Written by: IOSG Ventures
Looking back at this year, the GameFi-related projects that received high financing and performed well (currently GambleFi is also categorized under GameFi) have primarily concentrated high financing in gaming platforms and GameFi tracks such as Layer 3 infrastructures. The most striking has been the pump.fun casino and the explosive Not and Telegram mini-game ecosystem that has attracted countless participants since the beginning of the year. This article will analyze the defensive investment logic behind such investment phenomena and our attitudes toward this investment logic.
1. GameFi market financing overview.
Source: InvestGame Weekly News Digest #35: Web3 Gaming Investments in 2020-2024
Looking at the investment volume and project number in the GameFi field from 2020 to 2024 each quarter, even though Bitcoin has surpassed the previous high of 2021 this year, data from the past year shows relative sluggishness and conservativeness in total volume and project count. In comparison, the same high of Q4 2021 saw up to 83 total investment projects totaling $1,591 million, with an average investment amount of $19.2 million per project. However, this year's first quarter, which broke the previous high, had a cumulative total of 48 projects with a cumulative investment of $221 million, averaging $4.6 million per project, a year-on-year decrease of 76%. Overall, investment behavior appears conservative and defensive.
2. Analyzing three market phenomena from the past year, the underlying logic, transformations, and doubts.
2.1 Phenomenon 1: Gaming platforms evolve from pure platforms to new user acquisition channels.
The reason gaming infrastructures, aside from their strong survival ability and long lifecycle, gradually evolve into user acquisition channels is why they are so 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 3s. From BSC to Solana, from Base to Polygon, and even self-built Layer 2 and Layer 3s, gaming platforms are flourishing. Even in the case of a significant decline in total financing amounts, 38% of high-value investment projects are still concentrated in gaming infrastructure, which demonstrates strong survivability and longevity. Platforms will not be invalidated by trends, also serving as a defensive investment choice with low risk.
Source: PANTERA
Moreover, for leading game ecosystems, there are several funds heavily investing in top gaming platforms like Ton, similar to Pantera. Ronin is also a secondary preference for multiple VCs. The reason Ton's ecosystem and Ronin are so favored by VCs may boil down to the gradual evolution of platform roles. Nearly a billion users on Telegram, attracted to Web3 by mini-games like Not, Catizen, and Hamster (Not has 30M users, Catizen has 20M users, 1M paying users, and Hamster has 300M users), or the new user groups flowing from Ton’s ecosystem to exchanges post-listing, have injected new blood into the crypto world. From March this year, Ton announced over $100 million in ecosystem incentives and multiple league prize pools, but the later on-chain data shows that $Ton's TVL has not significantly increased with the explosion of mini-games; more users are primarily converted through pre-deposit activities on exchanges. On Telegram, the CPC (Cost-Per-Click) minimum cost is only $0.015, while the average customer acquisition cost for a new account on an exchange is $5-10, with the customer acquisition cost for each paying user exceeding $200, averaging $350. The acquisition and conversion costs on Ton are far lower than those on exchanges themselves. This also indirectly confirms why exchanges are racing to list various Ton mini-game tokens and memecoins.
The existing user base of Ronin provides many opportunities for individual games to seek users, as seen from high-quality games like Lumiterra and Tatsumeeko gradually migrating to the Ronin chain. The user increment and acquisition capabilities brought by gaming platforms seem to have become a new angle of favor.
2.2 Phenomenon 2: Short-term projects dominate the market and become a new favorite, but user retention ability is in doubt.
In a secondary market with poor liquidity, many games' flywheels and profit effects are directly truncated, making perpetual games a one-off gamble. During a poor macro environment, these short-term projects closely align with VCs' risk-averse defensive investment choices. However, whether users' long-term retention abilities merit VCs' optimism and expectations remains in doubt.
Look at Not (short-term projects) economic model.
Source: PANTERA
Not's active users have declined sharply since the token went live, dropping from an initial 500,000 to 200,000 five days after TGE, stabilizing at around 30,000. The user drop-off rate reached 94%. If we take user data into account, Not is indeed a short-term project in every sense. Recently launched on Binance, projects like Dogs, Hamster Kombat, and Catizen have piqued the interest of the market and VCs alike; what makes these fully circulating short-term projects so favored?
