Web3 Games Are “Inevitable”

King River Capital will be investing the new fund into the most exciting games, game studios, and game infrastructure companies in the world.

Please refer to the disclaimers at the end of this report. It is important that you read our disclaimers, and understand the nature of investments in digital assets. King River or affiliates may have position(s) in the crypto currency assets described below. All dollar figures USD

King River Capital is announcing the launch of a new fund, the Inevitable Games Fund (IGF), in partnership with Immutable and Polygon. We will be deploying $100M into the most exciting games, game studios, and game infrastructure companies in the world. Underlying this partnership is the conviction that the transformation of the game industry by blockchain and crypto-related technologies is inevitable and that Polygon and Immutable are at the center of this transformation.

King River Capital, Immutable launch $100m web3 games fund

Each crypto bull run has had some catalyst or investment framework that acts as an underlying driver. For example the 2017/18 run was undergirded by the unprecedented access that retail and institutional investors gained via tokens to startups hoping to realize the dream of a decentralized and secure global financial system. These investors effectively accessed direct listings of mostly early venture stage projects through the ICO boom of that era, with projects launching such as Binance’s $BNB token (now valued at ~$38B) and Cardano’s $ADA token (~$27B today), for example, still ranking in the top 10 tokens by market cap.

The next market cycle, in 2020–2022, was initially sparked by DeFi and then extended by the L1 rotation thesis before it finished with a speculative NFT craze. Startups that emerged as winners from that bull run include L1s or Ethereum scaling solutions such as Solana ($40B) and Polygon ($8.9B) and DeFi solutions such as Synthetix ($1.5B) and Chainlink ($15B); these protocols continue on as top 20 tokens as of the date of this writing. By the time NFTs arrived on the scene the speculative mania was running hot and this obscured the fact that NFTs, at least from the perspective of the migration of value from legacy video game platforms, could potentially represent the underlying catalyst for the next wave of value creation and exceptional investment returns.

King River Capital believes that this next bull run could be fueled by the rapid emergence of games integrating web3 elements. And while there are many leaders emerging already and there will certainly be more than one winner, we believe companies like Immutable and Polygon, who we are partnering with to build the Inevitable fund, will be among the leaders of this revolution. Thanks to technologies such as zkEVMs and non-custodial crypto wallets that they are bringing to market, as well as unique blockchain and crypto related game play enhancements, we believe this cycle will be much more sustainable. Unlike past booms in crypto, this wave could be underpinned by millions (and potentially hundreds of millions) of people playing highly entertaining games and transacting billions of dollars each year across web3 infrastructure.

By way of comparison for how significant this could be, a single web3 game hit could quadruple the total number of active users in all of crypto: Peak daily players on Fortnite over the last 6 months has averaged 26M while, in comparison, the number of daily active users interacting with any blockchain across the entire web3 ecosystem is 6.2M.

In seeking to understand the size of this shift and the potential for it happening, in this post we consider three key questions:

1. How big is the global gaming market today?
2. Why might the existing gaming market migrate to web3?
3. In what timeframe might this migration happen?

In part 2 of our post on our Inevitable Games Fund thesis, we will explore who we think could win the battle to dominate this shift.

Why Immutable Can Win Web3

Gaming Is One of the Largest Markets

Saying that a material portion of the game industry revenue will migrate to web3 is a very big deal simply because of the sheer size of the video game market. In fact, the gaming industry is worth more than the revenue from the global music, movie and on-demand TV markets combined, and has likely surpassed Linear (i.e. non-streamed) TV, with spending estimated to have exceeded ~$200bn in 2023.

Figure 1: Market size comparison of different media categories. Gaming is on track to be the largest.

To take a specific example, the biggest film revenue earner of all time was the movie Avengers: End Game, capping out at nearly $2.8B in revenue. In contrast, the biggest mobile game blockbuster of all time was Honor of Kings, which had generated $10B+ in revenue as of 2021 and over 150M copies sold.

However, in spite of all the money being spent on and in games, players do not own the assets they purchase in games today. Game companies can take them away, prevent them from being traded or gifted, deflate their value by creating similar items ad infinitum, and can even have take rates up to 100%, preventing users from benefiting from any economic upside. For example, Roblox in-game currency ($Robux) are bought for dollars at an exchange rate of US$0.08 per $Robux but can only be sold back into dollars for US$0.0035 each. This forces players either to make a massive loss if they want to cash out valuable in-game items using Roblox or they can transact on third-party sites associated with scams and fraud, meanwhile paying yet another usurious fee.

