Original Title: "Game Special Topic: Seeking the North Star of Web3 Games - Crossing the Vortex of Liquidity Exhaustion, Identifying Entrepreneurial Competition Patterns and Potential New Opportunities"

Original Source: Folius Ventures

Original Author: Aiko

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Report Summary

Against the backdrop of improving global gaming industry standards and overcapacity, Web3 has become one of the ways for game developers to recover costs due to its high profit margins throughout the entire lifecycle, attracting many Web2 teams. However, the current supply side of Web3 is overcapacity, and the demand side is lacking liquidity, and after two years of development, the drawbacks are gradually becoming apparent. Therefore, this research report outlines the competitive landscape of the Web3 gaming industry and existing viable entrepreneurial opportunities.

For teams still in the web3 product development stage, it is important to understand that as an industry with incomplete infrastructure but extremely high profit margins, teams must have versatile capabilities. However, there is a huge gap in understanding between most mid-level and top-level teams, and they need to quickly recognize this gap and accelerate their learning and iteration speed. At the same time, new business models continue to emerge, and teams can fully leverage web3 commercialization to innovate and seize market opportunities. They can also seize the opportunity brought by changes in the distribution pattern and capture traffic-type super apps and traffic entry points, or independently open up the market to become a super app.

In addition, for those who are still exploring and observing teams, they can first seize the parallel opportunity between Web2 and Web3 when the customer acquisition cost is high and the business model is bottlenecked on Web2, especially the large group of players driven by casual games and AI. Secondly, summarizing and digesting the experience of past successful/hot projects can also learn a lot of methodology and use ingenuity in operation. Thirdly, products that satisfy more user entertainment needs and have long-term business models can be developed on top of high-traffic entrances. Fourthly, based on the new form of assets, there is still an opportunity for asset gamification + commercial innovation. Then, for the whole-chain game, it is more recommended that the team do excellent open-source racecourses instead of repeating the wheel, perhaps there is a chance to start the next wave of heat. Finally, the future Crypto agent (crypto+AI) field is also likely to still be dominated by traffic, and the team should adhere to the path of traffic dominance. In the near future, the chain-based AI agent will definitely tend to cooperate with high-quality traffic entrances.

Corresponding to our first two research reports, this attempt summarizes the cyclical changes in the industry and provides some more universal, macro, and feasible suggestions for entrepreneurs at different stages. During the writing process, we deeply realized that the industry has entered a deep water area, the infrastructure progress is slow, and the market liquidity is scarce, making entrepreneurship difficult. However, we hope that developers can find some methods and inspiration to cope with the market winter in this article, and we sincerely salute the seekers who are constantly moving forward.

For many game developers who are restricted by license numbers and buying costs, Web3 is indeed a good choice.

Web3 provides commercial leverage throughout the entire lifecycle of gaming: NFT/FT/taxation. Compared to traditional development methods, web3 is indeed an effective way to increase game profitability and achieve globalization.

Supply side: However, against the backdrop of elevated industry standards in both the East and the West, web3, as the only outlet for excess productivity, has taken on a lot of surplus capacity. After two years of development, problems have gradually emerged.

Client: We have entered an era of liquidity scarcity, with limited inventory in the market and scarce attention that shifts rapidly. Therefore, at this stage, the team should focus on polishing the product and incentive model, striving to break through the circle and attract customers, in order to catch the fast train of abundant liquidity.

What is the current competitive landscape for web3 gaming startups?

From the perspectives of industry profitability, team cognition, business model, and market analysis.

1. As an industry with high profit margins but incomplete infrastructure, the Web3 industry allows versatile teams to reap the greatest benefits, while teams without versatile capabilities will face even greater challenges and higher error rates.

2. There is a huge gap between the waist and head manufacturers, and most manufacturers may not even reach the threshold of curling. It requires the team to have strong evolutionary ability and iteration speed.

3. Innovative business models emerge constantly. In an era of liquidity drought, there is a greater demand for novelty and change. Web3 business models are evolving with market trends and new asset forms, and teams need to innovate with a full understanding of the market and economic models.

4. The drainage potential of L1/2 and platforms is gradually declining, and super ecosystems and traffic entrances that surpass single L1/2 are rising and expected to compete in the next cycle. Project parties need to quickly choose a good place to settle or actively open up new paths for user acquisition.

So, what are the directions worth exploring for web3 game teams during the liquidity drought cycle?

1. Seeking parallel opportunities between Web2 and Web3 games, catching up with new user consumption habits and AI experiences when Web2's customer acquisition costs are high and commercialization reaches a bottleneck.

