We Still Maintain a Cautious Attitude Towards Recent Defensive Investment Trends in the GameFi Market
As we look back on the year 2023 to date, the GameFi-related projects that have received significant financing and performed well (currently, GambleFi is also classified within the GameFi sector) have mainly focused on infrastructure construction in GameFi tracks such as gaming platforms and game Layer 3. The most striking examples include the pump.fun casino that has attracted countless participants since the beginning of the year and the wildly popular Not and Ton’s mini-game ecosystem.
This article will dissect the defensive investment logic behind such investment phenomena and our attitude towards this investment logic.
Overview of Funding in the GameFi Market
Looking at the investment volume and project numbers in the GameFi field from 2020 to 2024, even though Bitcoin has broken through its previous high from 2021 this year, the data over the past year appears relatively stagnant and conservative in both total volume and number of projects. In comparison, in Q4 of 2021, there were as many as 83 investment projects with a total amount of $1,591 million, averaging $19.2 million per project. In contrast, this year, during the Q1 that broke previous highs, there were a total of 48 projects with a cumulative investment of $221 million, averaging $4.6 million per project, reflecting a period-on-period decrease of 76%. Overall, investment behavior presents a conservative defensive posture.
Detailed Analysis of Three Market Phenomena in the Past Year: Logic, Changes, and Doubts Behind Them
Phenomenon One: Gaming Platforms Evolving from Pure Platforms to User Acquisition Channels
“Game infrastructure, aside from strong survival capabilities and long lifecycles, is gradually evolving into a user acquisition channel with lower customer acquisition costs, which is why they are favored by VCs and exchanges.”
During the period from June 2023 to August 2024, among the 34 GameFi-related projects that received over $10 million, 9 were gaming platforms and 4 were game Layer 3. From BSC to Solana, from Base to Polygon, and even self-built Layer 2 and Layer 3, gaming platforms are blooming everywhere. Even with a significant decline in total financing amounts, 38% of the high-investment projects are still concentrated in robust survival projects with long lifecycles. Platforms are narratives that will not be disproved by trends and are low-risk defensive investment choices.
Moreover, for leading gaming ecosystems, several funds like Pantera, publicly hold significant stakes in the toppest gaming platform — Ton’s ecological tokens. The reasons for the popularity of Ton and Ronin among VCs could be attributed to the gradual evolution of platform roles. Telegram has almost a billion user base, users are drawn into Web3 by mini-games like Not, Catizen, and Hamster (Not with 30 million users, Catizen 20 million (1 million paying users), and Hamster 300 million users).
Since March of this year, Ton announced over $100 million in ecological incentives and multiple league prize pools. However, subsequent on-chain data showed that Ton’s TVL did not significantly increase with the mini-game boom, as many users were directly converted to exchanges through pre-recharge activities. The minimum CPC (Cost-Per-Click) advertised on Telegram is only $0.015, while the average customer acquisition cost for a new account on exchanges ranges from $5 to $10, and for each paying user, it can exceed $200, averaging $350. The customer acquisition and conversion costs on Ton are far lower than those of the exchanges themselves. This also explains why exchanges are racing to list various Ton mini-game tokens and memecoins.
Ronin’s established user base offers more opportunities for individual games to find users. The migration of quality games like Lumiterra and Tatsumeeko to the Ronin chain further demonstrates the user increment and acquisition capabilities that platforms can provide, becoming a new angle of favor.
Phenomenon Two: Short-Term Projects Dominating the Market, But User Retention Capabilities Are Doubtful
“In a secondary market with poor liquidity, many games’ flywheel and profit-making effects have been forcibly castrated, turning perpetual games into one-time games. In a poor cyclical environment, these short-term projects align more closely with VCs’ risk aversion as a defensive investment choice, but we remain skeptical about whether users’ long-term retention capabilities match the optimism and expectations of VCs and exchanges.”
Let’s take a look at Not (short-term project) and its economic model.
Not’s active users have continuously declined since the token was launched. Five days after TGE, the number dropped from an initial 500,000 to 200,000, stabilizing at around 30,000, marking a 94% decline. Based on user data, Not is indeed a short-term project. Recently launched projects on Binance, such as Dogs, Hamster Kombat, and Catizen, are all fully circulating short-term projects that have attracted significant attention from the market and VCs.
