July 30, 2021
The crypto ideologues have long since converted every last dollar, euro, or yen into their favorite basket of crypto assets. Although these early adopters have been rewarded handsomely, many wonder in which crypto corridor the next wellspring of adoption will form. After all, an investment is only as great as the volume of incremental dollars that follow it.
Human Nature is Constant, Incentives are Variable
Many early adopters of crypto resided in developing nations. The incentives to adopt crypto are more potent for Venezuelans, Argentinians, Turks, and Nigerians. Citizens of these nations do not have the privilege of a predictable fiat regime. Access to the global reserve currencies and bank accounts are limited. Further, individuals who’d immigrated abroad for higher wages wanted a way to remit earnings back home without a middleman taking 5-10%. Those of us living in developed countries have a far less visceral need to adopt the virtues and features of crypto.
With the benefit of hindsight, we now know that DeFi is the first crypto-vector to find product-market fit across the world. It seems that people do indeed want to trade, borrow, and lend across borders self-custodially, trustlessly, and quickly. The meteoric rise of DeFi blue chips like Maker, Compound, AAVE, and Uniswap are testament to the appeal of on-chain financial products. Blockchain technology is well-equipped to support decentralized financial services. Outside of DeFi, it is not clear which other use cases actually need blockchains. To inform our predictions about the next wave of (mainstream) adoption, we should consider which domains most obviously benefit from a restructuring of incentives. In which other industries are their masses of passionate users who have grown disillusioned with how value is captured and by whom?
Sports: Patriotism in the Post-Industrial Age
The gaming population is one of the largest and most international tribes in the world. Sports fans and video gamers are different, but their motivations for involvement and desire for competition is similar. In many ways, the cohesion and patriotism of these tribes is stronger than that of modern nation states. People are born into their respective countries without consent. Gamers opt-in to their tribes, propelled by similar values and passions. Communities like Barcelona fans or World of Warcraft players, who are voluntarily and organically entrenched, display unyielding loyalty to their tribes.
Interestingly, these groups really aren’t able to meaningfully affect change in their communities. Barcelona fans cannot participate in the financial upside of the club, nor propose changes to the architecture of or advertising within Camp Nou. World of Warcraft fanatics cannot permanently modify the digital topography of their world, nor port their in-game assets out into the broader world. The value embedded within these communities is largely extracted by the owners of the platform, be it Barcelona’s parent company or Blizzard. This has been the Web 2.0 (gaming) model: create an appealing platform that generates a network effect and monetize it as much as is swallowable by users. How would the value embedded in gaming communities change if the members were able to actively modify the trajectories of their arenas? What sort of value multiplier does a technology that enables community members to participate financially in the ecosystem unlock?
We can get a glimpse into the answer through the success of TopShots, SoRare and Chiliz, all sports projects built on blockchains. TopShots, a crypto NFT project built on the Flow blockchain, enables basketball fans to trade noteworthy in-game video clips. The partnership with the NBA introduces legitimacy and the integration with the Flow blockchain introduces digital scarcity and provenance. SoRare is similar but secured by Ethereum and for soccer. SoRare combines digitally scarce and club-licensed player cards with a traditional fantasy sports competition. TopShots has generated $655MM of revenue across 531K wallets while SoRare has slotted $54MM across 22K wallets since inception. 1
Chiliz protocol has built out a latticework of club-licensed “fan tokens” which redefine what fan engagement looks like. Chiliz takes engagement a step further: it empowers fans to affect change in their sporting communities. Using the native token, $CHZ, fans can purchase licensed tokens from clubs like Juventus, Manchester City, and FC Barcelona which come embedded with decision-making power.2 The collective token holders for a club are a sort of decentralized governance committee with financial upside. CHZ currently has a $1.3B market cap.
Through a perfunctory look at these three blockchain sports projects, we can glean a few things: 1. Fans have a desire to more deeply engage with their communities 2. Fan communities want to partake in the financial upside of these teams and players 3. NFTs, blockchain-secured digital property rights, can bolster digital scarcity and liquidity for assets that have real value within their native gaming communities.
I see TopShots, SoRare, and Chiliz as evidence of gaming’s transition from Web 2.0 to Web 3.0, where community ownership and agency reign supreme. As exciting as these sports projects are, I view them as canaries for a broader and more interesting trend. The frontier for blockchain x gaming is infinitely richer.
The Axie in the Coal Mine: Establishing Scarcity in Gaming
Axie Infinity illustrates gaming’s further evolution towards its mature, decentralized form within Web 3.0. Axie Infinity can be thought of as a Pokemon-esc battle game. The game and its native assets are secured by Ethereum. Players “buy in” by purchasing three “Axies”, the in-game animals that sit at the core of gameplay. Players use their fleet of Axies to battle other players, earning in-game currency. All of the unique in-game assets, from Axies to land to wearables, are represented by ERC-721 non-fungible tokens. These NFTs, along with the AXS and SLP, the relevant in-game currencies, trade freely on the open market.
