13 May 2022 |

A Flood of Venture Dollars



A Flood of Venture Dollars

The gaming industry is quietly massive. In 2020 the US Music industry did $12B in revenue. Streaming did $27B. By contrast, gaming generated $57B in the US and $126B globally. More than music and movies combined.

Over the past 18 months, the best VCs in tech have poured hundreds of millions into funding crypto-based games. Andreessen Horowitz, Sequoia, Lightspeed, and others have backed dozens of crypto gaming companies and top-tier developers are moving en masse out of big gaming firms and into startups building NFT games.

Today these startups are only a few months old but by early 2023 – if even a single one works – the news is going to be replete with headlines about teenage gamers making six figures playing video games. 


Money For Nothing, Kicks For Free

In crypto-economy games, a game’s virtual currency trades against the dollar. Items in the game – a rare sword or gear or land – are NFTs and the game’s virtual currency is a cryptocurrency. All of which trade on exchanges for real dollars.

  • Virtual currencies have always existed in gaming – rings in Sonic, coins in Mario, gold in everything else – but they have zero real-world value.
  • It doesn’t matter how much gold I rack up in World of Warcraft, I can’t redeem it for dollars and I can’t use it to buy a house IRL.
  • Axle Infinity’s SLP token, on the other hand, has traded for $0.25 per potion. That’s interesting.

Alex Paley, cofounder of Faraway calls it ‘open economy’ gaming. Players have ownership of their assets in-game, can trade them as they see fit, and have governance over how the game evolves over time.

But is this just Ponzi-nomics? Does the price only go up if more people buy in? What happens when new players stop joining? Does the currency crash?

To answer that we need to consider how pre-crypto games make money.

3 Revenue Models for Pre-Crypto Games

Pay to Win: Battlefront – EA recently decided to remake Battlefront, a classic Playstation 2 Star Wars game beloved by fans. They went to market with what’s since been dubbed a Pay-to-Win game. When fans finally got their hands on it, it became immediately clear the only way to win was to purchase items from the in-game store using real dollars. Sales cratered and the backlash was vicious.

Digital Goods: Fortnite and CS:GO – Fortnite and CS:GO sell digital fashion. New avatars, camouflage for guns, hats. All entirely cosmetic with no effect on gameplay. Yet sales of digital goods generate billions for Epic Games, maker of Fortnite. There’s also no market beyond Epic, the game’s developer. You can’t sell what you own to other players. At least legally. The black market for CS:GO skins is legendary.

Gamer to Creator: Roblox – In Roblox, gamers create their own games. Then other gamers pay them in Robux, an in game currency, to do things within their game. You can buy Robux with dollars and game creators can even cash out. At the start of this year Roblox had a ~$48B valuation.

Ads? – Fortnite maker Epic and others are experimenting with in-game, native ads. Imagine a billboard built into the landscape of the game that’s also a targeted ad.

What makes crypto games interesting is the combination of two and three. In open economy games, players will be able to sell their NFT avatars on open markets beyond the game. And not just avatars, potentially anything they earn or create in game.


NFT Feudalism

“The joke internally is that you’re reproducing feudalism” – Vincenzo Alagna, CEO of Core Loop

One of my favorite ideas from crypto games is Core Loop’s ‘Blacksmith Medallion’:

If you’re a blacksmith and you’re the only one that can make this recipe the sword or whatever it is and you need that sword to kill a dragon in the world, then you’re going to be very very in demand. And you may not be able to corner the market forever.

We’re going to be selling blacksmith medallions. Like a taxi medallion. Back in the old days of 10 years ago, taxi medallions were very very valuable, right? You could only have a limited number of taxis in the world.

– Vincenzo Alagna, CEO of Core Loop on Just Raised

Core Loop is going to license blacksmiths to make new NFTs the way Massachusetts licenses weed dispensaries.

Want to learn to make that rare sword yourself? Well, there are only 5 recipes in the game so you have to find one or your clan has to take one.

Not everything in the game will be NFTs and you won’t need one to start playing but some things will be. Gear, weapons, characters, and land can all have underlying NFTs on the blockchain.

Digital Land

In Faraway if you own a piece of land, via an NFT, you can generate a yield from it: the Faraway token. Faraway tokens trades against the dollar, but it’s not just about ownership, you also have to maintain control over the land you own. 

So this is our solution for a hedge fund coming in, buying a piece of land in the game, and never playing the game. That sort of kills the game for a lot of people.

So we said, ‘Hey, If a hedge fund ever does end up owning a piece of land, that’s fine because they still must keep control over that piece of land. And if they are, they’re playing the game anyway. So if you just have a bunch of hedge fund people playing Mini Royale… Well alright that’s awesome.

– Alex Paley, CEO of Faraway on Just Raised

If only New York City real estate worked that way.

Open economies also allow for a long tail of interactions using decentralized finance tools.

“Maybe a gamer can’t afford a $10,000 NFT but they want to see what it feels like to play with something crazy for a day. So they go out and rent that something the same way you’d go out and rent a Ferrari for a day. It lowers also the barrier of entry to buying something prohibitively expensive”

– Alex Paley, CEO of Faraway on Just Raised

Raul Sood, CEO of Irreverent Labs, is taking a different approach. Irreverent’s product is less a game and instead almost a Netflix competitor.

Mecha Fight Club is a Pokemon Go-esque AR game with fighting robot chicken NFTs. On the back end, the NFTs are represented by AI algorithms you can train. You fight them in the Cocktagon and can bet on matches in crypto betting markets. (Yes, this is a real company and Arianna Simpson at A16Z just invested $5M.)

Raul believes ‘artificially intelligent’ NFTs are the future of gaming.


Player, Leader, Hedge Fund Manager

DAOs are searching for a use case. There’s a joke going around tech Twitter that there are more startups building tools to launch DAOs than there are actual DAOs. Crypto games could change that.

The most successful DAOs invest in NFTs. Flamingo DAO’s NFT portfolio is worth upwards of $1B. (At least it was last month.) Pleasr DAO regularly purchases NFT art for millions. DAOs make sense as a way to own and manage digital assets.

And in open economy games, the land and resources clans are fighting over – clans being the groups people form to achieve quests and wage war in-game – are all digital assets, with a real-world value. So…

In Faraway’s Mini Royale clans are mini DAOs.

  • Self-Governed: Good leaders who pay themselves a reasonable amount will probably be popular. The ones who take all the rewards for themselves will likely be less popular and their Clan members will leave.
  • Investment Management: A successful clan means dozens or thousands of NFTs under management.
  • Digital Ownership: DAOs + DeFi tools like NFT fractionalization enable everyone in a clan to share in the prizes or earnings in a way that’s transparent and rules-based.

“Having the tools for all the players in a clan to collectively own things or share in the prizes or earnings, et cetera, in a way that’s very transparent and rule-based is also something that we think is going to be very powerful.”

– Dennis Zdonov Cofounder of Faraway on Just Raised

Faraway aims to build more games that will all run on a single Faraway governance token. Like bitcoin for Faraway properties. Players who earn Faraway tokens in game today will be rewarded if the company takes off.

Which raises questions about rewarding early users with tokens for all kinds of products across industries. But that’s for another newsletter.

Great Games First

“Crypto can deepen economies. It doesn’t create an economy where there is none, but it does deepen economies.” – Alex Paley, CEO of Faraway on Just Raised

Ultimately, blockchain is just another part of the stack. It enables the exchange of goods and creates a store of value that extends beyond the game but crypto alone wit can’t make games worth playing.

For games to be good they need to be fun first.