A dive into the world of NFTs (Part 2)

Disclaimer: All write-ups in this substack channel are Ocular Ventures’ own opinions, and should not be misconstrued as investment advice or recommendations. Ocular Ventures does not hold positions in the projects discussed in this channel, unless otherwise stated. This content is intended for informational purposes only

Introduction

Welcome back to part 2 of the NFT series. In this article we will be going through Gaming NFTs and wrapping up the section with overall thoughts on NFTs before a special interview section in part 3. Before we dive into Gaming NFTs, we should spend a bit of time on gaming in general and how it has evolved to provide a foundation for NFTs to proliferate.

The concept of paying for digital gaming assets is not a novel one. Players have been buying items or characters since the early 2000s, either through 3rd party platforms or on official stores that allowed companies to cash in on the lucrative market.

In 2007, a character on World of Warcraft was sold for ~$10,000 because he had one of the most rare items in the game. In the same year, an online version of Amsterdam was sold on eBay for $50,000 for the game Second Life.

Picture of Amsterdam in Second Life

More recently, gaming studios have set up their own cash shops to monetize player bases. World of Warcraft sells cosmetic in game items to players, while Valve allows players to buy and sell items and item skins on their auction platform. Recently, a player bought a CS:GO sniper rifle skin for $61,000 via the platform.

It’s not surprising that gaming would be a huge part of the NFT market given its characteristics, and the psyche of gamers. NFTs allow ownership of digital assets, provide a seamless way to buy and sell these assets, and with the right structure, allow owners to utilize and monetize said assets.

Picture of the $61,000 CS:GO sniper rifle skin

All it needed was the NFT ecosystem to blossom, and for creative minds to start putting their heads together to build out gaming ecosystems for NFTs to thrive in.

Axie Infinity – the new standard for “play to earn”?

Axie Infinity is a “play-to-earn” pet training game and virtual world built on the Ethereum blockchain founded by Trung Nruyen. In the game, players can collect, breed, battle and trade in-game pets called Axies.

Axies battling it out

According to their white paper, the founding team wanted to remedy a fundamental flaw in the Web2 gaming model: value generated in games like Fornite accrued solely to the platform owners and disempowered users. Axie Infinity was a way for users to gain control of their digital assets and swap the economics back in favor to the users.

How is this “Play-to-earn” (P2E) and why it is so powerful

In Axie Infinity, players can earn through the following ways:

1. Farming Smooth Love Potion (SLP) tokens and converting them into fiat. SLP is the foundation element of the Axie Infinity economy as it is the reward when a player completes daily quests or wins an Axie match. Depending on experience, time input, and level of the Axies used to battle, an average player can expect to earn around 200-400 SLP a day, and top players with powerful Axies can earn ~600 SLP a day.

1. (Data source: Coinmarketcap)
2. Breeding and selling Axies to other players. Like Pokemon, Axies can be bred with one another to produce children. This requires a combination of SLP and AXS tokens (AXS is the native Axie Infinity governance token).
3. Axie Breeding – note the SLP token requirement and breeding fee of 1 AXS

1. Starting an Axie Scholarship. Each playe requires a team of 3 Axies to enter a match. While many people are interested to play and earn in the games, they may not have the staring capital quired to purchase their Axies upfront (which will cost approximately US$1,000 and more). These people then can become scholars. These Scholars are run by managers who have lots of Axies but lack time to play. The earnings in the form of SLP tokens are divided on an agreed upon percenrage, usually in the range of 70/30 or 60/40 tilted towards the Scholars.
2. Investing in Lunacia Land. Lunacia is the homeland of Axies and is divided into tokenized plots which can be upgraded over time using resources. Land can spawn resources (AXS and other in game materials) that can benefit players. These lands can also be sold off for in game currency.

Given the recent covid job market, many people in developing countries have suffered from loss or reduce of income, Axie Infinity remains a lucrative way for players to utilize their free time to earn something extra on the side. 200 – 400 SLP tokens per day of grinding out on Axie Infinity equates to roughly $14 – $28 per day, which comes up to between $5,000 - $10,000 a year. For example, the year earnings is significantly above the average salary of $3,218 per year in the Philippines.

There is a huge pull factor for players from developing nations as playing Axie could easily double their annual income. Given more time, Axie could come up with ways to incentive players further – especially since they recently raised a $152 million Series B from a16z, Accel and Paradigm. Proceeds will be used to expand its team and build its own distribution platform to support game developers.

Axie Infinity’s diverse diverse ecosystem is a shining example for other game developers to refer to while trying to build out their own gaming ecosystems. An interesting phenomenon is the rise of guilds like Yield Guild Games, a Philippines startup that bridges the real world with the metaverse. The startup brings together Axie Infinity players and lends Axies to these players, which helps to remove one of the barriers to entry – the expensive amount of capital needed to build out a players’ first Axie team.