From the previous P2E (Play-to-Earn) games, simple game mechanisms, Spontaneous move modes, and the pixelated farming games to Not’s explosive click-to-earn model, these projects branded as GameFi are gradually simplifying or even shedding the gaming layer. When the market willingly accepts this, we must ask whether people’s acceptance is truly increasing, or if they have become impatient and restless. Given that the essence of most GameFi projects is merely a form of mining using interactive gameplay instead of complex game mechanics, there is no need for complicated game steps and modeling costs. Instead, the costs originally allocated to game development could be used to serve as the initial capital for this Ponzi-like mining factory, benefitting both sides.
Not’s economic model differs from the previous GameFi flywheel model, as it features fully circulating one-time unlocks without upfront cost investment, allowing users to exit immediately upon receiving airdropped tokens. VCs no longer face the burden of locking up funds for two or three years. The transition from a sustainable mining game model to a more short-term version, similar to memecoins. Besides, it suggests that just like the platform’s value, the simple monetization mechanism attracts new Web2 users to participate in Web3. Users who claim airdrops and exit quickly are funneled into exchanges, which could be another reason VCs favor such projects.
The essence of the flywheel cycle and the current market’s inclination towards short-term projects, our doubts about mid-to-late-stage investment returns.
The previous P2E (Play-To-Earn) games had a complete economic cycle, and whether this economic cycle’s flywheel can operate depends on whether players can calculate an acceptable ROI (Return on Investment). The formula for ROI = Net Profit / Net Spend, which in the context of P2E games translates to the expected future returns (the value of the mined assets) / cost of the NFT (the cost of the mining machine). Therefore, the formula for calculating participant returns in P2E games is:
ROI = Value of Future rewards / Acquisition Cost of NFT
Ignoring abrasion and electricity costs for now, the larger the calculated ROI, the stronger the incentives for players. How can we maximize ROI? Let’s break down the formula.
How Can We Maximize ROI?
- Path 1: Value of Future Rewards increase
Value of Future Rewards = Quantity of Future Rewards * Price of Future Rewards
V=P*Q
When the value of returns increases, either the quantity of returns increases, meaning token rewards increase, or the price of returns rises, meaning the price of the tokens goes up.
In the context of the Web3 economy, the output settings of basically all tokens tend to show a convergent trend, similar to Bitcoin’s halving cycle. As time goes on, token output decreases while mining difficulty increases. While more expensive mining machines or rarer NFTs may yield higher returns, they also increase additional costs. Therefore, without changing the quality of the mining machines, it doesn’t make sense for the quantity of returns to rise.
The more likely scenario is that the price of future returns increases, meaning the value of the tokens mined by players steadily grows. If the secondary market has sufficient buying volume, there won’t be a situation where supply exceeds demand; buyers will absorb all sell orders while still showing an upward trend. This way, the numerator in the ROI calculation increases.
- Path 2: Cost of NFTs decrease
When the denominator in the ROI calculation decreases, the ROI naturally increases, which means that the acquisition cost of NFTs as mining machines becomes lower. If the price of NFTs traded with project tokens decreases, it could be due to either a decrease in demand for those NFTs or an increase in supply, or it might be caused by a drop in the price of the token used as a medium of exchange and standard of measure, leading to a decrease in NFT prices from external factors.
A decrease in demand is typically because the game’s profit-generating attributes weaken, causing players to seek opportunities in other games with higher ROI. When using other fiat currencies like Ethereum or Solana, the prices of mainstream coins decline, negatively impacting altcoins as well. Thus, NFT prices and token prices are inherently correlated. Therefore, the increase in the numerator and the decrease in the denominator cannot occur simultaneously; their changes are synchronized and may even exhibit a certain proportion of interaction.
This means that the most likely way to increase ROI is through an anticipated rise in the price of the tokens, which in turn causes NFT prices to rise in sync, but at a rate smaller than or equal to the increase in token prices. In this scenario, ROI can remain stable or gradually increase, continuously incentivizing players.
In this case, new funds entering the system act as an external force and new liquidity, serving as a multiplier. Only during a bull market, when token prices are rising, can the flywheel of P2E games start to operate effectively. When ROI remains stable or slowly increases, players can reinvest their earnings, creating a snowball effect where injections exceed withdrawals. Axie Infinity is a prime example of a successful flywheel cycle.
Looking back at the games in this cycle, it seems that most experienced a brief period of market FOMO before launch, only to plummet overnight after the first trading day. All tokens unlocked through airdrops became sell pressure, leading to cashing out and then searching for the next opportunity. There was no subsequent ROI, no reinvestment of funds, and no flywheel effect; it became a situation where diamond hands bore the burden of all short-term fluctuations. P2E games are becoming less talked about, while P2A (play-to-airdrop) is quietly gaining traction — a frightening concept that essentially labels the game as a one-time opportunity. The goal of chasing airdrops is merely to sell them upon listing and cash out, rather than to continuously seek earning opportunities within the game ecosystem.
