Introducing Vader Research
Web3 gaming needs a new, independent research firm. Some crypto VCs have been designing and promoting ponzi tokenomics that align their short-term incentives at the expense of crypto’s long-term reputation.
Vader Research is a thesis-driven research firm dedicated to the long-term development of Web3 Gaming. We are a fundamentals-driven research firm that makes data-driven decisions at each step. We provide various consulting services for leading games, platforms, guilds, and institutional investors.
In this article, we share our 5 core Web3 Gaming Theses.
Thesis 1: Bullish On Web3 Games Developed by Web2 Game Developers
Making games is a difficult business — thousands of games end up in the graveyard every year. The industry has long been criticized for being a hit-driven business that is not scalable and not venture investable. The analytic approach to mobile games has changed the industry as the know-how developed through designing popular games became transferable to making new popular games.
The current wave of web3 games are not designed for fun-seeking traditional gamers but are designed for ponzi-return seeking crypto degens and gold farmer scholars. We shared our concerns about the sustainability of Axie Infinity’s play-to-earn model from day 1. P2E is a gamified pyramid scheme wrapped around complex tokenomics and all P2E games will eventually collapse just like every undercollateralized algorithmic stablecoins will collapse.
Every game economy has inflows and outflows — for any game to be sustainable, inflows must exceed outlflows. A sustainable game economy’s inflows should come from players who spend on various sinks (cosmetics, skipping waiting) due to entertainment without having any financial expectations in return.
The problem with the P2E model is that players spend on sinks with the expectation of doubling their money in 30 days. These inflows are what we refer to as inflationary sinks. They give a short-term cash flow boost to the game economy at the expense of larger longer-term economic problems.
Thus, the real solution is to build a fun game with addictive core loops, beautiful visuals/storyline and vibrant social elements that convince traditional gamers to spend money on virtual items without any financial expectations. Gamers typically spend money on virtual items to buy emotions.
Designing such addictive fun games is very challenging and takes years to master. We argue that it is easier for traditional game developers to master crypto with the help of experienced advisors rather than for crypto-native founders to master game design.
Traditional gamers don’t care about NFTs, decentralization or ownership. They want to play fun games and experience specific emotions throughout the process. Web3 Gaming needs traditional gamers who can be attracted by fun games and a smooth onboarding experience.
Thus, we are bullish on web3 games developed by experienced web2 game developers.
Thesis 2: Game NFTs Will Become a $100bn+ Financial Market
Due to the ownership aspect of blockchain, most web3 games will have open economies where in-game assets can be traded permissionlessly on secondary markets. Traditional in-game virtual items is a $50bn industry — this number mostly includes primary sales as trading secondary game items are typically forbidden. The black market for secondary game items was estimated to be $5bn in 2015.
As gaming converges into web3 gaming; more web3 games will be developed, resulting in millions of unique in-game NFTs to be created. There are 12m+ unique Axie NFTs to date. We believe the growth of web3 gaming will result in secondary in-game NFT financial markets that are cumulatively larger than that of some financial markets.
Like every sophisticated financial market (stocks, bonds, commodities), game NFT financial market will also reach a certain size that will attract complex solution providers such as asset managers, hedge funds, activist investors, quant traders, passive indices, derivatives brokers, guild brokers, structured NFT lenders, M&A advisors and much more.
We believe traditional gaming will converge into web3 gaming which will accelerate the industry’s growth as a whole and the open economy nature of web3 games will attract speculator/financial capital that will cumulatively increase the game NFT market size to above $100bn.
Thesis 3: Every Web3 Game Will Have A Central Bank Governor
Every Web3 Game is an independent state with an open economy. Players are citizens, speculators are foreign investors, gold farmers are immigrant workers, game developer is the government & central bank.
There is a tradeoff between growth and sustainability in real-world economies — governments aim for short-term growth to win elections while central banks aim for sustainability to have a long-term sustainable economy. To achieve both simultaneously, economies focus on improving productivity and efficiency (better tech, lower costs, higher yields).
Virtual world economies have different priorities — attract, retain and monetize players to maximize long-term game franchise value. The sustainability of the economy is as important as its impact on player behavior. Virtual economists don’t need to solve problems such as poverty or unemployment. That said, having a sustainable virtual economy is typically important to ensure long-term player retention. Inefficiency in virtual worlds is a feature, not a bug.
Web3 game economies possess a challenging problem that we haven’t fully faced before — open virtual economies with multiple user segments (gamers, speculators, gold farmers) within a permissionless secondary market. Web2 MMOs such as Runescape, EVE, World of Warcraft had similar challenges to some extent but none had permissionless and frictionless secondary markets.
Balancing growth, retention and monetization while having a sustainable open game economy will be an ongoing challenge for web3 game virtual economists as free-market arbitrageurs will be constantly looking for inefficiencies. Game economy management is also an important user acquisition channel through token/NFT incentives.
