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To those in the industry, it’s no secret that crypto moves in waves. Cyclical waves of hype, mania, and absolute craziness.
These cycles are the norm in crypto. Peak mania was in 2017 when all a company had to do was add the word “blockchain” to their name for an instant boost in stock price. One of the more absurd examples of this “blockchain effect” was when the iced tea company Long Island Iced Tea changed its name to Long Blockchain Corp. Their stock price immediately jumped over 200%. Adding “blockchain” to a company’s name became so common that the SEC had to issue a warning to all publicly traded companies to stop doing so.
2017 - ICO Era
This was also during a time when startups were raising money in seconds via “initial coin offerings,” commonly called ICOs. Blockchain startups were raising millions of dollars in seconds! No seriously, the ICO for Brave Browser sold out in 30 seconds and raised $35m. Obviously, none of this was actually sustainable because these startups were raising money before having any sort of solid product. It was the “.com bubble 2.0.” People would simply come up with an idea, create a whitepaper (oftentimes just a marketing document), and start their ICO.
I have to say, I can’t blame many of the participants for taking part in this frenzy. If I had a cool idea and knew I could get instant funding, it would be hard to resist. As the bubble was in full force, many started to look towards projects with real use cases, which is when smart contract platforms began to raise crazy amounts of funding.
2017-18 - Smart Contract Platform Era
Investors began to look towards new narratives besides just “blockchain.” Many seemed to latch onto the “Fat Protocol Thesis,” written by Joel Monegro, which discusses how underlying crypto protocols will accrue more value then the applications built on top of them. So in this example, Ethereum would accrue more value than Uniswap, which is an application built on Ethereum. This thesis caused VCs to give gobs of money to different protocols, which were often referred to as “smart contract platforms.” To name a few:
Polkadot raised $183m
Dfinity raised $195m
Tezos raised $232m
And lastly, putting everyone else to shame, EOS raised $4b (yes, “b” as in billion).
This is just a small sample of many smart contract platforms that raised crazy amounts of money because of the fat protocol thesis narrative. Note, I hold no opinion on whether or not the fat protocol thesis is correct. I honestly think it's too early to tell.
2018-19 - Stablecoin Era
The narrative in 2018 and into 2019 was all about stablecoins. There was a new stablecoin project announcement every day and we saw a number of them go live:
You can check out stablecoinindex.com for even more stablecoins I didn’t list. The point is, everyone wanted in on stablecoins. The narrative was that if you invested in the company that had the dominant stablecoin that everyone would eventually use, then there could be massive monetization opportunities. For the remainder of 2019 there were a number of other narratives, but nothing that really drove excitement levels to the point of having a material impact on prices.
2020 - Defi Era
Prices weren’t directly impacted by the hype until this year when a new narrative took hold. Decentralized Finance, or DeFi, is all the rage right now. We have projects like Yearn Finance, which started at $0 and is now trading around ~$13,000 per token (data as of August 25, 2020). Then there are projects like Synthetix, which is up ~1,600% for the year, and Aave, which is up ~1,700%.
This entire frenzy was started by a DeFi product called Compound, which allows users to earn yield on tokens that they essentially lend to the platform. Compound built an amazing product with real usage (unlike the 2017 ICO days) and they decided to launch a governance token. A project launching a token wasn’t all that interesting, but the method in which they launched is what made everyone extremely excited. Their governance token, called COMP, was rewarded to users of the platform. 2,880 COMP tokens were rewarded each day, with 50% going to token suppliers and the other 50% to token borrowers. This encouraged more users to flock to the platform to “farm” the coin. I am not sure why bitcoin is “mined” and DeFi tokens are “farmed,” but it’s okay because this terminology has given us great memes, like this:
This ingenious method to acquire users by creating a “farmable” token led to an explosion of different DeFi projects creating their own native tokens. It also led to a massive increase in DEX (decentralized exchange) trading activity because even DEX projects started launching tokens.
We are now at a point where we have gone full interstellar. There is so much happening daily in the NFT space that it can be hard to keep up. Matt Huang from Paradigm tweeted out this beauty that really captures the current vibe.
I foresee the DeFi trend not stopping for at least another 6 months (which, as you know, is a lifetime in crypto), but I do think the narrative will change. DeFi involves crypto products that, for the first time, are actually used by people. Now, if we take this useability idea to the next level, then we arrive at blockchain gaming.
Note: Blockchain gaming is a catch-all term for any digital game, collectible, or virtual world that uses blockchain in some fashion.
2021 - Blockchain Gaming Era?
Sometime in 2021, the narrative will switch from DeFi to something else, and my bet is on blockchain gaming. Blockchain gaming already has real products that people use every day. Importantly, the technology that blockchain gaming startups are building can be widely adopted by the broader crypto ecosystem. Executing financial transactions on DeFi is one thing, but having to perform multiple transactions to buy, sell, battle, breed, etc., in blockchain gaming is on an entirely different level. The user-interface and entire design of the application have to be exceptionally simple and fun in order to attract people to a blockchain game. DeFi competes with the banking industry and fintech startups, like Venmo, which do not have amazing user experiences. Blockchain gaming competes with the traditional gaming industry, which is 10,000x larger and better capitalized than blockchain gaming. This fact forces blockchain games to create the best user experiences in crypto.