Despite the changing times, the act of selling tokens remains consistent. However, in today’s weak secondary market, with altcoins struggling, the secondary token prices cannot sustain the flywheel effect. Without strong market makers to provide support, the flywheel and profit-making effects of many games have been forcibly curtailed, shifting from long-term loops to short-term plays, turning perpetual games into one-time events. In this light, the performance of Catizen and Hamster after their TGE further supports the notion that these projects are designed around a short-term economic model, negating the need to sustain a later flywheel. We still question whether token funding in the later stages of such projects can be considered a lucrative deal.
The flywheel cycle requires a more refined economic model and cost investment, while short-term projects only need the expectation of airdrops. Once the tokens are listed, the task is accomplished, allowing the subsequent economic model to be truncated. The expectation of airdrops can be understood as profiting from the liquidity differences between the primary and secondary markets. We can view these short-term projects as a type of fixed deposit until reinvestment occurs in the ecosystem, with players treating the costs of NFTs or pass cards as principal, allowing for a time cost of fund retention until they can earn airdrop profits post-listing.
Such projects do not require cross-cycle operating times or uncertain economic cycles, nor do they completely depend on market conditions and FOMO emotions. Their brief yet dazzling lifecycle and fully unlocked model allow VCs to avoid the hassle of lock-up periods, enabling quicker exit times. In a poorly performing market environment, these short-term projects align closely with VCs’ risk-averse defensive investment choices.
User Retention Capabilities Are Doubtful
Whether it’s Not, Catizen, Hamster, or Dogs, all have brought a significant influx of new users to exchanges like Binance. However, the actual long-term user retention within these ecosystems or exchanges remains unclear. Do the newly acquired users deliver value that meets the expectations of VCs?
Let’s examine Catizen, one of the hottest mini-games in the Ton ecosystem. It saw its active user base plummet from 640,000 to 70,000 in just one day after the token launch, with subsequent user retention data appearing dismal. Even without any changes in game content, over 90% of users exited immediately once the airdrop expectation faded, leaving only around 30,000 users. Does this retention rate align with investor expectations and achieve the goal of user acquisition? Even if the new users brought in by the airdrop shifted to exchanges, after cashing out their airdropped tokens, would they abandon Catizen in the same way?
When products become viral campaigns aimed solely at user acquisition, even if they briefly boost ecosystem growth, can the actual retained users meet the ecosystem and exchange’s expectations, justifying the investment? We remain skeptical.
Phenomenon Three: Top VCs Investing in Casinos for Revenue, But Lacking Token-Launching Expectations and Value Capture
“Infrastructure projects and secondary trading are closely related to macro market conditions. When the market is strong, funds are more willing to stay and profit from various hot trends. In a secondary market lacking strong buying or selling motivation, relying on casinos and pump.fun for revenue becomes a safer defensive choice for VCs. However, where does user acquisition come from? The lack of token expectations for platforms and tools raises questions about whether revenue from gaming projects can outperform these investments.”
Several casino projects have begun to emerge, accounting for 15% of high-value financing in GameFi for 2024. In this fast-paced crypto world, since meme and pump.fun can be accepted, larger gambling games no longer need to disguise themselves under the GameFi label and can openly appear.
On February 12 this year, Polychain Capital led a round of investment in Monkey Tilt, which offers a comprehensive betting site and online casino backed by large funds. MyPrize, announced on March 24, received $13 million in investments from Dragonfly Capital and other major VCs, boldly showcasing live dealers and betting options on its homepage.
The Logic of Revenue Generation in Pump.fun and Casinos
When the market is cold and uncertain, amid ongoing election uncertainties and the protraction of U.S. interest rate cuts diminishing market expectations, the combination of this “garbage time” with the emergence of tokens like BOME (Book of MEME) has significantly stimulated people’s gambling instincts, flowing more money into chains and pump.fun to find the next “golden dog.”
What is the biggest casino in Web3? Many may already have their answers. Binance, OKX, and other top exchanges offer 125x leverage on perpetual futures, while smaller exchanges provide even higher leverage. In comparison, the maximum fluctuation in the A-share market is only 10%, and 20% for the startup board. Tokens, with T+0 trading and no restrictions, combined with high leverage, allow for significant gains or losses from minor price fluctuations.