While there has been initial pushback from gamers regarding NFTs (e.g. Discord paused cryptocurrency and NFT plans following a backlash), the gaming industry received the same initial reaction when games moved from consoles toward PC and then free-to-play mobile game models. There is strong early empirical evidence that users have a strong preference to truly own their digital assets. Players’ engagement with the game is enhanced by being able to integrate these assets into game play (such as by breeding them, forging them or spending them on lootboxes etc.) and being able to trade them freely, in and out of the game where they originated. The most popular blockchain game to date, Axie Infinity, had fewer than 2 million players at its peak (versus 100M or more for a hit web2 game), but it nevertheless generated over $4B in cumulative revenue.

The only real-world application in crypto thus far to achieve true scale is payments (for example, see King River portfolio company and tech unicorn Paystand, which has automated >$6B in B2B payments over commercial blockchain rails for 600k payers across the Americas). According to Delphi Digital, there are hundreds of blockchain games launching and in development and this is expected to continue to grow given that venture dollars are backing the thesis that gaming is next at scale, with over $15B invested in web3 gaming so far.

The challenge with games is the long time scale required to build a world class product — on the order of 2–4 years for an indie game and potentially 5+ years for a AAA game. We’re at about the two year mark since material funding began for web3 gaming and hence, starting in 2024, we should begin to see the enormous investments in this space begin to be realized and the next blockbuster web3-enabled gaming titles likely to emerge in 2024. For an example of a web3 enabled game that is coming out soon, here is a link to Metalcore that has partnered with Immutable to integrate web3 features. Players are able to buy and trade in-game characters, vehicles and other game items.

The large size of the gaming market therefore can be taken as a given. What, then, must we believe in order for 10s of billions of dollars of transaction volumes to shift to web3? In summary, we are making the following two assumptions: 1) integrating web3 elements into core game loops and the player experience generally has sufficient attraction that a meaningful percent of gaming spend will shift to transacting over blockchain rails; 2) this shift will occur in a reasonable timeframe. These are both explored in more detail in the following sections.

Core Reasons web2 Gaming Spend Will Migrate To web3

Many market observers correctly note that there has only been one proof point of a $1B+ web3 game (and no examples yet of a world class / fun high grossing web3 game) that we can look to to support the thesis of mass adoption of web3 games. Until those games appear (and we think 2024 will be the year we finally see several breakout hits in this regard), we must base our thesis on a set of assumptions, each of which is considered briefly below.

In the same way that free to play mobile games (like Candy Crush and Clash of Clans) unlocked larger markets by engaging existing and new players through the unique experiences of an emerging technology modality (the smartphone), the thesis here is that blockchain features similarly offer a superior player experience and will attract large numbers of existing and new players. We consider the key elements of the improved player experience to be: unlocking true ownership, enabling interoperability, enhancing gameplay and shifting value accrual away from game owners to players. We expand on each of these points as follows, using King River portfolio company Immutable as the case study:

