How to evaluate Web3 investment opportunities more effectively?

Original: https://galaxyrtk.substack.com/p/digital-co-ops?utm_source=twitter&utm_campaign=auto_share&s=35

I started investing in crypto games in 2018 because I believe that once opened, game economies and virtual worlds will never be closed again. With a combination of content, authoring tools, open markets, and technology, the "sovereign individual" hypothesis seems like an unstoppable reality. I'm definitely amazed at how fast this is all going: the industry is moving fast...but where?

There have been many times when my belief system has been challenged by liars, speculators and shoddy things. Lately, I've found myself questioning whether tokens can maintain any fundamental value without being properly considered illegal securities. Now, more than ever, it’s important to learn from your mistakes and acknowledge where it didn’t work, but not get so caught up in the noise and negativity that you forget why it was all fun in the first place.

The role of long-term, scaled web2 consumer platforms in driving web3 mass adoption has been underestimated. They are often ignored because crypto-natives tend to overestimate the value of decentralization itself. But, like privacy, I don't think decentralization should be considered a goal in itself. Instead, it should be seen as a "means" to real ends: self-expression, community formation, and economic opportunity. Experienced IP creators play a key role in guiding communities and IP that consumers care about. Those who dare to take the long view and trade value for value will do well as these economies have exponential potential compared to closed economies.

When evaluating web3 investment opportunities, there are a few practical questions to consider first:

1. Is it really worth adding web3 to the consumer franchise?
2. Will the next wave of adoption be initiated by incumbents or crypto-natives?
3. Are we two steps too early, one step too early, or one too late?
4. Is all this just another way for retail to be scammed?
5. Why does web3 feel so dehumanizing for something designed to enable and empower?

In thinking about these questions, here are some of the things I've learned over the past few months:

The biggest unlock of web3 is the creation of digital cooperatives that: (i) transparent governance structures, (ii) facilitate reward ecosystems for creators/developers, and (iii) embed efficient means of exchanging value through digital collectibles.

Transparent governance structure. Having a set of on-chain rules makes it difficult for developers to unilaterally change the rules of the system. Transparent governance plays an important role in immersing and facilitating open world events.

Creator/Developer reward ecosystem. Creation returns the fruits of growth to contributors. The role of the open world game developer will change from a closed-loop designer to a founding contributor to an open ecosystem.

Exchange value from digital collectibles. NFTs have the potential to create "identity-as-a-service" businesses around gaming environments and social structures.

There is a fine balance between creating a rewarding community and a "community" that exists only for rewards.

• warm cryptocurrency
• Thoughts on the community
• Social Token Stream of Consciousness
• Sustainable Economic Design

Token economics boils down to a simple principle: let more tokens flow into community coffers than flow out.

Staking and other supply-side contraction mechanisms (especially when inflationary) are less relevant than creating demand.

Utility Tokens (1 vs. 2 vs. N): Precise models are more important than (i) flexible design and (ii) tokens earned through participation.

Separating NFTs as the primary outlet for speculation from more "earned input" tokens is a smart way to create a sticky/retention peg while retaining the flexibility to design a sustainable economy. Asia will overtake the West in its willingness to experiment with web3 at the enterprise level.

A data science-driven approach (e.g. token release rate, UX tuning, etc.) will lead to useful learnings for web3 early adopters who are outsized relative to team size or international reach (e.g. Com2us).

Companies doing token pre-sales but just integrating tokens into their player experience (while keeping most of the economy in fiat microtransactions) are weak implementations of web3 and unlikely to succeed, especially if token offerings reach In the case of multi-billion cases, existing corporate IPs that "free ride" in the valuation range do not really integrate into the creator-centric content world.

