https://galaxyrtk.substack.com/p/digital-co-ops

I started investing in crypto gaming in 2018 in the belief that, once opened, gaming economies and virtual worlds would never again close. Empowered by a combination of content, creation tools, open markets, and tech, the “sovereign individual” hypothesis seemed an inexorable reality. I’ve indeed been surprised at the pace of it all: the industry is running fast … but where?

There have been many times when my belief system has been challenged by scammers, speculators, and subpar everything. Recently, I’ve found myself questioning whether tokens can sustain any fundamental value without properly being considered illegal securities. Now, more than ever, it’s critical to learn from mistakes and acknowledge what hasn’t worked, but not to get so clouded by the noise and negativity that one forgets why this was all interesting to begin with.

The role of long-term oriented, scaled web2 consumer platforms in driving mass adoption of web3 is being underestimated. They are generally ignored because crypto natives tend to overvalue decentralization as an “end” in itself. But, as with privacy, I do not believe decentralization should be considered a goal in its own right; rather, it should be valued as a “means” to the real ends: self-expression, community formation, and financial opportunity. Experienced IP creators have a critical role to play in bootstrapping communities and IP that consumers care about. Those bold enough to take a long-term perspective and give value to get value are going to do well, with economies that have exponential potential relative to their closed counterparts.

In evaluating investment opportunities in web3, a few practical questions are top of mind:

• Is adding web3 to consumer franchises actually worth it?
• Is the next adoption wave going to be instigated by incumbents or crypto natives?
• Are we two steps early, one step early, or one step late to this movement?
• Is all of this just another way for retail to get the shaft?
• For something meant to enable and empower, why does web3 feel so dehumanizing?

In thinking through these questions, I have come to several observations over the past few months:

