Looking back at 2023 so far, high financing has mainly concentrated on the infrastructure construction of GameFi tracks such as gaming platforms and game Layer 3. This article will analyze the defensive investment logic behind such investment phenomena and our attitude towards this investment logic.
Written by: IOSG Ventures
As we review 2023, the GameFi-related projects that have received significant financing and performed well (currently, GambleFi is also classified under the GameFi sector) have primarily focused on the infrastructure construction of gaming platforms and game Layer 3. The most notable among them is the pump.fun casino, which has attracted countless participants since the beginning of the year, along with the explosive growth of Not and the Telegram mini-game ecosystem. This article will delve into the defensive investment logic behind such investment phenomena and our perspective on 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 number of projects in the GameFi sector from 2020 to 2024, even though Bitcoin has surpassed its previous high from 2021 this year, the data from the past year appears relatively sluggish and conservative in both total volume and number of projects. In comparison to the same high in Q4 2021, where the total number of investment projects reached 83 with a total amount of $1,591M, averaging $19.2M per project, this year’s record-breaking Q1 saw a total of 48 projects with a cumulative investment of $221M, averaging $4.6M per project, a decrease of 76%. In terms of figures, overall investment behavior shows a conservative defensive posture.
2. Analyzing Three Market Phenomena from the Past Year: Logic, Changes, and Doubts
2.1 Phenomenon One: Gaming Platforms Evolving from Pure Platforms to User Acquisition Channels
"The reason why gaming infrastructure is favored by VCs, aside from its strong survival capability and long lifecycle, is its gradual evolution into a user acquisition channel."
Among the 34 GameFi-related projects that secured over $10M 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 blooming everywhere. Even with a significant decline in total financing amounts, 38% of high-investment projects are still concentrated in gaming infrastructure, which is a survival project with strong capabilities and long lifecycles. Platforms are narratives that will not be disproven by trends and are a low-risk defensive investment choice to remain in the market.
Source: PANTERA
In addition, for leading gaming ecosystems, there are multiple funds like Pantera that heavily invest in top gaming platforms - the ecosystem tokens of Ton are not the only ones. Ronin is also a secondary choice for several VCs. The reason why the Ton ecosystem and Ronin are so favored by VCs may be attributed to the gradual evolution of platform roles. Nearly a billion users on Telegram are attracted to Web3 by mini-games like Not, Catizen, and Hamster (Not has 30M users, Catizen has 20M users with 1M paying users, and Hamster has 0.3B users), or the new user groups flowing to exchanges after the listing of tokens on Ton. This has brought new blood to the entire crypto world. Since March of this year, Ton announced over $100M in ecosystem incentives and multiple league prize pools, but later on-chain data shows that the TVL of $Ton does not seem to have significantly increased with the explosion of mini-games. More users are primarily converted directly into exchanges through pre-recharge activities. On Telegram, the CPC (Cost-Per-Click) is as low as $0.015, while the average customer acquisition cost for a new account on exchanges is between $5-10, and the cost for each paying user even exceeds $200, averaging $350. The customer acquisition and conversion costs on Ton are far lower than those of the exchanges themselves. This indirectly confirms why exchanges are racing to list various Ton mini-game tokens and memecoins.
Moreover, Ronin's existing user base provides many more customer acquisition opportunities for individual games. The migration of high-quality games like Lumiterra and Tatsumeeko to the Ronin chain also reflects this. The user increment and acquisition capabilities that gaming platforms can bring seem to have become a new angle of favor.
2.2 Phenomenon Two: Short-Term Projects Dominating the Market Become New Favorites, but User Retention Ability is Doubtful
"In a secondary market with poor liquidity, many games' flywheel and profit-making effects are directly castrated, turning perpetual games into one-time games. In the current unfavorable cyclical environment, these short-term projects are more aligned with VCs' risk aversion as a defensive investment choice, but whether users' long-term retention capabilities match VCs' expectations remains in doubt."
Examining Not (Short-Term Project) Economic Model
Source: PANTERA
The active users of Not have been declining since the token launch, dropping from an initial 500,000 to 200,000 five days after TGE, and stabilizing at around 30,000. The user decline reached 94%. If we refer to user data, Not is indeed a short-term project. Recently launched on Binance, projects like Dogs, Hamster Kombat, and Catizen, which are fully circulating short-term projects, have garnered significant market and VC attention.