Source: Starli
From once playing P2E games for profit, simple game level setups, auto-battler modes, Pixel's farming and logging for coins, to Not's explosive click-to-earn, these projects with the GameFi title are gradually simplifying or even shedding the game layer. When the market is happily buying in, is it that people's acceptance is rising, or is it becoming impatient and restless? Since most GameFi essentially replaces mining machines with interactive processes to mine, why bother with those cumbersome game steps and modeling costs? It's better to use all the costs needed for game development as the initial cake for this Ponzi mining factory, benefiting both parties.
The economic model of Not differs from the former GameFi flywheel model, with a fully circulating one-time unlocking and no upfront cost input. When users receive airdropped tokens, they can immediately exit, alleviating VCs of the burdens of two to three years of locked assets. It shifts from a sustainable mining game model directly to a short-term version resembling memecoins. Additionally, like the value-added role of platforms in acquiring new users, simple cashing-out game mechanisms attract new Web2 users to participate in Web3, shifting new users who claim airdrops to exchanges. This influx of user traffic brought to the ecosystem and exchanges might be another reason why VCs favor such projects.
The essence of the flywheel cycle aligns more closely with the current market due to the uncertainties in mid-to-late stage investment returns.
Once, P2E (Play-To-Earn) games had a complete economic cycle, and whether this cycle's flywheel can operate depends on whether players can calculate an acceptable ROI (Return on Investment). In the context of P2E games, ROI = Net Profit / Net Spend translates to future anticipated returns (the value of mined assets) / NFT costs (costs of mining rigs). Therefore, in P2E games, participants' return calculations follow:
ROI = Value of Future rewards / Acquisition Cost of NFT.
Ignoring wear and electricity costs for a moment, the larger the calculated ROI, the stronger players' incentives become. How can we maximize ROI? Let's break down the formula.
Source: Starli, IOSG Ventures
Path 1: Value of Future Rewards increase.
Value of Future Rewards = Quantity of Future Rewards * Price of Future Rewards.
V=P*Q
The future value of returns = quantity of future returns * price of future returns.
When the value of returns increases, either the quantity of returns obtained increases, i.e., the token rewards increase; or the price of returns obtained rises, i.e., the token price increases.
When looking at the Web3 economy, virtually all token output settings exhibit a converging trend, similar to Bitcoin's halving cycle. As time increases, token output will become scarcer, while mining difficulty will rise. More expensive miners or rarer NFTs may yield higher return quantities, but they also add extra costs. Therefore, without changing the quality of mining rigs, rising return quantities do not make sense.
Thus, the greater likelihood is the rise in future return prices, meaning that the tokens players mine keep steadily increasing in value. In the secondary market, if the buying volume is sufficient, a situation where supply exceeds demand will not occur. The buying power consumes all selling orders while still trending upward. Consequently, this enlarges the numerator in achieving ROI.
Path 2: Lowering NFT costs.
When the denominator in the ROI decreases, the ROI naturally increases. Therefore, if the acquisition cost of NFTs as mining rigs decreases. If the NFT prices traded in project tokens decline, it is either due to decreased demand for those NFTs with increased supply or a drop in the price of the token as a medium of exchange and standard measure, leading to price declines externally.
A decrease in demand is naturally due to the game's profit potential weakening, leading players to seek opportunities in other games with higher ROIs. With settlements in other fiat currencies like Ethereum or Solana, market influences mean that when mainstream coin prices decline, altcoins will not fare well either. Therefore, NFT prices and token prices are inevitably positively correlated. Thus, the numerator and denominator cannot both increase simultaneously; rather, their changes are synchronously proportional to each other.
This means the most likely way to achieve a larger ROI is through the anticipated rise in token prices, with NFTs rising in sync, but the increase is less than or equal to the rise in token prices, allowing ROI to stabilize or slowly increase, continually incentivizing players. In this case, new funds entering through Ponzi schemes serve as an amplifier, and only in a bull market when token prices rise can the P2E game flywheel start running. When ROI stabilizes or even gradually rises, players will continuously reinvest their earnings, leading to a snowball effect where injections exceed withdrawals; Axie is the most successful example of this flywheel cycle.