The rise or fall in token prices can be engaged through long or short contracts. Essentially, ultra-short-term contracts are just bets on the magnitude of price movements during the time between entry and exit, with leverage ranging from 5x to 300x. Exchanges profit substantially from fees for opening positions, holding positions, and forced liquidations (margin calls), among other charges. Similarly, casinos typically earn from the rake or the house edge.
If we say that infrastructure projects and secondary trading are closely related to the macro market environment, then when the overall market is clear and trending upwards, funds are more willing to stay in the market to capitalize on significant price increases across various hotspots, yielding substantial returns with lower risk. However, in the current uncertain market, funds seem to be flowing toward casinos and PVP (player versus player) games, leveraging high risk to achieve profits that are unattainable in the present environment. High leverage amplifies both gains and losses; thus, in a market that oscillates back and forth, the rake earned by exchanges and platform-type products may be more stable than during a one-sided market.
In this unstable market, as users’ propensity to gamble increases, funds and enthusiasm seem to gravitate towards casinos and PVP games. The rake earned by casinos and tool-like products has become a demand-driven, stable source of income, aligning with the logic of defensive investment through rake earnings. However, there are also certain issues with the rake-based revenue from casinos or platform-type projects.
Lack of Token-Launching Expectations and Value Capture
For platform projects like pump.fun, even if they become phenomenon-level platforms with substantial trading volumes and profits, they still lack the expectation of token issuance. Whether from the perspective of the token itself, its necessity and utility within the ecosystem, or from a regulatory standpoint, as long as there is no token issuance, there is no risk of being flagged by the SEC for securities violations. Similar casinos or platforms also lack a genuine expectation of launching tokens.
On the other hand, without the expectation of token launching, the rake and casino logic are more applicable during sideways market conditions, and they cannot predict future hotspots. The rake relies on the popularity and activity of on-chain memes or gambling, serving as an intermediary tool that meets demand rather than being the demand itself, lacking true value capture. The recent behavior of pump.fun, which has involved selling off Solana tokens for cash (as of September 29, it has sold approximately $60 million worth of Solana tokens, accounting for about half of its total revenue), illustrates this point. In the absence of token issuance expectations and value capture, pump.fun not only benefits from the prosperity of $SOL but also exerts significant selling pressure on the market.
While pump.fun undoubtedly brings many positive effects to the entire Solana ecosystem — such as increased trading activity, attracting new users to the Solana ecosystem during the meme summer, and fostering stable demand and buying pressure for $SOL — it also faces challenges.
It takes from the community but sells back to the community, charging fees in $SOL and then dumping those sell orders onto the market. The closer the total sales approach the total revenue, the more neutral pump.fun’s impact on Solana’s price becomes, almost acting like a stabilizer, potentially even leading to negative premiums (only sell orders with no buy orders). During periods of growth, pump.fun has a significantly positive effect on the Solana ecosystem, potentially exhibiting geometric growth; however, when it matures into a platform phase, the relatively fixed selling pressure (which serves as fee income) minus the diminishing positive effects may result in more substantial selling pressure.
In summary, similar gambling platforms are likely to underperform compared to GameFi projects that genuinely capture value. Moreover, most VC investment returns come from rake distributions, and under the logic that equity exits are unrealistic and lack token issuance expectations, they can only wait for the next round of mergers or acquisitions to exit, making the exit process lengthy and challenging.
Conclusion: Casinos and Platforms May Lag Behind GameFi, Short-Term Projects Show Poor Retention, and We Maintain a Cautious Attitude Towards Past Defensive Investments
Whether it’s attracting existing users to new games or converting the user base into new Web3 users, the primary role and value direction of gaming platforms seem to have evolved into a channel for user acquisition. However, for projects that rely on such platforms to convert users through short-term initiatives, the long-term retention rates of users have yet to be proven by time and data. Gambling platforms, in the absence of token launching expectations and value capture, appear to underperform compared to GameFi projects that genuinely capture value and achieve product-market fit (PMF) during bull markets.
We remain cautious about defensive investments in the past market and are more eager to find products and high-quality games that have not yet formed a consensus and attract fewer investors at this stage. Such games, due to their quality, can transform future willing buyers into higher retention rates, increased in-game spending, and greater on-chain activity. Ultimately, this will translate into a higher value for the tokens.
We Still Maintain a Cautious Attitude Towards Recent Defensive Investment Trends in the GameFi… was originally published in IOSG Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.
