Tokenizing Game Economies & XR Content Distribution
Hartmann Capital Weekly, Tuesday November 28th, 2023
If you are attending Art Basel in December or iConnections in January and would like to book a 1-1 allocator meeting to learn more about our funds, please send us a message by replying to this email.
In this issue
It’s been a turbulent week in tech. From the ousting and re-instatement of Sam Altman at OpenAI, to the investigation and plea deal of crypto titan CZ of Binance. Today we’ll draw your attention away from the latest tech gossip of the week and instead dive deep on tokenized game economies and share a 101 on XR content distribution. We hope you find this weekly insightful.
The Evolution of Game Economies: Blockchain-based Models in the Gaming Industry by Jonas Luckhardt
Understanding XR Content Distribution by JP Minetos
The Evolution of Game Economies: Blockchain-based Models in the Gaming Industry
Written by Crypto & Macro Analyst Jonas Luckhardt; Edited by Felix Hartmann
During 2021, dual-token models in play-to-earn games, especially titles like Axie Infinity and Stepn, attracted significant attention. These models aimed to decouple incentivization (generally via token inflation) from governance by shifting the incentives and associated inflation to a second token (AXS/SLP, GMT/GST). This second token was explicitly designed to carry the rewards and incentives for players, allowing a clear separation from the governance function of the primary token.
The interest rate hikes by the Federal Reserve in November 2021 marked a turning point towards a more restrictive monetary policy, bringing the bull run to an end. As expected, Hartmann being among the biggest short sellers of both AXS and GMT in 2022 by open interest, the dual-token system collapsed due to decreased speculation and the dwindling influx of new players. The economic failure of the most well-known Web3 Games and and the ever more competitive funding environment led to teams re-evaluating token economy construction in the Web3 gaming industry. Gaming projects faced the challenge of developing token designs that enabled sustainable positive flywheels, that were regulatory compliant, and still ensured the studio’s long-term profitability. In this context, the concept of play-to-earn lost significance and was replaced by play-to-own. The focus shifted to the long-term utility of NFTs as in-game assets, improving the user experience and representing a more sustainable use of blockchain technology.
End-to-End Single-Token Economies
Illuvium combines a collectible card game with an auto-battler. Their battle pets, called “Illuvials” (think Pokemon), function as NFTs. The game integrates its token, $ILV, into the in-game system for governance and central economics (e.g. staking)/ Instead of using a secondary token however, Illuvium offers players the chance to earn their staking rewards in the form of synthetic escrowed ILV (called sILV2), with the main purpose of being used for in-game transaction. sILV2 is designed to reflect the value of ILV, providing players with a seamless and familiar reference point for token pricing. However by reducing its immediate usage to being spent in-game, the mechanism of making it synthetic + escrowed puts a damper on the inflationary pressures other web3 games and two-token models have suffered from. On the flip-side, this approach represents a bold move in fully incorporating the dynamics of crypto volatility into the game's economy. We have been monitoring the ILV token since 2021 and will closely analyze the project's development following the game launch on November 28th in the Epic Store.
Tokens to Power NFT Economies & Traditional Payment Rails
Shrapnel is a modifiable AAA first-person shooter built on the Avalanche blockchain. While Shrapnel allows players to purchase the game using traditional payment methods such as credit cards and offers the option to create accounts via email, increasing user-friendliness, the team has focused its use of web3 particularly on in-game asset ownership through NFTs. This approach indicates a trend where blockchain technology is no longer forced on the user, enabling a seamless opt-in model making games accessible to both those familiar and unfamiliar with the technology. The SHRAP token is used for NFT creation, such as gamer tags and skins, as well as a medium of exchange. High demand for in-game cosmetics therefore would provide meaningful support for a game’s token price.
Pure Governance Tokens & Stablecoin Payment Rails
Hytopia, a project initiated by the Minecraft modding community, aims to expand the creative boundaries of playing and developing. The game plans to use USDC instead of its token as in-game currency to create a more stable economy and avoid price fluctuations. The game's governance token would then focus on governance and revenue sharing, clearly separating the game economy and token governance. The separation could be an advanced step towards user-friendliness and meaningful token implementation, with token holders still benefiting from revenues from NFT sales and marketplace fees.