What is one of the factors that has been driving DeFi’s growth like crazy? Real usage. 2017 was the year of promises, 2018 had some products but little usage, 2019 was stablecoin usage, 2020 has been incredible use of DeFi products. Today blockchain games are used intensely by the small community but that is the key, real usage. Instead of just farming for yield these games have real economies and real functionality built-in them. So usage will play a huge role in changing the narrative towards blockchain gaming and although the community is small today they are extremely passionate and highly engaged.
Speaking of this small community lets explore the addressable market for blockchain gaming. In May of 2020, Richard Chen from 1confirmation tweeted that there are roughly 20,000 users on OpenSea, the number one exchange for blockchain gaming items.
According to a report from consulting firm Chappuis Halder & Co, in June of 2019 there were roughly 42m active crypto users across the globe.
If we take a strict approach to only onboard people with existing crypto knowledge into blockchain games, the total immediate addressable market for the blockchain gaming sector is 42m. That means that using this ultra-conservative addressable market number, user growth can grow 2,000x from where it is today. Even if 1m users enter the blockchain gaming sector, then that would be a 50x user growth from today's tiny user base of ~20,000.
Where Will Value Flow?
Okay, so now we think that the narrative can switch from DeFi to blockchain gaming due to the sector’s simplicity and functionality. Plus, we have a massive addressable market - so the growth prospect looks great. The question is, where will the value flow? Blockchain gaming is a large category that encompasses many things, such as in-game assets called non-fungible tokens (NFTs), native game currencies, gaming-focused blockchains, and more. Within each of those categories, there are even more subcategories. For example, within NFTs there are:
Collectibles: CryptoKitties, CryptoPunks, Avastars, SoRare, etc.
Games: Axie Infinity, Gods Unchained, MyCryptoHeroes, etc.
Virtual Worlds: Decentraland, Cryptovoxels, Somnium Space, The Sandbox, etc.
Crypto Art: SuperRare, Async Art, Nifty Gateway, KnownOrigin, MakersPlace, Rarible, etc.
And multiple other categories that are not well defined.
That is just a small sample of a number of projects that use NFTs as their in-game items. We are now seeing many of these projects release their own native tokens for their in-world economy. The majority of games today that have some form of economy do not use fiat currency but instead create their own monetary system in order to design something that best suits their economy. As blockchain games become larger, they are doing the exact same thing as mainstream games and creating their own native currencies. The only difference is that these native currencies in blockchain games are all ERC20 tokens. This makes them easily accessible and transferable into other cryptocurrencies.
For example, The Sandbox recently launched their $SAND token on Binance which instantly enables millions of people ready access to it and they can trade it for other cryptocurrencies. Other virtual worlds have their own native tokens, like Somnium Space’s $CUBES and Decentraland’s $MANA (Decentraland was actually the first large NFT project to launch their own native token). The collectible project Avastars is also launching their own native token that will be required to create more Avastars. The Pokemon-like game Axie Infinity is launching their own governance token, so on top of the token being used to buy and sell goods, users can use it to vote on certain governance functions for the game. I expect to see many more NFT projects implement some form of native token over the coming months.
Then, there are the gaming-focused blockchains, like Enjin, WAX, Xaya, and more. To clarify, these blockchains are not necessarily their own blockchains entirely. They are often chains built on an existing protocol, like Ethereum, EOS, etc., and their purpose is specifically focused on the blockchain gaming sector. For example, WAX is a blockchain built on the EOS protocol. The WAX token has a publicly traded price, but WAX also issued their own NFTs native to the WAX blockchain. They recently released William Shatner NFT collectibles that can be bought and sold with WAX. So, these blockchains are meant to be multi-functional compared to something like a native token for an NFT game.
Lastly, there are tokens within blockchain games that are not native governance or currency tokens, but fall into a different category. Let’s just call this category “Other” for now. A great example of this Other category is the Small Love Potion (SLP) from Axie Infinity. They are ERC20 tokens that can be obtained from battling other players and used to breed more Axies. While this token is technically native to Axie infinity, it is not their main native token and is more similar to an in-game item. While today these Other tokens make up a tiny section of the blockchain gaming world, I believe there will be an explosion of them over the coming months and years.
Okay, so let me cut to the chase here. Where will the value flow? Value will flow to what is most readily accessible, and that will most likely be publicly traded tokens. These are tokens like $SAND, $CUBES, $MANA, Axie’s native token (Not yet launched so no ticker symbol), Avastars’ native token (Not yet launched so no ticker symbol), etc.
I also think gaming-focused blockchains will get a boost, but not as significant of an increase as native tokens. The reason being is that native tokens are more concentrated on specific projects with in-game direct uses (buying and selling assets within that specific game), while gaming-blockchains have a broader ecosystem and not every project within that ecosystem will perform well. It is much easier to point to a single game that is doing really well and purchase that native token versus looking into an entire blockchain-based around a gaming ecosystem. I also believe NFTs will broadly experience a large increase in value as well. Once the narrative of blockchain gaming takes hold and people earn money investing in the tokens, they will inevitably search for more yield and dive into NFTs. NFTs are harder to understand than a single token but as people research and start trying different blockchain games out, we should see those new users reflected in the value of NFTs. Keep in mind that this is all speculation, but if the narrative does change to focus on blockchain gaming, then I believe this is how the value could flow.