tokens may not carry the value of positive externalities

Games are a content consumption industry, as the final value comes from the IP. Any game product has its life cycle, however, IP and production capabilities are the core assets that can be passed down. For the current Web3 game, most of the tokens carry the profits of individual products, and cannot be bound with IP or production capacity.

It is conceivable that if a product fails, the game’s token will hardly be reused, and the return of investors will be lost. Even if a Web3 game product is successful, there is no IP value to be shared by investors.

Suggestion

Equity investment or mixed investment may solve the above problems.

Regularize opaque income distribution

Equity investments are usually accompanied by dividend rights. The implicit revenue of the project party is obliged to share with investors in clearly written rules.

As an example, a16z general partners David Haber and Jonathan Lai will join the 「Carry1st」 board as observers.

Committed to long-term common interests

Investors have long-term cooperation with project parties through equity, which can help users grow and improve products in many ways.

Investors use their own resources to give the project party legal, financial, technical, market, and other support in the early stage. After the success of the product, the project party will also share other external benefits such as IP and content.

Binance’s strategic investment in Stepn in April may inspire us.

Help Web3game grow healthily

Under the condition of asymmetric risk, the phenomenon of bad products driving out good products (Gresham’s Law) often occurs. This is also the reason that most Web3 games are now devoted to financing and Ponzi, and very little effort is devoted to content and fun to play.

As an important initiator in the market, investors have the responsibility to use more reasonable solutions to encourage the healthy growth of this industry.

Of course, there are some companies that focus on the product itself, in order to avoid investment advice. Some good games will be independently analyzed in the future.

Disclaimer: This research is for information purposes only. It does not constitute investment advice or a recommendation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision.

🐦 @Nemo_eth

📅 21 June 2022

Reference:

[1] https://www.mds.deutsche-boerse.com/resource/blob/1335780/224223c1b0e8cf02d8948bcea3258d05/data/Changing-the-game-for-the-world-of-games.pdf

[2] https://mirror.xyz/0xfu.eth

[3] https://thedefiant.io/looksrare-opensea-protocol-revenue