Thus, every web3 game will have an internal or external central bank governor.
Thesis 4: Ponzis Will Slow Down Web3 Gaming Adoption
Projects such as Stepn, Luna, Thetan Arena, DeFi Kingdoms and Pegaxy that use complex tokenomics to camouflage their ponzinomics nature will take web3 gaming a few years back in terms of real gamer adoption.
These projects are marketed as safe or non-ponzi by influencers and VCs at the expense of longer-term crypto adoption. Even though some users are aware of the ponzi nature and enjoy the gambling thrill, most users are uninformed retail investors who end up losing their savings.
Negative publicity and word-of-mouth around these projects crashing typically lead to traditional gamers and game developers thinking that web3 games & NFTs are nothing more than unregulated ponzis. Web3 gaming needs traditional gamers who will be onboarded to fun web3 games developed by experienced game developers.
Fun games don’t need 5000% APY ponzis to build and grow a player base. These incentives attract mercenary investors or gold farmers who churn immediately once another similar project offers more attractive returns. A game dominated by mercenary users early on will likely discourage traditional gamers from participating. These projects constantly need fresh capital to sustain their economy and will eventually face the inevitable death spiral.
Ponzinomics, if used reasonably, can be a very effective tool to cold start and grow network effects, as long as it is not abused. A rule of thumb to understand whether a game has unsustainable ponzinomics is to look at the ROI. If your payback period is lower than 120 days, that is a textbook ponzi — the lower the payback period is, the more unsustainable the economy.
We built detailed financial models for Axie Infinity, Pegaxy, Thetan Arena, Crabada and many other web3 games to project the economic outlook by applying various simulations & stress tests. We also warned about Axie Infinity’s economic unsustainability back in August 2021.
We believe ponzis will slow down web3 gaming adoption. Thus, we will only be working with teams that want to build long-term game franchises and will not advise on designing unsustainable ponzinomics.
“Shipbuilding is best left to those not involved in intentionally designing and marketing Titanic”
Thesis 5: Web3 Games Will Employ 100m+ Scholars by 2030
Axie Infinity helped more than 3m players earn from playing video games. Even though its economy wasn’t sustainable — the idea of game developers sharing earnings with players with the expectation that this could attract even more spending by whales is a win-win case. As we see more sustainable web3 games, we believe the grinder/scholar community will grow and reach 100m+ by 2030.
The open economy of web3 game economies will enable players to trade their time against money in games where large spenders/whales are happy to pay for someone else to perform specific actions. As long as the non-spender makes the spender feel good, the spender will continue spending and the game economy will be sustainable. This thesis was mainly inspired by Castronova’s Players For Hire whitepaper which is a must-read for those that want to learn more about this topic.
“The presence of other people is valuable to the big spenders for several reasons: The thrill of being richer and more powerful than others, yes, but also the simple happiness of companionship. Whatever the reason, big spenders are willing to pay a company enough money that the company can afford to open the doors to anyone.” (Castronova)
Automation of low-skill work will create more unemployment for low-skill workers and lead to wider income inequality. This will likely lead the rich to spend more time on entertainment as boredom will become their biggest problem. Thus, they are likely to spend more time and money on games.
On the other hand, the poor will struggle to find job opportunities for low-skill work. Gaming will be a good side-earning option for the poor as they don’t necessarily need to be competitive. Earnings will most likely not be sufficient alone to cover the entire cost of living but will represent a meaningful side income. Competitive players might be able to earn a living by playing video games, but non-competitive players likely won’t be able to fully cover their cost of living and will treat video game earnings as a side income.
“Psychologically and socially, first class only exists if there is a second class. Thus the comparison role of all the free players is simply to be the second class. Their job is to sit in second class precisely so that the first class passengers can feel good about having been able to board first, get better food, and have more space.” (Castronova)
“In the play-for-hire game, everyone will still be a hero. But some of them will be paying a lot of real money to be a truly amazing hero, while others will be receiving a very modest amount of real money to be a pretty good hero.” (Castronova)
In a dystopian future, this will gradually converge into universal basic income as governments and private ad networks will give out daily earnings in exchange for specific to-earn actions. Thus, we believe web3 games will employ more than 100m+ scholars by 2030.
Vader Research Advisory Services
Tokenomics Design, Economy Management and Strategy
We provide end-to-end tokenomics design and conduct stress tests based on various simulations. We provide outsourced economy management services by optimizing token allocation and pricing decisions. We advise on optimal web3 UA strategy; guilds, crypto degens, gold farmers, players.
We provide deal flow sourcing and investment due diligence on early-stage deals and provide discretionary portfolio management services focused on web3 gaming.
Special thanks to Terry Chung for reviewing this article.
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