Source: Starli
From the previous P2E (Play-to-Earn) model of earning money through gaming, with simple game level setups, auto-chess modes, and Pixel's farming and logging for coins, to Not's explosive click-to-earn model, these projects labeled as GameFi are gradually simplifying or even shedding the gaming layer. When the market readily accepts this, is it because people's acceptance is increasing, or are they becoming impatient and restless? Accepting that the essence of most GameFi is merely a way to replace mining machines with interactions to mine, why bother with those cumbersome game steps and modeling costs? It would be better to use the costs originally needed for game development as the initial cake for this Ponzi mining factory, benefiting both parties.
The economic model of Not differs from the previous GameFi flywheel model, with a fully circulating one-time unlock, eliminating the need for upfront cost investment. Users can exit as soon as they receive airdropped tokens, and VCs no longer have to endure the pain of locking up for two to three years. The model has shifted from a sustainable mining game to a more short-term version similar to memecoins. Additionally, similar to the value added by platforms in user acquisition, the simple monetization game mechanics attract new Web2 users to participate in Web3, with new users cashing out their airdrops and moving to exchanges. The user traffic brought to ecosystems and exchanges may also be another reason why VCs are optimistic about such projects.
The Essence of the Flywheel Cycle and Why Short-Term Projects Align More with the Current Market, but Mid-to-Late Stage Investment Returns are Doubtful
Previously, P2E games had a complete economic cycle, and whether this economic cycle's flywheel can operate depends on whether players can calculate an acceptable ROI (Return on Investment). In P2E games, ROI = Net Profit/Net Spend translates to future expected returns (value of mined tokens)/NFT costs (mining machine costs). Therefore, the formula for participant earnings in P2E games is:
ROI = Value of Future Rewards/Acquisition Cost of NFT
Ignoring wear and electricity costs, the larger the calculated ROI, the stronger the incentives for players. How can we maximize ROI? Let's break down the formula.
Source: Starli, IOSG Ventures
- Path 1: Increase the Value of Future Rewards
Value of Future Rewards = Quantity of Future Rewards * Price of Future Rewards
V = P * Q
When the value of future rewards increases, either the quantity of rewards increases (i.e., token rewards increase), or the price of rewards rises (i.e., token prices increase).
In the context of the Web3 economy, the output settings of almost all tokens exhibit a converging trend, similar to Bitcoin's halving cycle. As time progresses, token output decreases while mining difficulty increases. Perhaps more expensive mining machines or rarer NFTs yield higher rewards, but they also incur additional costs. Therefore, without changing the quality of mining machines, increasing the quantity of rewards does not make sense.
What is more likely is the price increase of future rewards, meaning the tokens players mine consistently appreciate in value. A well-supplied secondary market will not experience oversupply, with buying pressure absorbing all selling pressure while still trending upwards. This way, the numerator in the ROI equation increases.
- Path 2: Lowering NFT Costs
When the denominator in ROI decreases, the ROI naturally increases, meaning that the acquisition cost of NFTs as mining machines becomes lower. If the NFT prices traded with project tokens decrease, it could be due to either a decrease in demand for that NFT and an increase in supply, or a decline in the price of the token as a medium of exchange and standard of measure, leading to a drop in NFT prices from external factors.
A decrease in demand is naturally because the profit-making attributes of the game weaken, prompting players to seek opportunities in other games with higher ROIs. When settled in other fiat currencies like Ethereum or Solana, influenced by the market, the prices of mainstream coins decline, and altcoins will not fare well either. Thus, NFT prices and token prices are inevitably positively correlated. Therefore, the increase in the numerator and the decrease in the denominator cannot coexist; their changes are synchronous and may even have a certain proportional interaction.
This implies that the most likely way to achieve an increase in ROI is through the anticipated rise in the price of the tokens, with NFTs rising in sync but by an amount less than or equal to the increase in token prices. In this case, the new funds entering the Ponzi scheme act as amplifiers, and only in a bull market, when token prices rise, can the P2E game's flywheel start to turn. When ROI stabilizes or gradually increases, players will continuously reinvest their earnings, creating a snowball effect, where injection exceeds withdrawal. Axie is the most successful example of this flywheel cycle.
