Axia8 Ventures - Dyo Hu
The current GameFi is at an overheated stage, the entire market supports project valuation and token price with the irrational influx of funds and new users. Once the market starts to correct itself, the token price and in-game asset values will drop dramatically. The overall in-game economy will be heavily challenged, with high chances that users and funds will quickly move to other projects with better potential. Therefore the current situation is bound to be to usher in a substantial wave of adjustment.
As a primary market investor at the peak of GameFi, we still need to evaluate the next stage and assist in investment strategy calmly.
Phase 1 GameFi 1.0 - Play-to-"Earn"
The current Play-to-Earn theme is to Earn, and whether the game is fun or sophisticated is more like helping the narrative of the project.
If all of the below are achieved, the game will be considered a complete project at this stage.
Can users earn within a short period?
Is the gaming mechanism designed to make money for early adopters?
Is there an incentive for new users to keep joining and bringing money into the game?
Is the token economics supporting the game for at least a few months?
Even if the game graphic quality isn't necessarily good, or the gameplay may be far from that of a real-world game, it doesn't detract from the critical GameFi narrative at this stage.
As primary market investors, we are more concerned about whether the team has a long-term mindset. No one will be able to predict what GameFi will look like exactly in the coming year, and this article is also our best estimation of the market based on the current information. We believe the best strategy is to find a project with a low valuation, willingness to operate for the long term, and the ability to earn revenue in a bull market. So the projects can iterate on the product and mechanics in a bear market, increasing the chances of recalling lost users in a bear market.
At the current stage, a project with a good mechanism design, overall good product quality, and strong marketing capabilities will attract many money-driven users in the early stages. The project may make millions of dollars through NFT or blind boxes in a few months. Even though the game may not even be online yet, the primary and secondary investors will make good profits in the process.
Therefore, at the current phase, we focus more on the project in the following aspects:
For point 1, we focus on the DNA of the projects. Since we layout the Southeast Asia GameFi at the beginning of this year, we pay more attention to whether the project has Southeast Asia, Latin America, and other local marketing resources, including guilds and KOL.
Such projects require less VC funding and instead share the investment allocation to KOLs and communities for promotion and marketing in different regions. The key for VC funds to participate in those projects is whether the fund can provide enough advice on game mechanics and marketing resources.
Southeast Asia project fluctuates in quality. Some projects might have token design and private investment allocation issues, but they still list and try to make some quick money. They sometimes manipulate the token price through marketing-making to attract secondary market investors to invest and exit quickly.
However, most project investors are local VCs or communities, making it difficult for primary and secondary market investors to find familiar investment institutions in the cap table as references. That's why we started deep cooperation with KardiaChain in Vietnam at the beginning of this year to invest in projects such as MyDeFiPet/Thetan Arena/Mytheria/Whydah. They can help with the quality of the projects, mindset of long-term operation, token economics, and local marketing resources through strong local partners.
For point 2, we look at the token economics design, which is fundamental to gaming projects while most fail. Currently, many GameFi projects transform from traditional gaming studios and their token economy copy from other projects' whitepapers. We need to pay attention to the following:
Will the new user inflow be an excellent way to accrue project token price and increase the value of the in-game assets?
How long is the break-even period?
Potential reasons for the failure of token economics?
Are there any additional attraction in addition to the narratives (superb graphic quality/strong investment bakers or ecosystem support)
Allocation of tokens, whether there will be too much selling pressure at the beginning, etc.
Generally speaking, these Gamefi projects need to pump the price to attract users initially. If the TGE/Cliff, token allocation design are poor, it may result in too much selling pressure and fail to attract secondary market investors through the token price.
The current premium will drastically decrease if one of the following events happens:
In addition, most of these games have a tiny circulating market cap to control their token price, which can change dramatically in a short period or even go to zero overnight. Even Axie Infinity is unsure of the impact of a bear market on its existing ecosystem and economic system.
A decline in token prices puts the in-game economic system and key coefficients initiated in a bull market at risk of short-term failure. A rapid decline in user break-even point and all asset values will be a massive blow to project confidence and an enormous loss of game users who most likely won't return to the game. Therefore, many games keep trying to let users accumulate assets in the project, increasing leaving costs.
The good news is that GameFi will still have a place in a bear market. After all, users are more restrained with their money, and market conditions are bad, so Play-to-Earn is one of the best ways to pass the time. GameFi programs that initiate in a bear market still have great potential. It's just that the primary and the secondary market fund will start to move towards iterative projects and narratives that can solve the Play-to-Earn problem, and the industry as a whole will move on to the next theme.
In phase 2, there is a higher standard for the quality of the game and token economy. The low-quality Play-to-earn GameFi will become like degen farming, a short-term speculative tool for a small group of high-risk enthusiasts. We will focus more on mechanics that will address a single in-game economy and Pay-to-Play with social attributes.
Even Axie Infinity is experiencing a slowdown in new user inflow, a surplus of NFT assets, and a decline in revenue for all. Axie does an excellent job in well-designed game metrics, an extended economic activity chain, and a long payback period. Each user needs a certain amount of financial and time investment to benefit in the long run. However, even the longest economic activity chain still circulates within a single game, and factors inside or outside the game can affect the success of the project and its token price.
A project that avoids token value only circulating within a single game would be a quality target at this stage. It has better narratives.