In essence this is an Axie scholarship, just scaled up multiple times with their own token which provides autonomy to design and reward the startup founders. Players within Yield Guild Games are incentivized through Axie tokens, SLP tokens and the native YGG tokens which creates a powerful feedback loop for the startup. These guilds are not only looking to launch on Axie, but across other NFT games such as Animoca Brand’s Sandbox, Parallel Life, League of Kingdoms, and others.

An overview of the Axie Infinity ecosystem

(Data source: Twitter)

There are other play-to-earn models that are being built which mirror Web2 games – Gods Unchained is very similar to Hearthstone, while Parallel Life is similar to Magic the Gathering: Arena. The space feels like the early days of web2.0, where creators were referring to web1.0 concepts and building duplicates of them. However, like what we saw in web2.0 – we believe that given enough time, new concepts and new ideas would start to bear fruit and become the gold standard or AAA rated games of the future.

We believe that that this is a big innovation in gaming, evolving from a service model to an ownership model. GameFi (an intersection between Gaming and Finance) has also become an important channel to attract users into the decentralized world of finance. Users can now enjoy earning monetary rewards while playing different games, all of which culminates to learning how to use DeFi applications to cash out or swap their rewards. We expect a lot of the P2E games to start popping up soon, and eventually these games will start to incorporate NFTs to retain users on their platform.

Loot – A decentralized way to build games?

Loot is a collection of 8,000 unique NFTs which represents bags of adventurer gear. The NFT collection was launched by Dom Hofmann (co-creator of Vine) and was intended to be a side project where users could claim the NFT by just paying gas. Dom intended the project to be an unfiltered, uncensored building block for stories, experiences, games that would be empower the community to build out for themselves. Putting it another way, it would be a completely decentralized way of building a metaverse.

Dom’s inaugural post for Loot

(Data source: Twitter)

Hoffman’s bet on a decentralized gaming metaverse paid off – in 5 days, Loot bags were resold for $46 million and had a market cap of $180 million. Sure, Hoffman’s fame might have played a part in building hype and curiosity around the NFT mint. But Loot’s success was built upon the community which came together and started iterating on the building blocks which Hoffman provided.

Loot’s discord started to rapidly fill up, with Loot holders and non-Loot holders who were keen on contributing to the Loot metaverse. Guilds, the foundation of every game, started popping up and attracting like minded followers to join their cause and to build adventures around Loot. A financial ecosystem called Lootmart was built to accommodate players who were seeking individual items to upgrade their adventurer in the Loot universe.

Lootmart on Twitter

(Data source: Twitter)

But at the end of the day, Loot was envisioned as the building blocks for the community to build games on top of it. Dom never built a game for players to participate in. And build the community did. Games such as Loot Infinity, On Chain World Boss started to manifest itself on the community boards. Artists started rendering Loot characters for owners of Loot bags. All of which pointed to signs of a healthy ecosystem which could continue to push the community forward and create more utility and ultimately create value for Loot holders.

Loot character based on Loot #1 NFT

(Data source: Twitter)

The question that some might have is – what is driving and sustaining the value of Loot? Ultimately, it’s 8000 randomly generated words on a screen. How does one ascribe value to it?

Our take on it is this. Right now, player agency is key – the capacity of individuals to act independently and make free choices is a driving force in today’s world. Bandersnatch, the “choose your adventure” episode of Black Mirror received huge fanfare and garnered two Primetime Emmy Awards. Until Dawn, The Wolf Among Us and Undertale are some games that have the “choose your adventure” element. Avichal Garg at Electric Capital likens Loot to a deck of playing cards, where on its own its just sturdy paper with drawings on it. But with some imagination, it becomes the base for Solitaire, Poker and other games. The player agency which Loot provides is the true value of the underlying Loot itself. The NFT is only as valuable as the ecosystem and utility it brings. Given enough time and imagination, the games on which Loot is the foundation will provide value for Loot holders.

But the opportunity for Loot is also its biggest challenge. Can Loot’s community continue to build and iterate? Can a decentralized community come together and create value for themselves and others? This utility could come in the form of strategy games like Axie Infinity where Loot items are used in turn-based combat games. Where the art is built on what has already been created by the community. At the end of the day, it all comes back to how players and users utilize the agency provided by Dom Hoffman.

The end, or the beginning?

There’s a common theme of value creation being driven from utility and community across both NFT articles. This feeds back into the larger theme around cryptocurrencies – value ascribed to tokens are driven from the utility derived from owning the token, and the community that can create hype around it. Which is like startup companies in the real world – the value of the startup is derived from the utility it provides to the users, and the ecosystem it creates for its users.

