Inside Latin America: Why we invest in DUX, the largest Web3 gaming infrastructure in Brazil

Anchor: Gui, Investment principal of Old Fashion Research

Dux Blockchain Games was the first investment case led by Old Fashion Research (OFR) within Latin America and co-led by Animoca Brands back when GameFi was drawing all the attention in Q4 2021. The project successfully finished an European launchpad at Bit2Me, the very first regulated cryptocurrency exchange in Spain.. This prerogative marks a milestone allowing retail users to join big VC funds during the fundraising process of a project that is yet to be listed in 2022 once initial vesting period expires, all in accordance with European guidelines. 

Fast forward 6 months and investing in a GameFi project may seem like a hopeless exercise, at least from a venture capital standpoint with 10,000+ guilds and multiple games launched every week. We feel like it is time to properly place Dux and our view of Latam Web3 potential within our broader "Global South" thesis at OFR, which also includes Africa, India and SEA countries as target markets.

High inflation, wealth disparity and income inequality are issues that span across all 33 countries in Latam, however, huge discrepancies exist from country to country. While the minimum wage in Brazil is approximately $250, it may go as low as $28 in Venezuela, following a decision by President Nicolas Maduro last April that increased the monthly minimum wage 18-fold (it used to be around $2). When you add a 28 million unemployed population to this equation we start to understand the profound impact that Web3 and its value-share proposition can have upon the local economy where any extra wage can drastically improve quality of life.

GameFi, the combination of "Game" and "Finance" opened the doors for the financialization of pure game-based economies and initiated a paradigm shift between “in-game assets” and what is seen as "real-economy assets”. Mostly through NFTs, a cultural shift to "live-to-earn" and the establishment of virtual worlds (aka metaverses) we see the constant onboarding of new users who seek possibilities to monetize and seize the income generating opportunities available in decentralised economies. In this context, play-and-earn guilds function not only as a way for those users to "play" but also fill in the gap regarding a more urgent necessity: Web3 education.

The Backdrop

The worsen of labor condition during times of covid led millions of people to seek alternative forms of income to survive, which led to a massive inflow of players-in-potential to join the GameFi space. With top Axie Infinity players reporting around $800 in monthly income, over 3x Brazil's minimum wage, the idea of being able to realistically make money from home took over the Global South, turning guilds into “employers of last resort”. Even though we know that high wages reported by skilled players are not sustainable, this possibility infiltrated the minds of a population desperate for employment options. 

Given Dux’s educational focus prior to turning into a gaming guild, and a data driven approach to growth we could establish during our due diligence an increase from around 50 players in the guild MVP in March-21 to over 12,000 players in January-22, which started hinting to the fact that guilds became onboarding infrastructure for Web3.

Therefore, any attempt to value guilds based on their capacity to generate game-based returns alone became far-fetched, turning the thesis on guilds a little more subjective and conditioned to an ecosystem play, from a VC standpoint. As mercenary capital flooded GameFi and no sustainable game-based economy with critical mass emerged, it became unrealistic to believe that scholarships could return the investments received through revenue-share agreements. It was at this point that a shift from play-to-earn to play-and-earn occured. 

It became infeasible to maintain a game economy where users are only focused on income generation; history is proof that maintaining a game without playability is a losing strategy. It is important that the remuneration of users be sustainable as it is not possible to rely solely on user acquisition for token appreciation to occur. In other words, when no more users come in, the token price will go down, no doubt about that. 

One of the main red flags when studying a GameFi case is usually a too generalist proposition. Just like in traditional gaming where a lot of Indie games are launched, we see a high number of users at the beginning and a decrease in that number shortly after launch. This mechanic is pretty much the same as mercenary yield farming on DeFi.

Against this background, it became clearer to us at OFR that the strongest guilds would be those acting as hub for education, GameFi research, NFT loans and with access to an audience that grows during all cycles of the market, namely those where the minimum wage makes GameFi attractive regardless of the market condition, such as Latin America. In a nutshell, all those activities mentioned can be considered onboarding mechanisms which thrive in markets that seek new ways to improve income levels and where people rely on side gigs to provide to their families. 

As we talked to more and more guilds, the disparity on user onboarding stood out among different geographies. While some regions showed a decrease or negative user onboarding in the bear market, we keep seeing a constant influx of users at Dux from its Latam audience. In fact, what we are witnessing in this region is that Dux started to be seen as the “employer of last resort” for those willing to break into the GameFi economy.

User Growth

The following image paints a pretty straight forward picture of how early Web3 is in terms of user acquisition, which coupled with the proper frame of "Guilds as onboarding tool" creates the perfect scenario for geography specific investments centred around GameFi and education in Latam. 

Image 1: Ethereum addresses growth 
Source: World Bank, Coin Metrics and a16z analysis of public data on the Ethereum blockchain. Data is through 12/31/2021.
Image 1: Ethereum addresses growth  Source: World Bank, Coin Metrics and a16z analysis of public data on the Ethereum blockchain. Data is through 12/31/2021.