The models presented show different approaches to integrating blockchain and crypto assets into the game economy. While Illuvium fully integrates its token into the gameplay, embracing the volatility of the crypto, Shrapnel relies on traditional payment methods, thereby increasing accessibility for a wider audience. Hytopia, on the other hand, experiments with using USDC to create a more stable game economy. Each of these models has its advantages and disadvantages: Illuvium's approach of fully integrating its token into the game could generate meaningful demand and value for the ILV token, but may pose challenges in terms of user-friendliness due to the volatility of the asset. Shrapnel's strategy could increase acceptance among traditional gamers but forgo the direct integration of its token. Hytopia's model promises stability but might lack the dynamics and incentives currently associated with game tokens. It remains to be seen which approach will ultimately prove successful.
The quality of gameplay will play a crucial role and may offset the challenges in terms of user-friendliness, and further help overcome adoption hurdles. The evolution of the web3 gaming industry could be significantly influenced by the Play-to-Own concept, which brings the novel aspect of on-chain ownership of in-game assets to the forefront. The aspect that may be most exciting is combining the network effects of User-Generated-Content, with the flywheels of tokenization, and the financialization and ownership of NFTs.
These developments show that the gaming industry continues to seek innovative ways to integrate blockchain technology in a meaningful and user-friendly manner, balancing user experience, economic viability, and technological innovation. While the sector will continue go through much trial-and-error, the ultimate winners will launch franchises that will likely dwarf any IP created thus far.
Understanding XR content distribution
Written by XR & Gaming Analyst JP Minetos; Edited by Felix Hartmann
While the XR industry provides diverse aims, from disrupting education, live entertainment, gaming, and even fitness — a common thread unites them—the relentless pursuit of attracting and reaching a growing user base.
In the emergent case of XR applications, the “meta” has changed significantly for app distribution. While the mobile model is bifurcated between the Apple and Android App store, XR distribution remains a bit more complex. This complexity roots from an ever expanding number of device makers, and different tiers of content moderation among stores.
Distribution can be reduced to five venues, with 90% of content coming from one of these respective channels:
Quest Store & First Party Stores
The Quest Store is the flagship first-party marketplace for the standalone Meta Quest devices, and has grown in marketshare as exponentially as the headsets have.
Meta’s store has a user experience flow akin to other first party marketplaces, such as the iOS app store or Google Play Store. This creates the lowest friction for users to access software, and comes with a certain level of quality assurance and trust through their deep content moderation.
However, having to get approved by Meta and go through quality assurance, makes it more difficult to get listed. Additionally, Meta takes a 30% fee on all sales. Both of these benefits and disadvantages are true for other first party stores, such as Playstation VR.
Quest Applab:
Quest Applab provides developers with a less stringent approval process, offering a greater degree of freedom in releasing applications compared to the Quest Store. This flexibility allows developers to experiment and release beta versions for valuable user feedback, fostering an environment of innovation.
However, Applab comes with its challenges, notably limited visibility compared to the official Quest Store. Developers may struggle to reach a broader audience and have a lower probability of their app being “accidentally” discovered.
Sidequest:
Sidequest serves as a platform for developers to showcase experimental and niche applications that may not find acceptance on official stores, including Applab. This freedom allows for unique and diverse content creation, fostering direct engagement between developers and users. Despite these advantages, Sidequest faces challenges in terms of a limited user base compared to official stores, potentially hindering the reach of applications.
SteamVR:
SteamVR boasts a wide user base and established platform, making it an attractive option for developers seeking an audience beyond Meta devices. Its compatibility with a range of VR hardware enhances its appeal, as well as the ability to make more compute heavy games that are offloaded to a PC. Like on other first party stores, Steam does take a revenue share, but it is notably easier to list a game to Steam. The combination of being the biggest game-launcher in the world, supporting PCVR, and being device agnostic continues to make Steam a popular choice. That said, games that are on both Quest and Steam sell about 10-20x as many units on Quest.
OpenXR Web Applications:
OpenXR standard Web Applications offer developers the advantage of creating platform-agnostic applications compatible with various VR platforms. The absence of an approval process provides the freedom to publish without third-party hurdles. Nevertheless, these applications face challenges in gaining visibility when compared to dedicated app stores. The friction to access OpenXR based applications for casual users limits discovery and monetization.
In 2023, a majority of high sales games have been on first party stores and on Applab. In order to achieve commercial success, developers have to build for standalone and work with Meta to get their applications released. Commercial viability aside, building for WebXR provides advantages of a simple launch for basic applications, and Sidequest offers developers the ability to pre-launch their applications to hardcore VR fans for early feedback.
Disclaimers:
This is not an offering. This is not financial advice. Always do your own research.
Our discussion may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.
 | A guest post by
|