Source: Starli, IOSG Ventures
Looking back at the games in this cycle, it seems that most experienced a brief FOMO in the market before launch, only to plummet overnight after the FG, with all airdrop-unlocked tokens becoming selling pressure. After cashing out, they seek the next opportunity. Without subsequent ROI, reinvestment of funds, and the flywheel cycle, it has become the responsibility of diamond hands to bear all the short-term risks. P2E has become less talked about, while P2A has quietly gained popularity; "play to airdrop" is a frightening concept, as this title seems to label the game as a one-time event. The goal of harvesting is merely to sell the airdrop upon listing and cash out, rather than continuously seeking to earn within this game ecosystem. Despite the changing times, the behavior of selling tokens remains consistent. However, in the current weak secondary market, where altcoins are struggling, the secondary token prices cannot drive the flywheel. Without strong market makers to support the price, many games' flywheels and profit-making effects have been forcibly castrated, shifting from loops to short-term plays, turning perpetual games into one-time games. From this perspective, looking back at the performance of Catizen and Hamster after their TGE also indirectly supports the notion that they were designed with a short-term economic model, making it unnecessary to run the subsequent flywheel, thus negating the need for price support. For such projects, whether mid-to-late stage Token Funding represents a lucrative deal remains in doubt.
The flywheel cycle requires a more sophisticated economic model and cost investment, while the short-term only needs the expectation of airdrops, as the tasks are completed upon listing, and the subsequent economic model can be curtailed. The expectation of airdrops is merely about earning the price difference in liquidity between the primary and secondary markets. We can understand these short-term projects as a form of fixed deposit until reinvestment into the economy, where players invest the costs of NFTs or pass cards as principal, allowing for a time cost of fund retention, waiting to earn airdrop profits upon token listing and cashing out.
Such projects do not require cross-cycle operating time and uncertain economic cycles, nor do they rely heavily on market conditions and FOMO emotions. With a brief and brilliant lifecycle, the fully circulating unlock model alleviates VCs from the hassle of lock-up periods, allowing for quicker exit times. In the current unfavorable cyclical environment, these short-term projects align more closely with VCs' risk-averse defensive investment choices.
Doubts About User Long-Term Retention Ability
Whether it is Not, Catizen, Hamster, or Dogs, they have brought a significant wave of new user growth to exchanges like Binance. However, how many of these new users actually remain in the ecosystem or exchanges in the long term? Does the value of these new users match VCs' expectations and investments?
Source: IOSG Ventures
Let’s take a look at Catizen, one of the hottest mini-games in the Ton ecosystem. It dropped from 640,000 active users before the token launch to just 70,000 in a single day, with subsequent user retention data appearing even more dismal. From the perspective of long-term users, even if the game content remains unchanged, once the expectation of airdrops disappears, over 90% of users immediately withdraw, leaving only about 30,000 retained. Does this level of user retention meet investors' expectations and achieve the goal of user acquisition? Even if users who received airdrops turn to exchanges, bringing a wave of immediate user growth, will these users abandon Catizen after cashing out their airdrops? When the product itself transforms into a viral campaign, aimed at user acquisition, even if it brings a wave of incremental growth to the ecosystem in the short term, can the truly retained users meet the expectations of the ecosystem and exchanges, justifying this investment? We still have doubts.
2.3 Phenomenon Three: Top VCs Positioning Casinos for Profit, but Lacking Token Issuance Expectations and Value Capture
"Infrastructure projects and secondary trading are closely related to the macro market. When the market is strong, funds are more willing to stay in the market to benefit from various hot spots. In an environment where there is no strong buying and selling desire in the secondary market, relying on casinos and pump.fun's PVP to earn fees and kill rates has become a more prudent defensive choice for VCs. But where does customer acquisition come from? Platforms and tools lack token issuance expectations, and the fees earned may underperform compared to GameFi project investments."
Multiple 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, large-scale gambling games no longer need to disguise themselves under the GameFi label, appearing openly before everyone.
On February 12 of this year, Monkey Tilt, led by Polychain Capital with follow-on investments from Hack VC, Folius Ventures, and others, provided a betting aggregation website and online casino backed by large funds. Myprize, which announced on March 24 that it had raised $13 million led by Dragonfly Capital and participated by major VCs like a16z, is even bolder, with its homepage featuring sexy dealers dealing cards live.
Source: Myprize
Pump.fun: The Logic of Earning Fees and Cash Flow from Casino Platforms
When the market cools and remains uncertain, with the election undecided and the U.S. interest rate cuts dragging on, consuming market expectations, during this garbage time, coupled with the emergence of tokens like BOME (Book of MEME) and other hundredfold or thousandfold coins, people's gambling instincts are greatly stimulated, leading more money to flow onto the chain and into pump.fun, seeking the next "golden dog." The timing of pump.fun's emergence coincided with the sustained fluctuations after Solana's rise.