The first idea of the solution is to establish an economic ecology of multi-game interoperability. The first example is Mobox, with a strong development team to quickly design multiple games on one platform to provide the narrative that the token could be used in more than one game. Another example will be Sandbox, with users buying land and providing development tools, expecting users UGC content for SandBox to continue producing valuable content to support the token price.
The other solution is to invest in the GameFi incubators/accelerators, providing a lower friction cost of cooperation after having interoperable game assets, like our investment in Whydah, an GameFi incubation platform from Kardia Chain with seven games under it. We invest in Hotwire Studios with the same logic. This solution can substantially mitigate the economic system's failure, using the time to exchange for space.
There is a single game economy problem because most GameFi is dependent on new users to bring in money outside of the game ecosystem to provide revenue for all the people to earn. The game itself is just the medium rather than the real purpose and provides no real value of playing.
Therefore, another solution is to make users feel the game itself is the purpose and willing to Pay-To-Play. In addition to the money brought by new users, the "spending" of existing users in the game is also a considerable solution to the current economic difficulties. Such games also have the value of shifting to Dao, which otherwise remains a short-term means of attracting users to stake platform tokens to solve the selling pressure.
One way to attract users to spend within the games is to reply on extensive investments checks to make high-quality games for users to spend money, but there are already many 3A games available on various platforms outside the crypto world. There is no need for users to understand the crypto mechanics, set up wallets, etc. So whether or not the game has social attributes would be something we'd pay extra attention to.
Is it possible to communicate with other crypto users and make friends in the game?
Does it reflect social status and assets to brag and link NFT assets?
Does it connect to other GameFi or DeFi applications extending to the user's identity?
Does it spread to the user's actual social media?
Games that reflect this aspect of value would be precious investment targets.
At this stage, whether it is to develop an innovative mechanic platform like Mobox or a high-quality game with social elements, a single development team may lack sufficient resources to solve the problem. We expect developers with resources to start emerging at this stage, but we are currently cautious about developing ultra-high valuation games that will take several years to launch.
Mainly we believe that GameFi development iteration is not clear enough. There may be considerable changes in gameplay, mechanics, token model, and expansion every six months. It's too risky for a single economic system game to launch in a few years; most of the token price has been overdrawn once they list. It's not too late to invest in similar projects when the logic is more apparent; after all, there can't always be just one 3A GameFi masterpiece on the market.
However, such projects can get investment from the most well-known institutions. They can perceive the market changes faster, launch at the most appropriate time, and have an economic model in line with the market trend at the time. The graphics and gameplay are strong, while the economic model is not difficult to adjust. At the same time, the project guarantees to deliver. The worst scenario for these projects will usually choose a soft run (let the token price drop and give it to the foundation).
GameFi development takes time to iterate. If investors are optimistic about GameFi, investing in games & guild tools is safer. It can be split to focus on solving the current problems that involve all parties, including players, guilds, and project teams. User end solutions like Gametaverse will display GameFi data such as revenue measurement of game assets in the wallet, Kyoko for in-game asset rental, and Guild to Guild lending. Project end solutions like Dora Factory/Ink Finance provide DAO-as-a-service solutions.
We also expect a deeper integration between NFT and gaming finance and need more scenarios focused on financial extensions to allow for greater liquidity of currently fragmented gaming assets and funds. Things like NFT collateralized lending from Drops and Vera, NFT cross-chain solutions from XY Finance, etc.
While Pay-to-Earn and game platforms can alleviate the economic woes of a single game, the best solution may be for each game to be just one piece of a mega-economic system, also known as a meta-universe.
For example, a user may Create-to-Earn, Design-to-Earn, or Write-to-Earn in game A, contribute productivity and value to get money, and then spend money in game B with high quality and better gameplay, just like in the real world. At this point, the assets and values of the games are circulating among each other, solving the problem of the existing Play-to-Earn economic chain being too short.
So having a way to build NFT interoperability standards, as well as providing an infrastructure that corresponds to the physics engine, so that adopted games can all have the same physics response and exchange each other's in-game assets and characters would be the underlying project that would best take on the value of all GameFi. After this phase of infrastructure is caught up, the third phase of the metaverse becomes possible.
Phase 3 Attempts at a metaverse
This phase begins as an attempt by humans to live towards a virtual economy, and GameFi as the best understood metaverse application would be as a tool for its infusion. Whether users can provide productivity and value in the virtual world in exchange for money, spend or perform other financial actions in different but interoperable games and other crypto applications, or even interact with reality is the ultimate goal of our current imagination of gaming.
Of course, the metaverse has had too much fantasy, and at this point, no one can be sure what the final form will be and how long it will take, and the infrastructure is a long way off, so investment decisions at this stage do not unfold here. I will write another article to address this.
I think the percentage of Earn-focused projects will decrease over time but will always be there. Earn-focused games are like a mining mechanism, a friendly way to distribute project tokens. Whether it is DeFi or other tracks, gamification can boost attention and participation in the project. There may even be mining services that gamify the original distribution mechanism in the future.
As long as the project needs to distribute tokens out and market them, a money-making-oriented GameFi is likely to continue to exist. Whether the purpose of making money is to be used as a short-term incentive to raise the price of the token or to encourage long-term positive behavior, the project owner and users need to consider it before participating.
The GameFi and NFT became well-known and attracted users from outside the crypto world to join. It is now at the craze peak of GameFi 1.0, but the most important thing for investors is to focus on the long-term development of the ecosystem and find the precious innovations and teams.
Axia8 Ventures has investment in most of the above projects. The content of this article does not constitute investment advice, and readers should make their judgments.