• Ownership: blockchain platforms allow games to give their players true ownership of their assets (with an immutable record that is visible to all). It also allows players to trade their items quickly and safely. In web2 games, users often rely on black markets which are rampant with scams and risk that the account gets banned or compromised. In contrast, the process of transferring, say, a Gods Unchained card is simple and transparent. Another example of where this is helpful is when a player decides they no longer wish to play a game. They can easily gift assets to friends and family, sell these for some financial value or bring those assets to a new game for a fresh experience (see below for interoperability)
• Interoperability: Interoperability relates to the ability to move unique, privately owned game-related assets between different games and contexts (e.g. socials, DeFi etc.). Immutable has designed its games such that interoperable assets make sense from both a gameplay perspective (e.g. woven into intricate storyline or shared lore) and have utility (e.g. unlocks new abilities or characters or maps). For example, the mythical worlds of two of Immutable’s games, Guild of Guardians and Gods Unchained (GU) have been intertwined and cards collected from Gods Unchained can be ported over to the Guild of Guardians game. This delights players as they can benefit from the hours of Gods Unchained gameplay and experience levels and emotional connection they have to those characters from GU in the new game. Immutable will also be looking to integrate some NFTs with other games including Illuvium, Metalcore and Shardbound. Currently, there are no examples of web2 games that have successfully created truly interoperable games. This is due to technical limitations not achievable without blockchains, including a lack of: central account to hold assets, decentralized bridges between games, and smart contracts that permissionlessly and automatically determine how items interact in different contexts. The only way to do this pre-blockchain was through complex joint venture legal agreements followed by prolonged technical integrations with ongoing maintenance requirements. Moreover, web2 games are not incentivised to create interoperable assets given the existence of walled gardens and the difficulty in determining value flows.
• Open order book: A related feature of interoperability is the concept of an open order book. This means that instead of simply being able to list your in game asset on that particular game or game platforms marketplace, or manually going to other marketplaces such as OpenSea on other chains, an open order book such as the one operated by Immutable means that you simply list it once for it to be included in every marketplace and game connected to the Immutable platform. Players have already seen the benefits of this, with the increase in the buyer universe leading to more liquidity and higher prices.
• Enhancing gameplay: While ownership and interoperability are important to players, blockchain features ultimately need to enhance the joy, entertainment and playability of the games. Interoperable NFTs could enable game developers to create a new class of in-game assets that are more interactive and dynamic than ever seen before in web2, opening new avenues for creativity and ways of playing games. Immutable will ensure that players are still able to enjoy their games without paying (or using fiat) and without interacting with tokens and NFTs, however the best gameplay (e.g. certain bosses, new dungeons and premium forging and upleveling opportunities) can be more quickly unlocked by the use of these sorts of assets. As an example a first person shooting game may look just like today’s version but will be enhanced with the ability for players to become say, arms dealers by buying the factories in the game that produce valuable resources such as ammunition or tanks in perpetuity that can be used by the creator or other players, or limited edition / elite characters or game assets (e.g. planes that can be used for certain exclusive maps only). This is in contrast to web2 games where items can often only be accessed via paid loot boxes or subscriptions — where the chances of getting a certain item is opaque and often provides once-off or very menial, temporary benefits. Therefore all users are able to access items necessary for completing the game without web3, however if they want the most efficient or fun or a distinctive experience, they can make use of web3 assets
• Value Accrual: Another reason is that we believe web3 games will disintermediate web2 platforms such as Roblox, Steam, and Epic Games Store is that they shift more value to the players. Traditional web2 gaming platforms typically charge 10–30%: Steam takes 20–30%, Roblox takes 30%, Apple takes 20–30%, Google takes 30%, Epic Game Store takes 12%. In contrast, web3 marketplaces typically charge 0–2.5%: Immutable takes 2%, Opensea takes 2.5%, Magic Eden takes 2% and Blur charges 0.5% (recommended but not enforced). Moreover, according to the 2023 a16z state of crypto report, web3 games generate 23x more on-chain transactions than DeFi. This generates gas and staking revenue for the chains on which the transactions are executed on e.g. Immutable ZK EVM.

2023 State of Crypto Report: Introducing the State of Crypto Index

The bet is that these benefits are sufficiently great that much of the current gameplay will shift to using blockchain features or rails.

Figure 2: Summary of web3 game enablement vs traditional games.

Mass Adoption Imminent

The last question we explore is how long might it take for blockbuster games to be developed and launched that will attract millions, or even hundreds of millions, of players. In short, we believe that mass adoption at a scale comparable to some of the best web2 hits (like Fortnite or Call of Duty) will occur within the next 1–3 years. Some hits may even be found in the coming crop of web3 games set to be launched in 2024.

The initial batch of web3 games haven’t on the whole resulted in a massive breakout hit on the scale of an Axie which has discouraged many market participants.

Game7 research shed some light on the low quality of the first batch of web3 games in their recent research report where they concluded that only 1% of games were at a AAA level and only 5% were at a AA level of quality.

Figure 3: Web3 games by production quality

We believe that the lack of mass market adoption of web3 games is due to the low quality of the games and the poor implementation of web3 features in the games released to date rather than any fundamental problem with web3 as a game platform. Potential reasons for the low quality of the initial releases might include:

• One could reason that the first batch of games to launch have been the ones with the least unique stories or “lore”, as this takes significant time and very specific talent to develop
• One might also conjecture that the initial batch of games focused on emulating the Axie Infinity-type “click to earn” type mechanics that worked spectacularly well (albeit briefly) in the peak of the mania but are not what AA and AAA game developers employ to launch true game ‘hits’
• The games brought to market most quickly are the ones with the fewest, most simple and least integrated web3 elements. For example some of the web3 games launched are basic web2 games with profile pic NFTs or a useless game-related token (i.e. with no actual in-game, value- or fun-enhancing utility)
• The ones that have come out so far were operating on thin budgets (VC and strategic investment in the space only increased dramatically in late 2021/2022 and these games are mostly still in development) and therefore created poor player experiences

As an early indicator of the power of the blockchain value differential vs. traditional games, currently, 30–40% of all transactions sent to dapp smart contracts come from games (see fig. 4). This is despite the fact that the current crop of web3 games lack the features being built into the well- funded and professionally developed ones, almost none of which have yet launched. It is therefore not surprising then that web3 gamers (800k all time unique active wallets according to dappradar) still represent only a small fraction of web2 gamers (3B players in 2022 according to Statista).