Can NFTs continue to hold the value currently ascribed to them? Would they hold up in a bear market? Only time would tell, but one should look at NFTs the same way as investing into alt coins – find ones that have strong staying power, if not, make sure you’re ok holding them throughout the cycle

There are three main comments that we’ll leave with users as we move on to the next part of this series of articles on NFTs – pricing, use cases and getting to mainstream.

Pricing

They say beauty is in the eye of the beholder (beHODLer even). And it applies to NFTs as well. NFT pricing is fluid because no one really knows how much a digital asset is worth, let alone a digital asset promising some utility in the future. Plus, NFTs are priced in the base currency – it is easier for someone to spend 0.03ETH on a JPEG, than to shell out $112 on the same thing. Even though 0.03ETH = ~$112, our human brains are numbed to a smaller number and not converting it to real currency before clicking the purchase button.

The analogy to draw here is between the art world and the NFT world. Art pricing is subjective. No one can explain why one would value a Van Gogh at $30 million instead of $10 million. To the collectors and the people in the art world, there is meaning behind the purchase. However, to the people looking from outside the fishbowl, they can’t comprehend it. Similarly, dropping 100ETH for a Cryptopunk or 50ETH for a Bored Ape Yacht Club is a no brainer for people in the ecosystem, but blows the minds of people outside of it.

Use cases

Currently, NFTs are generally used in a basic manner – rewards for participating in activities like gaming or being traded on platforms like Opensea. But underlying this basic layer is a strong use case which has started to disintermediate traditional industries like the art world. As mentioned in Part 1, NFTs have empowered artists to directly interact with their audience without middlemen, or constraints of geography. Royalty collection becomes fair as every transaction is locked onto the blockchain. Instead of selling creations to a platform or an agency, they can now own and earn from their own pieces.

We believe the next step is for the music industry as it shares similar characteristics with the art world. 3LAU and other musicians are pioneers in this space, and we look forward to more musicians embracing NFTs soon. Another industry that could soon embrace fungibility is the real estate industry, and we have started to see early entrants like CitiDAO try to tokenize real estate.

Getting to mainstream

The question front and center on people’s minds is – when do NFTs become mainstream? For one, the steps that the community has taken is a great first step:

1. Get celebrities like Steph Curry, Tom Bradley, Renee Witherspoon, Mike Tyson, Snoop Dogg on board and get them to preach the good word to their followers
2. Get recognition from “pillars of the community” such as Sotheby’s and Christie’s through auctioning pieces of NFTs
3. Create massive hype through transacted volumes and news articles
4. Create accessibility to NFT games such as Ronin as an on-ramp tool for Axie Infinity. This allows non crypto natives to be able to find their way onto NFT game metaverses with ease

But what else can be done to elevate NFTs to the next level?

1. Collectibles in the form of NFL x Dapperlabs
2. Fantasy sports in the form of Sorare’s platform
3. Pokemon in the form of Axie Infinity’s ecosystem
4. Trading card games like Hearthstone or Magic the Gathering in the form of Parallel Life or Gods Unchained
5. Comics in the form of DC Comics NFT
6. Create interoperable NFTs across multiple alternative chains (Tezos, Fantom, Solana). A true metaverse means that assets on the Ethereum blockchain can be traded for assets on another blockchain. Right now, we see walled gardens within each chain, but we believe that with time, we will be moving to a single metaverse for NFT games.

It’s only a matter of time that other web2 or traditional assets start to JPEG-ify. Once an incumbent in a particular space (Visa, Budweiser, NFL) starts to move, the rest of their competitors will start to move to.

While traditional gaming platforms such as Steam have banned blockchain games and assets, other platforms such as Epic Games has embraced it. Ubisoft also recently invested into Animoca Brands, strengthening strategic ties with the NFT ecosystem. SEGA has also announced that it will start selling NFTs related to its classic IP after partnering up with Double Jump Tokyo.

Right now, we’re in between the second and third generation of NFT games. Moving forward, we can expect more traditional gaming companies to get involved (i.e. fourth generation and beyond).

(Data source: Nansen)

We believe that gaming companies still feel that the addressable market of crypto-native players is relatively small given the target audience they are focused on (male, 20 – 40 years old). It makes sense that gaming companies that have built walled gardens through their cash shops will continue to double down on them. However, as crypto starts to become mainstream, we expect these walled gardens to be slowly worn down. Once Epic Games launches its first successful NFT based game, we believe that other gaming companies will start to take note and build, partner or acquire their own.

My guess, the next product that will have NFTs attached to it will be sneakers, given that hype and community go hand in hand with the sneakerhead community. Till then, crypto natives and NFT natives can only wonder when, and outsiders can only wonder why.

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