Source: Starli, IOSG Ventures
Source: Starli, IOSG Ventures
Looking back at the games of this cycle, it seems that most of them experience a brief FOMO before launch, then plummet overnight after FG, with all tokens unlocked through airdrops becoming selling pressure. After cashing out, they look for the next opportunity. Without subsequent ROI, reinvestment of funds, and a flywheel cycle, diamond hands bear all the short-term burdens. P2E is heard less, P2A is quietly rising, play to airdrop is a scary concept, as this title seems to label games in a disposable manner. The purpose of farming is merely to sell airdrops for cash out upon listing, rather than continuously searching for opportunities to earn within this game ecosystem. Despite the changing times, the behavior of selling coins remains the same. In the current weak secondary market, during the time when altcoins are struggling, secondary token prices cannot drive the flywheel; without strong market makers supporting, many games' flywheels and profit effects are directly truncated, shifting from loops to short-term, making perpetual games a one-off gamble. From this perspective, looking back at the performance of Catizen and Hamster post-TGE, it also indirectly supports that the economic model designed for the short term does not need to run the subsequent flywheel, eliminating the need for any upward pressure. For such projects, whether mid-to-late stage Token Funding represents a substantially profitable deal remains in doubt.
The flywheel cycle requires a more refined economic model and cost investment, whereas short-term projects only need the expectation of airdrops, as the task is completed once listed, and the subsequent economic model can be truncated. The expectation of airdrops is merely profiting from the liquidity price difference between primary and secondary markets. We can understand these short-term projects as another form of fixed deposit until reinvestment into the economy, with players investing the costs of NFTs or pass cards as principal, allowing time for funds to remain until the token issuance and airdrop profits are realized.
Such projects do not require cross-cycle operating time and uncertain economic cycles, nor do they entirely rely on the market environment and FOMO sentiments. Their short-lived yet vibrant lifecycle, combined with the fully circulating unlocking model, frees VCs from the headache of locked assets, allowing for quicker exit times. During a poor macroeconomic environment, these short-term projects are more closely aligned with VCs' risk-averse defensive investment choices.
User long-term retention ability is in doubt.
Regardless of whether it’s Not, Catizen, Hamster, or Dogs, they have brought a wave of new user growth to exchanges like Binance. However, how many long-term users actually remain in 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 on the Ton ecosystem. Its active users plummeted from 640,000 to 70,000 within a day before token issuance, with subsequent user retention data showing even lower figures. From a long-term user perspective, even if the game content remains unchanged, after the expectation of airdrops is no longer present, over 90% of users immediately withdraw, leaving only about 30,000 users. Does this user retention rate meet investors' expectations and achieve the goal of new user acquisition? Even if users who received airdrops shift to exchanges for immediate user growth, will these users abandon Catizen after cashing out their airdrops? When the product itself transforms into a viral campaign, a short-term project aimed at user acquisition may bring a surge of new users to the ecosystem, but will the truly retained users satisfy the ecosystem and exchanges' expectations, justifying this investment? We remain doubtful.
2.3 Phenomenon 3: Top VCs are investing in casinos for house edges, but do they lack token issuance expectations and value capture?
Infra projects and secondary trading are closely tied to the macro market. When the overall market trend is strong, funds are more willing to remain in the market to benefit from the rise of various hotspots. In an environment where there is not a strong desire for buying and selling in the secondary market, earning from house edges and pump.fun’s PvP becomes a more stable and conservative defensive choice for VCs. But where does user acquisition come from, as platforms and tools lack token issuance expectations, and earning from house edges may also underperform compared to GameFi project investments?
Several casino projects have begun to emerge, accounting for 15% of the high financing related to GameFi in 2024. In this fast-paced crypto world, since memes and pump.fun can be reasonably accepted, games of various scales no longer need to disguise themselves under a GameFi cloak like before, appearing openly before everyone.
On February 12 this year, Monkey Tilt, led by Polychain Capital with follow-up investments from Hack VC, Folius Ventures, and others, provided a betting site and online casino backed by a large fund. Myprize, which announced on March 24 that it was led by Dragonfly Capital with participation from a16z and other big VCs, raised a total of $13 million for its online casino, being even bolder, with sexy dealers appearing online and live options on its homepage.
Source: Myprize
Pump.fun, the casino platform's logic of earning from house edges and cash flow.
When the market cools and remains volatile, with the elections undecided and the US interest rate cuts dragging on, in such a garbage time, coupled with the emergence of BOME (Book of MEME) and other miraculous coins and hundredfold or thousandfold coins, people's betting tendencies are greatly stimulated, leading to more money flowing into the chain and pump.fun in search of the next 'golden dog.' The timing of pump.fun's emergence coincided with the period after Solana's increase and continued volatility.