• The big unlock of web3 is the creation of digital co-ops: (i) transparent governance structures, (ii) facilitating a rewarded ecosystem of creators/developers, and (iii) embedding efficient means to exchange value through digital collectibles.
  • Transparent governance structures. Having a set of on-chain rules that make it difficult for developers to unilaterally vary the rules of the system. Transparent governance plays an important role in immersion and facilitating open world activity.
  • Rewarded ecosystem of creators/developers. Create the potential to return fruits of growth to contributors. The role of the open-world game developer will transform from closed-loop designers into founding contributors of an open ecosystem.
  • Exchanging value from digital collectibles. NFTs have the potential to create “status as a service” businesses around game environments and social structures.
• There is a fine balance between creating a rewarded community and a “community” that exists only for reward.
  • Warm Crypto
  • Reflections on Community
  • A Stream of Social Token Consciousness
• Sustainable economy design.
  • Token economics boils down to one simple principle: getting to the point where more tokens are flowing into the community treasury than flowing out.
  • Staking and other supply-side constriction mechanisms (especially when inflationary) are less relevant than demand-generation.
  • Utility tokens (1 vs. 2 vs. N): the exact model matters less than having a (i) flexible design, and (ii) tokens earned by engagement and not bought.
  • Separating NFTs as the primary outlet for speculation vs. tokens which are more “earned inputs” is an intelligent way to create engagement/retention hooks, while maintaining the flexibility to design a sustainable economy.
• Asia will leapfrog the West in its willingness to experiment with web3 at the corporate level.
  • Data science-driven approaches to what works and doesn’t (e.g., rate of token emissions, user experience tweaks, etc.) will yield useful learnings for early web3 adopters that are outsized relative to team size or international reach (e.g., Com2us).
  • Companies doing pre-sales of tokens but only tangentially integrating tokens into their player experience (while preserving most of the economy in fiat microtransactions) are weak implementations of web3, and not likely to succeed, particularly where the token offerings are in the multi-billion valuation range “freeriding” the IP of incumbents, but no real integration into a creator-focused content universe.
  • Some teams (particularly Chinese studios, such as a Funplus spinoff focused on web3 games that has recently concluded a large token sale) have extensive experience in building “simulation life games” (e.g., strategy games / SLG) that have a demonstrated history of payer conversion and retention by monetizing social status. These teams are likely to build great blockchain games, as demand for “status as a service” is the missing element of crypto gaming today.
  • Korea is innovating at a rapid clip in web3, and precisely because of restrictions on gambling and fiat trading of virtual goods, and the reputational overhang of retail losses on Terra, corporations in Korea need to implement sustainable web3 implementations across fintech (superapps for payments), entertainment (K-pop remix to earn) and gaming (sustainable creator-driven ecosystems and MMOs).
• Pure-play crypto raises are unlikely to provide favorable risk/return dynamics for investors over the long run. We believe the opportunity is in backing the equity (with token warrants for no additional consideration) for experienced development teams building sustainable economies.
  • There is a structural oversupply of venture capital in pure-play token space, as evidenced by the flood of capital supporting P2E game developers with no real experience in making content.
    • With projects often reaching multi-billion FDVs on a pre-product basis (e.g., as one case in point, pre-product Illuvium’s token FDV achieved a valuation 50% higher than the $7.5b that Bethesda sold to Microsoft for), investing decisions in crypto are driven more by FOMO and short-term trading decisions than fundamental drivers (e.g., does the 12-24 month lockup justify participating at a 60% discount, as opposed to, is this token actually worth $4b with discount / $10b spot?).
  • We have yet to witness on a wide scale the materially negative impact that large unlocking token supply is going to have on the spot token prices of many venture-backed projects. For many tokens, buy-side speculative demand will be insufficient to absorb massive liquid supply unlocks.
  • Teams that have raised large token sales without equity may end up creating structural conflicts between equityholders and tokenholders, to the extent their economies include both fiat-based and crypto-based components. We believe best practice for companies conducting private sales is to sell equity with token warrants, to align the interests of equity and tokenholders.
• Regulatory compliance will be a major differentiator for token projects, and drive an increasing number of corporates to NFT-focused web3 implementations.
  • A big area of web3 value capture in gaming will arise from NFT trading, the royalties and sale proceeds of which flow to equity holders (not token holders).
  • Given securities law concerns with tokens and structural inflexibility forced by white papers, we see the market shifting increasingly in favor of equity/NFT-based models instead of token-based ones.
    • Tokens will become increasingly less attractive to scaled game developers because of the need of issuers of virtual currencies to perform KYC/AML on token transfers. These concerns are arguably less relevant in the context of NFTs as digital collectibles, not currencies (although not free from doubt).
    • We also believe models where tokens can only be earned, not purchased in a large private offering, will increasingly become the norm. The large supply disruptions created by lumpy token sales inhibit flexibility of the designer to create a balanced economy.
  • Security tokens will become hot, this time with a retail consumer-focused angle. The ability to embed security-based cashflows into tokens for use cases like royalties + fan tokens, particularly in the context of music, sports, film, etc., will play a major role in mainstream adoption. Reg-compliant issuers such as Republic are going to be well positioned for this future.
    • Because of the utility that retail gets in collecting these NFTs above the pure financial value, security tokens have a stronger chance of succeeding this go-around with the right social contexts and trading games attached to retail ownership within a collecting community.
    • The key will be to balance the design of digital collectibles so that they don’t become “purely” about Utility (underlying financial value), but Utility+ (with collectible value forming part of a large enough engagement related premium so that the NFTs don’t just “pull to par” in terms of utility value).
• Performance marketing will be a pain point in web3 that guilds have the potential to tackle.
  • Guilds will play an important role in steering users to appropriate web3 gaming experiences, and solving several of the UX challenges associated with crypto (e.g., custody, fiat on and off ramps).
  • “Single sign on” will be an important concept in web3, for guilds that can marry on-chain analytics with off-chain player data (recorded through SDKs integrated by game developers). We see scope for large publishers to make credible platform plays in creating global “super-guilds” much as Facebook has aggregated a critical mass of consumer attention for mobile apps/games.