Axie Infinity is the killer app within blockchain gaming right now. This is largely because it benefits from a gameplay mechanic called Play-To-Earn. Skilled players can amass significant sums of in-game currency by winning battles. These winnings can be sold via decentralized exchanges like Uniswap and ultimately converted back into local fiat currency. The adoption Axie Infinity has achieved is mind-boggling. The Axie Infinity protocol has generated about $51.3 MM in revenue over the last 7 days, eclipsing the revenue of any other DeFi protocol.3 Over this same period, $181MM of Axie NFTs have been sold.4 The Axie Infinity Discord has 538K members, closing in rapidly on Fortnite’s 800K member server. Most impressively, the gaming application has reached 350K Daily Active Users (DAUs).5 The traction earned by Axie’s core development team, Sky Mavis, serves as a case study for how blockchains unlock dormant growth.
Axie Infinity transcends mere gaming because users join the community not solely for recreation, but for work. Players in the Philippines, Venezuela, Brazil, Argentina, India, and Indonesia are working within the Axie economy to feed their families. In many cases, Axie Infinity players can earn more in-game than they could in traditional economic sectors. Axie’s integration with Ethereum is essential because fungible and non-fungible tokens are the bedrock of its economic activity. ERC-721 NFTs imbue digital asset holders with property rights and sovereignty over their productive assets, whether land or Axies with which to battle and earn. The NFT is to cyberspace what law (and law enforcement) is to meatspace, except more rigorous.
These digital deeds have enabled the growth of capital markets in which NFT banks rent out productive Axies to players. The native ERC-20 token $AXS grants user governance power over the protocol and liquidity beyond the confines of the platform. Axie Infinity provides the first glimpse into gaming protocols that are owned and governed solely by community members. It is a canary in the crypto mine, but not one whose death portends disaster. Instead, its growth augurs multi-purpose digital worlds that will serve as the next major on-ramp for the mainstream to enter crypto. Most Axie players are not crypto native—Axie Infinity has been their blockchain debut.
Gaming: From a Cottage Industry to an Industry of (Digital) Cottages
Gaming is not a small industry by any stretch of the imagination. Globally, it is a $175B industry.6 But it has been hamstrung by its structure and scope. Publishers own gaming platforms outright and extract value accordingly. In-game assets, of indubitable value to players, do not carry (legal) liquidity outside gaming worlds. Players may work for years building an account only to be banned irreversibly at the drop of a hat.
The Overton Window has shifted. Gamers will come to expect digital property rights (NFTs), extra-game liquidity (crypto trading on exchanges), the ability to permanently modify digital worlds, and the opportunity to earn real wealth from in-game skill. Axie Infinity actualizes many of these features but is still cartoonish and appeals primarily to South East Asians who are lured in by the earnings potential. The next plane of blockchain gaming will be one of unprecedented immersion. It will consist of high-fidelity, un-sharded landscapes where thousands of agents can simultaneously engage in socializing, work, gambling, play, strategy, warfare, or casual sandbox activities. As Jane Jacobs explains, a healthy cosmopolis is one in which a variety of users use it at a variety of times for a variety of purposes.
Modern digital entertainment is so immersive that we temporarily fail to distinguish a compelling movie from real life. Movies used to draw on real human interaction. Now real human interaction draws on movies. Our interactions increasingly occur in the digital realm. Sure we will still share coffee and meals with friends. But much of our conversation occurs on iMessage, Twitter, Discord, Telegram, Email, or Facetime. We are now a hybrid species: biological and digital. The most obvious instantiation of this hybridity occurs when we begin interacting via personified avatars in digitally rendered worlds. Instead of watching a movie, we will be protagonists in our own movie. Our friends and families will be there. We will be socializing, playing, learning, partying, building, and working.
We are already living vicariously through inanimate avatars via Twitter handles. Many of the most successful NFT (CryptoPunks etc.) projects have been character-based, suggesting that humans collect them partly to project their distinct digital identities. The widespread use of the internet, initially dismissed by the Krugmans of the world, represented a significant deviation from our biological roots and spatial orientation. Now the web is a living, breathing organism that we live within. A metaverse, where we live through synthetic humans, actually represents a reversion back towards more biological and spatial systems.
I believe it is the high-fidelity blockchain worlds currently being developed that will beget the next major wave of crypto adoption. These worlds fill a need for us. Our biological essence cannot adapt fast enough to match the rate of technological change. Just as we spend on cottages in meatspace, we will spend on pixelated cottages in the metaverse. The avatar will act as an extended phenotype, a digital vehicle for the “I” to navigate the new frontier.