Some teams (notably Chinese studios, such as the web3-focused Funplus spin-off that recently completed a massive token sale) have extensive experience building "simulated life games" (e.g. strategy games/SLGs) and are Has a history of monetizing social status to convert and retain paying users. These teams will likely create great blockchain games as the need for "identity-as-a-service" is the missing element in today's crypto games

South Korea is innovating fast in the web3 space, precisely because of the restrictions on fiat currency transactions for gambling and virtual goods, and the reputational threat of retail loss on Terra, Korean businesses need to be in fintech (super app for payments), Sustainable web3 implementations in entertainment (money-making K-pop mixes) and gaming (sustainable creator-driven ecosystems and mmos).

Purely cryptocurrency funding is unlikely to provide investors with a favorable risk/reward dynamic in the long run. We believe the opportunity lies in supporting experienced development teams with equity in building a sustainable economy (without token warrants for extra consideration).

In the pure game token space, there is a structural oversupply of venture capital, as evidenced by the large amount of money backing P2E game developers with no real content production experience.

Since projects typically reach billions in FDV on a pre-prod basis (e.g. pre-prod Illuvium's token FDV was valued 50% higher than the $7.5 Bethesda sold to Microsoft, as a case in point), crypto Investment decisions for currencies are driven more by FOMO and short-term trading decisions than fundamental drivers.

We have yet to see how unlocking token supply at scale will have a materially negative impact on spot token prices for many VC-backed projects. For many tokens, the speculative demand from the buy side will not be enough to absorb the large liquidity supply unlocked.

Teams that raise large token sales without equity can end up creating structural conflicts between shareholders and token holders as their economies include both fiat currency-based and cryptocurrency-based components. We believe that the best practice for companies conducting private sales is to sell equity through token warrants to align the interests of equity and token holders.

Compliance will be a key differentiator for token projects and drive more and more enterprise adoption of NFT-focused web3 implementations.

A significant portion of in-game web3 value capture will come from NFT transactions, with royalties and sales proceeds going to equity holders (rather than token holders).

Given securities law concerns about tokens and the structural inflexibility mandated by white papers, we are seeing the market increasingly favor equity/NFT-based models over token-based models.

As virtual currency issuers need to perform KYC/AML in token transfers, tokens will become less and less attractive to large-scale game developers. In the context of NFTs as digital collectibles rather than currencies, these concerns may be less relevant (though not beyond doubt).

We also believe that a model where tokens can only be earned, rather than purchased through large-scale private placements, will increasingly become the norm. Massive supply disruptions caused by volatile token sales inhibit the flexibility of designers to create a balanced economy.

Security tokens are going to be hot, this time centered around retail consumers. The ability to embed security-based cash flows into tokens for use cases like royalties + fan tokens, especially in the context of music, sports, movies, etc., will play a major role in mainstream adoption. Compliant issuers like Republic will be ready for this future.

Since retail has more utility in collecting these NFTs than pure financial value, it is more likely that security tokens will succeed in doing so with the right social context and trading game associated with retail ownership within the collection community.

The key is to balance the design of digital collectibles so that they don't focus "purely" on utility (underlying financial value), but rather utility + (collectible value forms part of a sufficiently large engagement-related premium so NFTs don't just "Meet the mark" in terms of utility value).

Performance marketing will be a pain point for web3, and guilds have the potential to address this.

Guilds will play an important role in guiding users to an appropriate web3 gaming experience and addressing several UX challenges related to crypto (e.g. regulation, fiat on-ramp).

"Single sign-on" will be an important concept in web3 for guilds that can combine on-chain analytics with off-chain player data (recorded through SDKs integrated by game developers). We see a lot of room for large publishers to create global "super guilds", just like Facebook has gathered a lot of consumer attention for mobile apps/games.

Reputation and “soul-bound tokens” (i.e., the commitments, credentials, and affiliations that make up the social relationships, ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, of, of the Web3 network have the potential to represent a 0-to-1 innovation in the crypto space that is crucial for individuals to effectively participate in the decentralized economy . important.

Despite significant investment in NFT infrastructure, we believe this market is largely oversaturated, and have questions about which new financial primitives beyond exchanges, lending, derivatives, and aggregators can represent the true value of digital ownership. Innovations—for example, unsecured loans based on reputation scores.