What is the largest casino in Web3? Many may already have an answer in their minds. Binance, OKX, and other top exchanges with 125X leverage perpetual futures contracts, while smaller exchanges offer 200X or even 300X leverage. In contrast to A-shares which allow a maximum fluctuation of 10% daily and the ChiNext allowing 20%, tokens without T+0 restrictions and without price limits compounded with 100X leverage mean that even a movement of less than 1% in token prices can wipe out all your initial capital.
The price rise or fall of tokens can be participated in through long or short contracts, fundamentally viewing that ultra-short contracts are just betting on the size between entry and exit during this time, with odds ranging from 5x to 300x. Exchanges earn a fortune by collecting opening fees, holding costs, and forced liquidation (margin call) fees, etc. The logic is similar; casinos usually earn from house edges or kill rates when they sit at the table.
If Infra projects and secondary trading are closely tied to the macro market environment, during favorable conditions, funds are more willing to stay and benefit from the significant rises in various hotspots. However, in a currently volatile market, funds appear to flow towards casinos and PvP, leveraging high leverage to gamble for returns that cannot be reached in real-time. High leverage amplifies gains and losses, and in today's market, where fluctuations are frequent, the house edges earned by exchanges and platforms may be more objective than during unilateral market conditions.
In the current market, where volatility is high and users' betting tendencies are heightened, funds and enthusiasm seem to flow towards casinos and PvP. The house edge earned from casinos and tool-type products has become a stable income that is in demand and growing, aligning with the logic of defensive investment. However, the revenue from house edges in casinos or platform types also presents certain problems.
Lack of token issuance expectations and value capture.
For platforms like pump, even if they become a phenomenal platform earning substantial revenue, they still lack token issuance expectations. Whether from the token's necessity and usability within the ecosystem or from a regulatory perspective, as long as they do not issue tokens, there will be no violation of securities regulations under SEC scrutiny. Similar casinos or platforms lack genuine expectations for token issuance.
On the other hand, under the premise of lacking token issuance expectations, the logic of house edges and casinos is more applicable during sideways volatility periods, as it cannot predict future hotspots. House edges rely on the on-chain meme or gambling genres' popularity and activity, serving as an intermediary tool to meet demand rather than being the demand itself, lacking genuine self-reliant value capture. Recent actions by pump.fun to liquidate SOL on a large scale can also be observed (as of September 29, they have liquidated approximately $60 million worth of Solana tokens, accounting for about half of their total revenue). In the absence of token issuance expectations and value capture, pump.fun, while relying on the prosperity of $SOL, has also put significant selling pressure on the market.
Despite pump.fun undoubtedly bringing numerous positive impacts to the entire Solana ecosystem, such as increased trading activity and attracting new users to the Solana ecosystem from meme summer, there is also an issue. Taking from the people and then selling back to the people, charging $SOL as fees while dumping these sales into the market. The closer the total sales approach the total revenue, the more neutral pump.fun's influence on Solana prices becomes, resembling a stabilizer, with the potential for negative premiums (only sell orders without buy orders). During the growth phase, pump.fun has a very strong positive impact on the Solana ecosystem, possibly experiencing geometric growth; however, when sufficiently mature and at a platform stage, the relatively fixed selling pressure (from fees) minus diminishing positive impact may reveal greater selling pressure.
In summary, similar gambling platforms are bound to lag behind GameFi projects with genuine value capture. Additionally, most VCs’ investment returns are from house edge dividends, making equity exits unrealistic and lacking token issuance expectations, only being able to exit through the next round of mergers or acquisitions, which are lengthy and challenging.
3. Summary: Casinos and platforms may underperform GameFi; short-term project retention worsens, and we maintain a cautious attitude toward past defensive investments.
Whether it's attracting existing users to new games or leveraging user bases 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, users' long-term retention rates don't seem to have been proven by time and data yet. Gambling platforms appear to underperform in a bull market without expectations of issuing tokens and value capture compared to GameFi with genuine value capture and product-market fit (PMF). We remain cautiously optimistic about defensive investments from the past market and are eager to find products and high-quality games that currently lack consensus and investment, as these games can convert future willingness to pay into higher retention rates, increased in-game spending, and on-chain activity. This will ultimately translate into higher token value.