Phenomenon 1: The customer acquisition cost of web2 has increased again when facing the same user group.

Web2 global market. The growth of the gaming industry in the past 23 years has largely benefited from casual games such as match-three, simulation, and casino games. However, the cost of user acquisition in these areas is high, and after the success of "The Great Journey," the cost of acquiring users for traditional H5 games has tripled. Web3 faces the same user habits but with cheaper customer acquisition costs and higher profit margins. Recommendation: Teams that develop casual games can focus on retention rates instead of platform-based strategies. They can take advantage of the large traffic and quick attention shifts of casual games, continuously release products, and use mutual advertising and tokens to import traffic and liquidity into new games through self-built dex swaps and other methods.

Phenomenon 2: Gacha business model has reached a bottleneck and has no room for innovation.

Gocha's business model was introduced from Japan to China ten years ago. However, in recent months, especially after the domestic version was released, it was found that the purchasing power of players has weakened and the overall scale of user payment has declined. On the other hand, games such as "Nishuihan" have achieved success by adopting light payment and high DAU. Recommendation: Web3 has more commercialization opportunities and is suitable for commercial innovation. We suggest reading our previous two research reports to maximize the profit space of NFT+token+taxation.

Phenomenon Three: Simplified experience, high frequency stimulation.

Find a game that can quickly get people addicted and turn it into a mobile game. From "Vampire Survivors" to "Bulletproof Special Forces", from a gameplay prototype of "Crazy Knights", several games that rank in the top ten on WeChat mini-programs have been born. It can be seen that from the realistic art production pipeline of AAA to the 2D industrial capacity battle of three rendering and two dimensions, but when users become aesthetically tired, they increasingly choose to kill fragmented time in high-frequency stimulating small games. Recommendation: Based on the gameplay prototype, simplify and design more in line with the ability stack of the web3 team. Secondly, the closer it is to the original stimulus of opening a box, the more similar it is to the economic incentive pleasure of web3 itself. Therefore, it can be inferred that more reference templates can be used, and the user profile is more coincident. The web3 team can also consider adding a hang-up experience when making games, so that the game itself has the effect of "electronic plate string", rather than 24-hour unrestricted gold farming. Therefore, the design of the "energy value system" mentioned earlier is also very important.

Phenomenon 4: Developing in parallel with the AI and gaming industries.

There are indeed parallel opportunities in the gaming industry led by AI, but it is recommended not to increase entities without necessity. For teams that have come to web3 due to the collapse of the middle road or fierce traditional competition, they should reconsider this industry's transformative opportunity, especially in the context of facing censorship systems domestically and being unable to use foreign large models. It is best to use AI to create novel experiences and next-generation products while directly using web3 to achieve global distribution and higher leverage commercialization. Recommendation: Design from the economic/diplomatic/agency level. For example, the agent based on SLG games mentioned in my article. This also means more AI for transactions and profit margins.

2. Seize the window of opportunity to digest the proven routines of Web3 in the early and middle stages of operation.

前期： (no translation needed)

- Finding the right data pool: (Refer to Friend.tech) When X (formerly Twitter) incentivized creators and sparked social media effects, they accessed this open (API interface or data crawlable) data source and quickly completed the financialization (Share) of KOL. Perhaps entrepreneurs in this direction can also explore other eligible data pools. After all, the core of their business model is to package important off-chain Pow and traffic onto the chain, and the purpose of putting it on the chain is to rent valuable data, information, and people.

- Batch invitation system: (reference STEPN, Friend.tech) Slowly release people in batches using an invitation mechanism, while completing product testing at each stage. Let the entry fomo social fission serve as a prelude to economic incentives, and slowing down the speed of user entry in the early stage actually extends the overall operation life of the project.

- NFT Trading Experience: (Reference Memeland, Matr1x) Given that the NFT market has left enough cases and gameplay, this game operates in an NFT-driven manner with many playbooks to refer to, and even has a more complete industry chain (with NFT traders, whitelist intermediaries, and KOLs) as the core. (1) Early Twitter and alpha community marketing, pua users liver to create a deep community; (2) The small liquidity of the market can create a wealth effect by controlling the market and pulling up prices; (3) The expectation of several NFT series can continuously help improve prices; (4) Both issuance and speculation can help the team make money without spending a penny; (5) Finally, it relies on product + FT Airdrop + cash flow.

- Buying traffic/Regional arbitrage: (Reference to Axie, Hooked) Conduct UA testing on multiple channels to capture low-cost regions with high conversion rates and bring users on-chain for arbitrage. At the same time, establish local promotion and distribution systems (guilds) and add token incentives, which have a more significant wealth effect compared to the local per capita income level, bringing opportunities for spreading and breaking through the circle.