"Tribal ownership" will be key to making web3 art and digital collectibles accessible to a wider audience. What NFTs are missing today is cultural and historical context. Bringing traditional art collectors to web3 will lead to the next wave of mainstream adoption.

Access via hardware wallets and Metamask is impractical. A multi-sig DAO environment that invites "small groups" to curate is a solid introduction to the field.

As traditional art collectors and museums expand into the NFT field, we believe that digital art is the category with the most potential because of the huge market for collectors.

When we consume, we are looking for self-expression: something that represents our values and identity, whether it is fashion items, art or music. Historically, consumption has been one-way, a top-down approach from sellers to buyers. With the promise of digital scarcity through NFTs, consumption is now circular, dynamic and investable.

Art Blocks is an instructive example of a top-down curated digital collectibles sandbox. FXHash is equally interesting as a "community-curated" extension of this hypothesis.

An extension of this concept is "headless branding". Without a major UGC-driven brand, we think fashion brands that represent a fusion of physical/digital/social communities are a ripe breeding ground for experimentation.

“While brands have traditionally been planned and designed directly by businesses, the rise of online media has challenged the consistency of centrally managed brand identities. New blockchain-based decentralized organizations go one step further by giving users economic incentives to spread themselves brand story."

Guiding Principles

In order to put these ideas into practice to guide investment decisions, I found it necessary to distill my ideas into some guiding principles that distill my worldview.

• Trust binds the community.
• Money is bound to trust.
• Trustless communities cannot exist.
• Community currencies do.
• As long as it's not based on money.
• Rather be it.

→ Key Point: Tokens have the potential to accumulate substantial network value over time, but pre-sales and the pursuit of speculative profits work against this goal. Compared to a short-term model that relies too much on pre-sales and speculative enthusiasm, a model that can only earn and not buy tokens is more likely to accumulate organic "money", while crowding out the intrinsic motivation of forming a community.

• Production exceeds promise.
• Participate in possession.
• Abundance is better than scarcity.
• Inspire creativity/cooperation through play/grinding.
• Appears in Majestic Design.
• P+P=P^2 over PvP over PvE.

→ Main point: build the community first, no pre-sale. Emphasize earned engagement over hoarding and scarcity. Creation and conversion of paying users is more sustainable than the mechanical "play games and make money" grind. Flexibility in economic design is critical. Emphasis on the game economy, where social connections and user-generated content turn linear connections into exponential economies. PvP is more sustainable than PvE (due to continued player demand for skill-based games and status-driven SLG games), but not as much as the thriving UGC world.

• Virtual inputs (currency, resources) are more flexible than rigid.
• Virtual output (state commodity) is more rigid than flexible.

→ Key point: Separate the flexible tools that designers need for game balance (tokens, resources, virtual currencies) from those designed to accumulate ecosystem value (nft, financialized nft baskets). For the long-term development of the ecosystem, transaction fees should flow back to the community.

• Delayed cashing out of instant liquidity.
• Adjustments to principal sales withdrawals based on royalties.

→ Takeaway: Implement long-term value adjustment mechanisms such as stream-based royalties instead of milking primary sales. Earned value should be subject to delayed cashouts to avoid bleeding liquidity and selling pressure.

• Minimizing friction is better than maximizing dispersion.
• Flexibility is built on top of structural invariance.
• First party first, UGC second, third party third.
• Centralize content => democratize tinkering => 3rd party ecosystem.

→ Takeaway: In the early stages of a project, creating economic opportunity is more important than maximizing the cryptographic principles of decentralization. Ease of use and player adoption are critical, and we should trust IP creators to steer the content ecosystem and create vibrant opportunities for UGC. Over time, IP creators can aim to gradually decentralize the ecosystem they create, inviting creators and developers to expand knowledge of the IP world. Given the difficulty of creating compelling content, a system that is completely decentralized from the start is unlikely to thrive.