Back in 2013, Chris Dixon wrote a blog post, which like so many other pieces from Andreessen Horowitz partners, has been widely quoted. He proclaimed:
If you think back, many breakthrough technologies started out as hobbies. Bill Gates and Paul Allen learned to code during their extracurricular time and while it’s mostly folklore that Jobs and Wozniak built the Macintosh from a garage, Google really was launched from one. Other hobbies make money, too. For example, blogging is a career now, YouTubers make millions, and so on.
I’m not sure what they’re putting in the water (or the whiskey) over there, but this a16z piece is proving increasingly prescient as well. Angela Strange lays out her thesis regarding why every company will soon be a fintech:
The presentation above explains how the different layers of the financial service stack are being SaaS-ified, which will enable an interesting sort of vertical integration, as non-banks look to offer money management solutions. For most people over the age of thirty, it would seem strange to obtain financial products outside the banking system, but for a generation that has grown up having access to the internet as long as they can remember, the lines have been blurring the whole time.
It's hard to deny Gen Z’s early impact on society and there’s no reason to see it abating soon, either. During previous generational transitions, media channels were still in the hands of older cohorts, which meant the prevailing narrative was one where the beliefs/behaviours of the youth was something strange and bad. That pattern goes back millennia, with even Aristotle saying that 4th Century BC youngsters were “high-minded because they have not yet been humbled by life, nor have they experienced the force of circumstances.” However, most twenty-somethings consume their current events on social media where they’re also the main broadcasters. Further, marketers who increasingly use digital platforms for advertising are required to embrace the values of those spending the most time online. This appears to be shifting the power of persuasion and societal change is abundant.
Regardless of age, digital technologies are encroaching on daily life. As computing power and network speeds have increased, the video game industry has seen a massive boom across demographics. The iPhone was launched when the oldest Gen Zer was about ten years old, and the average Millennial was in their late teens, so most of these folks have grown up with a connected computer in their pocket, which provides an outlet for on-screen entertainment that they’re accustomed to having around. Lately, we’ve seen these trends seep into novel use cases through gamification, which taps into our social and competitive natures to create fun incentives around tasks that might otherwise be mundane. In fact, games have become so important that elite players are attaining celebrity status.
If we smash together the themes above, then we can start to make sense of another emerging trend – GameFi. To really dig into this topic, I’d recommend Covalent’s 80-page eBook that uses a data-first approach to explore the nuance and potential of the space. For a more cursory approach, the researchers at Messari summarize this theme well:
These new forms of divertissement sit at the intersection between financial infrastructure and fun-driven communities, which sounds pretty cool. The problem is that, in practice, these forms of “entertainment-that-pays-you” are still subject to the current frictions pervading web3. The experience tends to be discontinuous, graphical interfaces aren’t great, and speculation/greed corrupts the good-natured intent of developers’ attempts to iterate over utility models. Unfortunately, creating economies is complicated.
When the pandemic hit, the world got a good look at the potential and pitfalls of GameFi. In 2018, a Vietnamese company named Sky Mavis introduced a then-obscure game called Axie Infinity, which is often described as a mix between Pokémon Go and NFTs. To gain access, players would buy Axies on the Ethereum blockchain. These avatars would battle others and engage in various adventures to earn winnings in the form of Smooth Love Potion (SLP), a token whose utility comes from its use within the Axie environment as a medium of exchange or to mint new digital creatures for combat. Axie has another associated coin, AXS, which represents governance of the game and can be conceptualized as an equity. Important to the story is that this could all be done on a mobile device and the tokens were swap-able for other digital assets that were easily converted into cash.
The Philippine economy was one of the fastest growing in Asia from 2010 – 2019, but due to their market being heavily tilted towards tourism and related services, the pandemic lockdowns were particularly crippling. Some kids had been playing Axie into the COVID crisis, so when ETH shot up after the March sell-off, they noticed their Axie holdings were also getting more valuable. Suddenly, a hobby that parents once scorned was able to put food on the table when other family members couldn’t go to work. Word of this got out and the momentum train darted out of the station as AXS, SLP and the Axie NFT prices all jumped higher.
Exceptional growth exposed the weakness of this model. First, new entrants were quickly priced out of the market. This was addressed through the guild model that would allow owners to rent their NFTs and collect a percentage of the players’ earnings. Next, the minting of new Axies picked up as the number of players increased. While enabling those without capital to buy-in to the game was equitable, it also meant that the supply of axes (and SLP) rose exponentially, and the eventual selling sparked cascading prices for all related assets. Generally, periods of very tight supply are followed by excess inventory, and this played out for Sky Mavis’ gamified market, too.
The play-to-earn model has since ceded way to play-and-earn. Here, participants are still able to cash out some of the value they accrue in the game, be it through skill in competition or by designing some new feature which others pay to use. But this approach is meant to refocus the intent of interacting with the program – it’s meant to be fun.