What is the largest casino in Web3? Many may already have the answer in their minds. The 125X leverage perpetual futures contracts in top exchanges like Binance and OKX, and even 200X or 300X leverage in smaller exchanges. In contrast, the maximum fluctuation in A-shares is 10% daily, and 20% for the ChiNext, while tokens with T+0 and no price limit combined with 100X leverage mean that less than 1% price fluctuation can wipe out all your principal.
Whether the price of tokens rises or falls, contracts can participate in both long and short positions. Essentially, ultra-short-term contracts are just betting on the size of the entry to exit period, with odds ranging from 5X to 300X. Exchanges profit handsomely from transaction fees, holding costs, and forced liquidation fees, among others. The logic is similar for casinos, which typically earn from fees or the house edge.
If infrastructure projects and secondary trading are closely tied to the macro market environment, when the broader environment is clear and the market is rising, funds are more willing to stay in the market to benefit from significant price increases across various hot spots, yielding considerable returns with lower risk. However, in the current uncertain market, funds seem to be flowing into casinos and PVP, leveraging high margins to bet on returns that cannot be reached in the present. High leverage amplifies gains, but it also magnifies losses. In a market that oscillates back and forth, the fees earned by exchanges and platforms may be more objective than during a one-sided market.
In a time of market uncertainty, with users' gambling instincts heightened, funds and enthusiasm seem to flow toward casinos and PVP. The fees earned from casinos and tool products have become a stable income with demand and growth, aligning with the defensive investment logic of earning fees. However, revenue from casinos or platform-based fee structures also presents certain issues.
Lack of Token Issuance Expectations and Value Capture
For platform projects like pump, even if they become phenomenon-level platforms, earning substantial transaction volumes, they still lack token issuance expectations. Whether from the necessity and utility of the token within the ecosystem or from a regulatory perspective, as long as no tokens are issued, there is no risk of being flagged by the SEC for securities violations. Similar casinos or platforms lack genuine token issuance expectations.
On the other hand, in the absence of token issuance expectations, the logic of earning fees and casinos is more applicable during sideways market fluctuations and cannot predict future hot spots. The fees depend on the popularity and activity of on-chain memes or gambling, serving as an intermediary tool that meets demand rather than being the demand itself, lacking genuine value capture based on its own merits. The recent actions of pump.fun in selling Solana for cash (as of September 29, it has sold approximately $60 million worth of Solana tokens, accounting for about half of its total revenue) illustrate this; without token issuance expectations and value capture, pump.fun, while relying on the prosperity of $SOL, also exerts significant selling pressure on the market.
Although pump.fun will undoubtedly bring many positive effects to the entire Solana ecosystem, such as increased trading activity, attracting new users to the Solana ecosystem during the meme summer, stable demand and buying pressure for $SOL, and the purchasing power of those who jump in after seeing $SOL's price rise, meme players gradually evolving into long-term holders and ecosystem supporters of $SOL, thus promoting the overall prosperity of the ecosystem and driving premiums, the issues remain. Taking from the public and selling to the public, while charging $SOL as fees and then dumping these sell orders into the market. The closer the total sales approach the total revenue, the more neutral pump.fun's impact on Solana's price becomes, resembling a stabilizer, and there may even be negative premiums (only sell orders without buy orders). During the growth phase, pump.fun has a very strong positive impact on the Solana ecosystem, potentially exhibiting geometric growth; however, when it matures and enters a plateau phase, the relatively fixed selling pressure (as fee income) minus the diminishing positive impact may result in greater selling pressure.
In summary, similar gambling platforms are likely to lag behind GameFi projects that have genuine value capture. Furthermore, most VCs' investment returns come from the dividends of fees; with equity exits being unrealistic and lacking token issuance expectations, they can only wait for the next round of mergers or acquisitions to exit, resulting in a long and difficult exit cycle.
3. Summary: Casinos and platforms may underperform GameFi, short-term project retention worsens, and a cautious attitude towards past defensive investments
Whether pulling retained users toward new games or relying on the user base to convert new Web3 user increments, one of the main roles and value directions of gaming platforms seems to have evolved into a channel for user acquisition. However, for projects that rely on such platforms to convert users through short-term projects as genuine value, the long-term retention rate of users has yet to be proven by time and data. In the absence of token issuance expectations and value capture, gambling platforms seem to underperform compared to GameFi projects that genuinely capture value and have product-market fit (PMF) during bull markets. We remain cautious about past defensive investments and are eager to find products and high-quality games that have not yet formed a consensus and have few investors at this stage. Such games can convert future willing buyers into higher retention rates, increased in-game spending, and on-chain activity due to their quality. Ultimately, this will translate into a higher value for the tokens.
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