Figure 4: Month after month, Games already dominate the crypto ecosystem

The first games are emerging only in 2024 from a period of 3–4 years of development and a collective $19B of funding since 2021. Guild of Guardians ran a Family and Friends Demo in October 2023 with 555 players over one week. Early engagement was promising, with day 1 retention at 66% and Day 7 at 43% which exceeded industry benchmarks (Average Day 1 retention for gaming apps is 29%). Total playtime during the demo exceeded 1.1 days over the week period. Over 86% of players also expressed that they could see themselves playing Guild of Guardians at launch.

Figure 5: The first week’s data from the Guild of Guardians beta test

Conclusion

At the outset of this post, we asked three questions:

1. How big is the global gaming market today?
2. Why might the existing gaming market migrate to web3?
3. In what timeframe might this migration happen?

We concluded that by any measure the gaming market is enormous, by some estimates on the order of $600B+ by 2030. We went through our rationale for why game ecosystems will likely integrate web3 elements into their core game loops and player experiences. While there are strong economic incentives driving this shift, ultimately we concluded that it was enhanced gameplay, true ownership and new storylines that could attract potentially hundreds of millions of players over to web3 games. That said, most of them won’t even realize they are transacting on web3 rails or are using digital assets as the experience will be seamless. And finally we surmised that this shift is likely to accelerate in the coming one to two years as the many billions of dollars that have been invested into gaming over the last 2–3 years start to finally bear fruit.

In our next post we make the case for why Immutable is one of our favorite platforms to be among the major winners in the development of this new market space.

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Disclosures & Risk Considerations

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. We do not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of our organization or our other employees.

The information, valuation scenarios and price targets presented in this blog are not intended as financial advice or any call to action, a recommendation to buy or sell any digital asset, or as a projection of how assets will perform in the future. Actual future performance of assets is unknown, and may differ significantly from the hypothetical results depicted here. There may be risks or other factors not accounted for in the scenarios presented that may impede the performance of assets. These are solely the results of a simulation based on our research, and are for illustrative purposes only. Please conduct your own research and draw your own conclusions.

Past performance is not an indication, or guarantee, of future results. Hypothetical or model performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading, and accordingly, may have undercompensated or overcompensated for the impact, if any, of certain market factors such as market disruptions and lack of liquidity. In addition, hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading (for example, the ability to adhere to a particular trading program in spite of trading losses). Hypothetical or model performance is designed with benefit of hindsight. Index performance is not representative of fund performance. It is not possible to invest directly in an index.

Investments in digital assets and Web3 companies are highly speculative and involve a high degree of risk. These risks include, but are not limited to: the technology is new and many of its uses may be untested; intense competition; slow adoption rates and the potential for product obsolescence; volatility and limited liquidity, including but not limited to, inability to liquidate a position; loss or destruction of key(s) to access accounts or the blockchain; reliance on digital wallets; reliance on unregulated markets and exchanges; reliance on the internet; cybersecurity risks; and the lack of regulation and the potential for new laws and regulation that may be difficult to predict. Moreover, the extent to which Web3 companies or digital assets utilize blockchain technology may vary, and it is possible that even widespread adoption of blockchain technology may not result in a material increase in the value of such companies or digital assets.

Digital asset prices are highly volatile, and the value of digital assets, and Web3 companies, can rise or fall dramatically and quickly. If their value goes down, there’s no guarantee that it will rise again. As a result, there is a significant risk of loss of your entire principal investment.

Digital assets are not generally backed or supported by any government or central bank and are not covered by FDIC or SIPC insurance, or any other protection afforded by most central banks or governments. Accounts at digital asset custodians and exchanges are not protected by SPIC and are not FDIC insured. Furthermore, markets and exchanges for digital assets are not regulated with the same controls or customer protections available in traditional equity, option, futures, or foreign exchange investing.

Digital assets include, but are not limited to, cryptocurrencies, tokens, NFTs, assets stored or created using blockchain technology, and other Web3 products.

Web3 companies include but are not limited to, companies that involve the development, innovation, and/or utilization of blockchain, digital assets, or crypto technologies.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.