You might be tempted to take the same position of many digital asset detractors and conclude that because of these early shortcomings, the entire GameFi concept is doomed to fail. I tend to be more optimistic (and clearly biased to the success of the space) so my impression is that the combination of a passionate developer ecosystem, open-source code and continued investment have the potential to drive innovations and uncover models that do indeed work. Last month we saw some significant fundraising in this sector as VC investments were up 99% YOY despite the market turmoil. This adds credibility to the notion that games will play a critical role in how web3 reaches the masses.
Someone is going to figure this out.
In this podcast, Ikigai Asset Management’s Travis Kling explains why he feels socially responsible to invest in this space. They just raised a $30M fund “which is designed to invest in startups or projects related to the metaverse, blockchain gaming, non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs) and other web3 initiatives.” To date, Ikigai’s approach to digital asset markets has been based on fundamental research combined with quantitative analysis. Because they need significant liquidity to execute their strategies, the portfolio has heretofore focused on long/short positions in the largest coins like BTC and ETH, so this is a notable expansion of scope. Travis acknowledges where the early attempts to complete the trifecta have failed, but he also sees GameFi’s onboarding power and the potential to do a lot of good in less fortunate communities.
Operators, investors, and players have seen the positive potential for good/fun here and they also realize where the problem is. Nat Eliason is one of many analysts exploring how to create sustainable economies and his Substack is one of the best I’ve seen covering the space. In recent articles, he digs into how game operators can use decentralized exchange liquidity pools to help balance supply/demand, the merits/risks associated with different token models, and why developers should hold off on launching a token altogether. The point is, many ardent and intelligent people love the idea of GameFi and they’re acutely aware of how important it is to balance creating in-game token utility, inducements that keep players engaged, and an experience that people play because it’s fun.
Solving the economic model might be accomplished by a grassroots project, but a big contingent of gamers is drawn into the space because of smooth and realistic graphics. The largest studios have an edge because they employ teams of experienced professionals who know what it takes to build an interface so good that people pay to use it. Executives are listening to their communities and will have to move slower than a start-up, but as EA Sports’ CEO remarks:
Just as play-to-earn has given rise to play-and-earn, many teams are starting to experiment with other forms of gamification. STEPN is a popular shoe NFT that uses an associated app with GPS and a wallet to reward participants with tokens when they walk or run (move-to-earn). They’ve had some difficulty ironing out the kinks in the incentive model (not to mention Solana downtime), but after launching at the end of 2021, the project has attracted over 2.3M monthly active users. As customer-facing businesses, the traditional studios are right to take cues from their players, but there’s a broader revenue growth opportunity at stake here, too. STEPN recently reported that transaction fees on their network brought-in $100M in monthly revenue and daily net profit between $3M-$5M. Sure, in its current form the figures above are unsustainable, but imagine an insurer (public or private) managed a system like this. They’d reap an additional benefit of keeping their policyholders/citizens healthy, which could improve profitability, subsidize premiums, or reduce system costs.
Apps like Duolingo and Wordle use rudimentary gamification as motivation for players to exercise their brains and learn in their spare time with impressive success. Recently, learn-to-earn has shown up on the scene and it also has profound implications. In many communities, young people must decide between feeding their families and school, so education falls to the wayside. But efforts from teams like 1729 and Rabbithole are creating ways to reward studious and diligent users through a smartphone. As the developed world wrestles with a shortage of quant-minded workers with web3 experience, solutions like this have the potential to advance innovation and address global income disparity.
It seems that pedagogies which emphasize trial-and-error and gamification are growing in popularity. As the economy continues to rely on new innovations, it makes sense that success will favour creative types who can solve problems dynamically. Go-to-market strategies are changing. Will the successful HR departments of the near future also have to adapt their searches? Joel John and Siddharth think so: “Employers will use these data sets as a parallel to university credentials in the future. If you are hiring a community manager - what would be more valuable? A degree or a thousand hours of coordinating gaming communities. I think I know what I would go with.”
People often say that web3 is a product of excess monetary stimulus. I’d be remiss to discount the impact of central bank actions on the capital flows that feed the economy, but there are other forces at play here, too. The information age seems to be selecting for more creative mindsets, favoring a flowing learning style over rote instruction-following and memorization. Video games have communities of loyal followers who are drawn in by the sharing of fun times with friends. And as tech seeps further into our lives the barrier between digital and physical is being eroded– especially for younger cohorts. Hobbyists have serious tech at their fingertips. Some are passionate about integrating financial incentives with online competition and scarcity. A handful of their attempts have created quite a stir, so big industry is taking note and it won’t be long until one of these projects hits big. Get ready, Player 1.