The authors or their affiliates have ownership or other economic interests or intend to have interests in zCloak Network, Axie Infinity NFTs, ETH, BTC, and may have ownership or other economic interests or intend to have interests in other organizations and/or crypto assets discussed as well as other crypto assets not referenced.
The weather is heating up, and so is the web3 space. Infrastructure capabilities are growing, L2s are starting to branch out into L3, and zkps are everywhere. Gaming playtests are blooming all around, sleeping giants are waking up and gamers are (hopefully) starting to take notice. Let’s dive in!
Everyone Loves a Comeback
Sky Mavis’ Axie Infinity kicked off the web3 gaming boom in 2020, and was the industry’s darling until the in-game economy collapsed under its own weight in 2021. Since then, seemingly every newfound expert has used it as an example of a bad game with ponzinomics.
Historical Price of SLP
However, if we have learned anything in this industry, it’s that you cannot dismiss resilient builders. Last month, Crypto-Guilds published an interview where I pointed out that Sky Mavis has been unfairly counted out despite proving out the gaming ecosystem thesis with Ronin.
Don’t you just love it when you don’t have to wait long to be proven right!
Sky Mavis put the world on notice when it announced its staking program and unveiled a host of new gaming partnerships. Last week, it continued its marketing push in anticipation of staking rewards. There was a tournament for one of the announced partners, The Machines Arena, that was won by AXIE.GG. The title represents one of the first non-Axie IPs to surface on the Ronin.
The list of validators for Ronin continues to grow, with Nansen initiating support starting next week. Additionally, the network was highlighted in a favorable piece by decentralized.co, that explored the ecosystem approach.
All in all, don’t sleep on Ronin!
Gamers as the Pioneers of the Metaverse Frontier
The letdown of Decentraland’s most recent Metaverse Virtual Fashion Week, highlighted the challenges of web3 virtual worlds. On their own these worlds struggle to offer engaging content, so users don’t visit. Without traffic creators cannot spend much effort on developing exciting content for these spaces. It is a vicious cycle.
MMORPGs offer a solution. The gaming content gives users the initial reason to come (and stay) in the world. The communal spaces can be easily reimagined in a land plot format. Gamers play, and sticky traffic incentivizes creators and service providers to develop additional content and services making gamers even stickier.
That’s the dream anyways, but MMORPGs are notoriously hard to build, which makes each launch particularly important. Ember Sword has announced its alpha and invited community members to its upcoming playtests. In 2021 the game’s land sale attracted over $200M in pledges, so it’s curious to see what quality of product will be rolled out in this release.
Using another approach, Farway (Mini Royale: Nations) and Novel Labs (Mutant Cartel) will collaborate on a city building game to help bolster the Yuga Labs ecosystem. The game genres may differ, but the approach is quite similar. Web3 ecosystems are counting on their ability to attract gamers to catalyze network effects for virtual worlds.
The ZKP Revolution Has Only Just Begun
Games need stable, scalable infrastructure, which is why L2s have been getting more and more attention. ZKPs have been looked at as a gateway to scalable computation, but they have so much more to offer. In a recent article, Elena Burger discussed five areas in machine learning where ZKPs can be useful.
A little over a month ago, p0x labs published their zkShuffle to show how you can use SNARK to play poker in a trustless way. A common complaint by game developers is that blockchain is not scalable and economically efficient enough to put high fidelity games off chain. Perhaps, verifiable computation may be a path to scalability without compromising core web3 principles.
One of our portfolio companies, zCloak Network, has been using zkps to develop privacy-first DID and verifiable computation infrastructure. They have recently released their Valid ID. Among other things, it enables teams to use verifiable digital signatures (Valid Sign) for announcements to reduce fraud and phishing attacks, a painful issue, particularly for companies working with NFTs.
As far as rollups go, the optimistic approach may have stolen the show in the short term, but ZKPs have so much potential that we are only beginning to explore.
Beware the Big Centralized Publishers
Last week saw two big brand lawsuits come to an end in the gaming space. Activision Blizzard settled the lawsuit for its alleged attempt to limit esports player salaries, and Take-Two Interactive dismissed its lawsuit against re3 and reVC modders. Both stories date back to 2021, but serve as a stark reminder of the type of power major studios wield in the gaming space.
This is especially relevant given the developing story around Dark and Darker. The battle between Ironmace and Nexon is getting ugly, and the much smaller gaming studio Ironmace, is hinting at the fact that Nexon may be trying to use its capital advantage to win the fight.
Our vision for the metaverse is of a digital universe, where games and other virtual environments can function as self-sustaining worlds. Gamers would then be citizens of those worlds, with all the fundamental rights that come with that.
Traditional gaming companies have started to embrace the creator economy. The recently released Unreal Editor for Fortnite is proof of that. However, the giants want to continue to hold all of the power. They may fear that truly opening up digital worlds will reduce their share of the pie, and destroy the bottom line. However, truly open economies will enable the pie itself to grow.
This is the paradigm shifting opportunity that web3 technology promises. The traditional model will continue to show more cracks, the question is will our space be ready to take advantage.
The Bitcoin Easter Egg
No one loves easter eggs more than gamers, and there was an amazing one involving Bitcoin discovered last week. It turned out that a copy of the Bitcoin white paper has been hiding in macOS potentially dating all the way back to 2018.
The reason for why Apple embedded the seminal paper in this way is unknown, but isn’t that part of the fun!
In other Bitcoin news, Stamps are looking to take a run at Ordinals for the title of the preferred NFT technology on the Bitcoin network by offering a more tamper resistant solution. While this is not suitable for high frequency usage use cases, such as gaming items, the evolution of NFTs on Bitcoin has certainly been interesting to watch.
Funds Making Moves
In one of the biggest gaming deals this year, Savvy Games Group acquired Scopely for an impressive $4.9B. Savvy is owned by Saudi Arabia’s Public Investment Fund, and we may hear more metaverse and gaming announcements from the Kingdom. In February KPMG announced a co-investment fund focusing on the metaverse in Saudi Arabia. The space appears to be part of the Kingdom’s strategy.
Bitkraft, a prominent gaming venture capital firm, raised $220.6 for another token fund. Bitkraft is one of the leaders in the web3 gaming space and it’s encouraging to see it bring more capital to it.
Delphi Labs raised $13.5M for a web3 accelerator. The accelerator model is becoming more popular among big investors, as they may be trying to lower their cost basis. So, we may see more similar announcements in the near future.
On the other hand Tiger Global may be looking to get rid of its VC investments in the secondary market. For a moment Tiger Global appeared to be very active in the web3 space, but the news may be a sign of a souring macro outlook.
This wraps it up for this entry. If you are working on something exciting in the web3 gaming space, or are a traditional gaming team looking to explore the possibilities, don’t hesitate to reach out to any of us at Sanctor Capital. We will be at NFT NYC, so look for us there, and have a great rest of your week!
Ilya Abugov (@AbugovIlya)
Disclaimer: This commentary is not investment advice. It does not purport to include any recommendation as to any particular investment, transaction or investment strategy, or any recommendation to buy or sell any investment. It does not reflect any attempt to effect any transactions or render any investment advice.
This post is solely for informational and entertainment purposes. It is inherently limited and does not purport to be a complete discussion of the issues presented or the risks involved. Readers should seek their own independent legal, tax, accounting, and investment advice from professional advisors. The views reflected in this commentary are subject to change at any time without notice.