Mid-term:

- Scroll Logic: (Refer to STEPN) Many people are talking to web2 vendors about "web3 issuance" of IP, but what many traditional vendors fail to realize is that not only can web3 be seen as a global issuance method, but you can even reissue on every chain. Given the significant differences in liquidity/user profiles/traffic support on each chain (especially in the era of large TVL), cross-chain issuance of new assets is like building a new mine for users, who will constantly enter new chains to earn early entry rewards. Or similar to the "scroll server" in traditional games, starting from a new starting line to practice new accounts, verify their assumptions about strategies, and receive positive feedback.

- Casualization/Fragmentation Operation: (Reference BAYC) For mature IPs, games can be seen as a tool to enhance community cohesion and attention, therefore the key is high frequency and asset fomo, there is no need to go for AAA and lengthy games.

3. Relying on high traffic entry points, create products that meet the entertainment needs of more users and have a sustainable business model. In other words, spread the existing entertainment needs and web2 business models through new traffic channels and incorporate them into the web3 incentive layer.

Telegram bot：

After Unibot quickly became popular, many entrepreneurs entered the TG bot race to create copycat versions. However, currently, only trading robots and GPT-type robots have made minor adjustments in terms of strategy/performance. Although trading bots have risen rapidly by meeting the trading needs of crypto users, their business model is single, and the ceiling for UI/UX and trading strategy optimization is low. In addition, the user base has not yet exceeded 10,000, making it difficult to break through and acquire customers. Therefore, new TG bot entrepreneurs need to open up their thinking and try to create products that are more in line with the habits of the general consumer, and establish a long-term and stable business model. One low-cost trial-and-error method is to directly use the already successful business model of web2 (gambling) and spread it through new traffic channels (Telegram) while adding a web3 incentive layer (token+NFT), as demonstrated by Rollbit. In addition, the following ideas are for reference only:

Example:

Game category: To see the gaming performance that tg bot can provide and the education it can offer to users, we can follow the development process of WeChat mini-programs. It is recommended to conduct more advertising tests and find the user profile by combining the main user distribution areas (India, Russia, Middle East, etc.) and game preferences. It is speculated that tg users can accept elemental games, and breaking through and growth require social and fission games, while crypto users can better accept the development + pvp gameplay of card games. [Simple elemental category] - Connect, Tetris. [Social gathering category] - You draw, I guess, Who is the undercover. [Comparison and fission category] - Jump, Sheep. [Placement card category] - Currently ranked high in WeChat mini-programs, such as Seeking the Great Dao, King of Salted Fish, etc.

Lottery type: Given the increasing number of valuable assets, there are not only consensual blue-chip NFT assets (BAYC/punk), but also IP joint assets and real-world collateral on the chain (such as Pokemon cards on the chain). Combined with a variety of lottery gameplay and dividend incentive mechanisms, there are many ways to play. [One-yuan snatch] - Everyone has the opportunity to participate in the NFT blind box draw for valuable items with only 1 yuan. [Game blind box] - Similar to participating in a tree planting game to get a fruit blind box, participating in an NFT game can get an NFT blind box lottery. [Bargain group buying] - Group buying fragmented blue-chip NFTs or directly making a TG launchpad bot, you can get or participate in the lottery at a low price through forwarding and group buying, bringing the whitelist brushing system from Discord.

Private domain: Both of the first two involve the spread and fission of tg groups, and tg is still in the early stage of content ecology. Therefore, before the content matrix is built, private domain can be combined with DAO+creator ecology to build and commercialize. [Release link]-Commission can be collected whether the link is posted in a group chat or in a channel. The conversion rate can be traced through steps such as browsing, clicking, downloading, and forwarding. When rebates are given to users in the community, the rewards will be directly deposited into their wallets. [Creator community]-Establish a voting bot in the creator's community, and the competition will be publicly displayed. Those who rank higher can receive token rewards.

4. Gamification and commercial innovation targeting assets still have opportunities: Treasure Trove

Background 1: The overall liquidity of the NFT market is exhausted, and the NFT market needs new narratives and trading hotspots.

Background 2: In the application layer, the complexity of NFT-driven game assets has already increased. There are multiple types and large quantities of assets under the same IP, and they are interrelated, with the ultimate value reflected in the product and tokens. However, players still need to conduct off-chain transactions in the community or manually collect NFTs that meet the requirements one by one, and the trading methods are very primitive.