If we compare Web3 growth to that of the internet, according to a16z analysis we are in the year of 1995. We know for a fact that Web2 growth has led to a fierce competition for user acquisition and to some extent this fight for users is occurring among guilds that are placed within negative-onboarding geographies or adopted a VC modus operandi, rather than a user-acquisition strategy. A case in point for positive-onboarding rates is that 2 million out of the 10 million monthly active users of the MetaMask wallet are from the Philippines. This is mostly all thanks to Axie Infinity revolution that threw a lifeline to those who suffered by the global pandemic and paved the way early on for the consolidation of GameFi as a major proponent for Web3 adoption.  

The Operations 

In this scenario, our investment in Dux met a few criteria worthy to be mentioned. We deem fundamental that any guild that is true to its root of onboarding users into Web3 should be equipped with the following:

Strong back office and clearing capabilities 

Since we started looking at Guilds to invest back in Q2 2021 our team has talked to hundreds of founders and it became clear that when a guild reaches around 2,000 players, handling payments manually becomes a daunting task. In the case of Dux specifically, the routine required approximately 50 hardware wallets and one week of work with 6 collaborators to process all payments. Back in the day only Binance offered Ronin bridge solution with long downtime intervals, which is not the case anymore as other exchanges like Coins started offering the same solution and helped improve turnaround time. Therefore, making sure that Dux had those processes streamlined became essential to automate the operation and increase player retention. As the lead investor and advisory we established full automation of player payment clearing to be reached before any further fundraising was conducted.  

Inventory performance

Another very strong red flag we realized when assessing guild projects was the fact that most founders had not pinpointed the processes involved in running a guild operation back-to-back. Although many games like Pegaxy have automated a great part of NFT management more recently, it goes without saying that a lot more work needs to be done under the hood. For instance, specialized teams dealing with the improvement of the NFT inventory should be in place for each of the games invested on a daily basis. As a case in point, let’s look at the Axie performance improvement flow put in place by Dux managers for the axie infinity game. 

Image 2: Axie Performance Review
Image 2: Axie Performance Review

Defining standard operational procedures, executing them and placing the correct people around the clock to optimize performance is how we would expect a serious guild to be ran, and having a full documentation of such processes in place is one of the defining points that led us to partner with Dux in Latin America. 

Institutional level research

The internal research process carried out by Dux walks hand-in-hand with OFR’s GameFi thesis so that a positive synergy and knowledge base is created among our portfolio companies. To date, Dux research team have reviewed over 300 games and made moderate allocations in over 50 projects, however, the core scholarship model focuses its higher allocations on Genopets and MetaDerby, both part of OFR family. By creating an environment for free exchange of ideas we incentivize our portfolio companies to work together in shaping the future of GameFi, creating a symbiotic relationship that leads to better user experience, community growth and early detection of game economies flaws. It’s worth mentioning that Dux also facilitates the dissemination of those games among local communities by providing local language support for projects that otherwise would not have such access. 

This positive feedback-loop also allows our investment managers to get first-hand insights from practitioners regarding new game-economics proposed by different games, changes in current games and any up-and-coming project across all blockchains. 

A data-driven example, turned into investment principle derived from this collaboration has been to invest in games that seek appreciation via the NFT themselves, rather than chasing token appreciation. Given the fact that NFTs are non-fungible they manage to capture more protocol value than a token by creating greater attraction through community sentiment. The chance of users leaving a token-based project is much higher than those based on NFTs. 

Transparent treasury management

Guild treasury management is probably one of the lesser discussed topics in the sector to date. Treating it as something to be developed post-launch was just not acceptable within our investment philosophy. It is our understanding that a DAO must give the facts transparent to its participants both financially and strategy-wise. With this in mind, we act as full-time advisors in the implementation of proprietary systems that can make it clear to the DAO members and the public in general the treasury positions and transactions at any point in time, which in turn must be verified by a reputable third-party through consistent audits. 

Final Thoughts

Looking backwards at our approach to GameFi so far, we can summarize that from a venture capital point of view investments in this segment must fit into a broader macro thesis, and may be supported by accompanying theses that require active portfolio management. At OFR we call this geographical targeting “Global South”, whereby we target specific themes such as Guilds that thrive in peculiar environments and geographies such as Latin America. Although this alone is not a guarantee of success, we further add an active ecosystem approach by investing in projects that boost each other which creates resilience to overcome adverse market conditions.

Moreover, we understand that the appearance of Super Guilds was partially responsible to a cooldown of the sector in the first quarter of 2022, meaning a lot of capital was chasing too few players, as those guilds went from doing the heavy lifting (onboarding new users) to becoming spray and pray venture capitalists with little to no experience on it. Following the same behaviour of Web2 giants, those guilds extracted more value than they brought back to the GameFi ecosystem, often for the own personal gains of the founders, with a hidden agenda wrapped up on a DAO package. This is far less sustainable than our approach to Guilds as onboarding infrastructure to Web3, which is longer-term and thoroughly planned out.  

In conclusion, continuous and consistent growth, streamlining of core technical operations, provision of education and transparent treasury management places Dux as a reliable “employer of last resort” to bring about positive impact in the society and act as an important player in the GameFi space which in connection with our portfolio makes it a great portofolio company.

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