Background 3: At the protocol level, with the emergence of ERC-6551 and ERC-4337, although the underlying technical issues of account abstraction wallets have not been resolved (such as the instability of supporting wallet generation and private key generation), with the improvement of infrastructure, the granularity of accounts and assets in the future will be significantly different from now. Just as ERC-721 and ERC-20 have completely different interaction forms/financial attribute logic, the future form of new assets will be: multi-subject + multi-granularity nested, more difficult to unify pricing, therefore, based on the financial interaction form and scenarios of future assets will become more interesting.

5. On-chain Gaming: Building an excellent open-source racecourse, rather than reinventing the wheel, finding innovative mechanisms with sufficient wealth effects and productizing and gamifying them, ultimately breaking through the circle and obtaining external liquidity.

Background 1: The full-chain narrative inherits liquidity from NFT and GameFi. Loot is closely related to NFTs such as BAYC and Punk, and its market price reached its highest point when the Dark Forest community, the pioneer of full-chain games, had the most participants. Full-chain gaming games (such as Wolf Game, Sunflower, etc.) also appeared after Axie and GameFi summer, but their FDVs are all below $5M, which is only 0.4% of Axie and 0.5% of STEPN. It can be seen that the possibility of social gaming full-chain games rising rapidly is small when the liquidity of both NFT and GameFi is exhausted, and even if they do explode, it is difficult to break through the circle and attract customers.

Background 2: In order to prevent the ultimate competition of primitive and rough pos/pow in the entire chain game and optimize UI/UX, the team needs to delve into technical issues and gradually develop the trend of technology-driven self-built Appchain/L2 in the entire chain game. The game and test network environment are closed, and there are only dozens of test users, which is easy to duplicate and lacks universality. Currently, there is no open source sign, and the road to non-permission and interoperability is long and arduous.

By analyzing three cases of innovation in the past full-chain games, the following commonalities can be summarized: 1) The innovation of full-chain games may not appear in the main tasks, but in the side tasks. If valuable side tasks can be identified and productized during this process, it may be possible to create universal infrastructure. If the product can be financialized and gamified on top of it, it can greatly reduce user thresholds and have the effect of breaking the circle and driving new liquidity. 2) Games with simple and FOMO asset gameplay that have wealth effects are more likely to drive innovation and break the circle: For example, the dividend mechanism in Fomo3D and the asset appreciation mechanism caused by breeding and deflation in CryptoKitty are what make them excellent racecourses.

6. The AI agent era is still dominated by traffic. The combination of traffic dominance and crypto agents makes it easier to achieve volume and find good commercialization paths, while backend AI can continue to optimize and modularize and seek cooperation with high-quality traffic entrances.

Disclaimer

The information contained in this presentation has been prepared by Folius Ventures LLC ("Folius") and is believed by Folius Ventures to be reliable and obtained from sources believed to be reliable. Folius Ventures makes no representation as to the accuracy or completeness of such information. The opinions, estimates, and forecasts contained in this presentation constitute Folius Ventures' current judgment and are subject to change without notice. Any forecasts, projections, and estimates contained in this presentation are inherently speculative and based on certain assumptions. In addition, the matters described are subject to known (and unknown) risks, uncertainties, and other unpredictable factors, many of which are beyond the control of Folius Ventures. No representation or warranty is made as to the accuracy of such forward-looking statements. It can be expected that some or all of such forward-looking assumptions will not materialize or will differ significantly from actual results. Accordingly, any forecasts are estimates only and actual results may differ materially and may be significantly different from the forecasts or estimates shown. Any investment strategy, including the strategy described in this document, involves a high degree of risk. There is a possibility of loss and all investments involve risk, including the loss of principal. This presentation is not an offer to sell any investment fund securities or a solicitation of any offer to buy such securities, nor is it a recommendation to buy or sell any digital assets or securities. This presentation does not consider or provide any tax, legal, or investment advice or opinion regarding the specific investment objectives or financial situation of any person. If any matter described herein or any opinion, project, forecast, or estimate described herein changes or subsequently becomes inaccurate, Folius Ventures has no obligation to update, modify, or revise this presentation or otherwise notify its readers. The graphics, charts, and other visual aids are for reference only. These charts, graphs, or visual aids should not be used to make investment decisions. No representation is made that these will assist any person in making investment decisions, nor can charts, graphs, or other visual aids capture all factors and variables necessary to make such decisions. The description of Folius Ventures' approach and its strategies and investment objectives features herein is based on current expectations and should not be viewed as definitive or a guarantee that the methods, strategies, and investment portfolios will actually have these features. These descriptions are based on available information as of the date of this presentation and the descriptions may change over time. Past performance of these strategies is not necessarily indicative of future results.

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