Why Immutable Can Win Web3
With an estimated 70% marketshare of new web3 games, the Immutable ecosystem looks set to remain one of the primary beneficiaries of this shift.
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. We preface this post with the disclosure that King River is an investor in Immutable and have insight into their web3 thesis. We also disclose that we have partnered with Polygon and Immutable to launch the Inevitable Games Fund which may invest in some of the projects or protocols named in this post. However, we have refrained from using proprietary information and instead have undertaken a review of their thesis using independent and public information only.
Executive Summary
In our first post on web3 games, we explained our rationale for why we believe a meaningful percentage of video game economic activity and value shifting to the blockchain is “inevitable”. Just as with any such disruption of a large industry, this shift will precipitate a new set of companies that will capture market share and value.
In this post we summarize King River Capital’s analysis for why we believe the Immutable ecosystem will be one of the primary beneficiaries of this shift. With the recent announcement of the Inevitable Game Fund, the launch of the Polygon/Immutable zkEVM onto mainnet in January of 2024, and the likely rapid release of major games on their combined platform in the wake of that go live date, we felt it was an appropriate time to share this thesis.
We’ll start with some context setting background on Immutable then cover why we believe Immutable is likely to be among the winners.
Background
From the company’s founding in 2018, Immutable has had a consistent vision for the future of blockchains and web3, as follows:
- Most if not all digital-native content (not just video game content) as well as real-world title to assets, will ultimately be expressed on the blockchain (e.g. as NFTs)
- That, in the lead up to tokenization of most if not all traditional financial and asset ownership instruments, gaming will be the beachhead asset class defining the standards, the infrastructure and the platform(s) upon which these assets will be registered and traded.
Underlying this vision were three key interim bets that Immutable made, again from the very beginning of the journey, as follows:
- That Ethereum would ultimately be the dominant settlement layer for the trillions of dollars in value that will be transacted across these asset classes; and
- That Ethereum, due to its inherent slowness and high cost, would need a scaling solution to enable that dominance to persist;
- That, not dissimilar to past technology introductions, blockchain scaling solutions will become commoditized. Therefore their focus should be to become the dominant platform sitting on top of that infrastructure. In other words, Immutable’s focus was to become the technology platform where market participants could build the best games and apps and where users could access the underlying benefits of blockchain technology for their particular needs.
The company was able to see this future years before other people and launched one of the first web3 games back in 2018, Gods Unchained, on the Ethereum blockchain. They immediately saw the incredible possibilities that smart contracts and a decentralized, censorship resistant and immutable ledger provided. But, having launched a game inside the “world computer” of a blockchain smart contract system, they became intimately and painfully aware of the mountain of problems that needed to be solved before the tokenization of game assets, let alone real world financial-assets, could become a reality. It was this combination of practical experience as one of the first ever web3 game developers (see Figure 1 from @tokenstheorum, below) that led to the founding of Immutable. Their deep understanding of the problem, and clear and consistent vision early on has helped the company cement itself as the market leader in web3 gaming.
In the years since Immutable was launched, these three shorter term bets have largely been proven correct: 1) Ethereum has maintained its dominant position with total value locked (TVL) on chain of $67B and 73% of total on chain TVL (excluding Bitcoin) and 2) many scaling solutions (including not just Immutable but also ones such as Polygon, Arbitrum, Optimism, Starkware, ZK Sync, Scroll etc.) have been built on Ethereum. 3) It is also becoming increasingly likely that Ethereum scaling solutions will become commoditized over time and thus Immutable have redoubled their focus on becoming the dominant gaming platform in terms of liquidity and user / developer experience, leaving the underlying scaling technology to others.
This has resulted in Immutable’s ecosystem token, $IMX, becoming the number one gaming-related token in the world (source: Coingecko.com Dec 13, 2023).
One of the primary impediments to the realization of Immutable’s vision to becoming the dominant Ethereum-based gaming platform in the initial innings of their business life was another Ethereum scaling solution called Polygon. There has been transient competition for game platform leadership from other chains (e.g. DapperLab’s Flow, Ronin’s Axie, both briefly; and Aptos, Avalanche, BNB and Solana, more persistently). However, data from companies like Delphi Digital and Game7 show that it was Polygon that consistently showed up as the main competitor for game companies pondering which blockchain platform to build on.
After competing for years, the two companies finally decided to combine forces, announcing a strategic partnership (“Partnership”) in March of 2023. Together, it is estimated that Immutable and Polygon now have ~70% market share of all games deployed (or deploying) in web3. This is an important figure to focus on because it highlights what is coming. What is published in research reports on web3 gaming is a snapshot in time looking backwards. The 70% market share of new and well-resourced games that Immutable claims tells us what is in the pipeline for games to be launched going forward.
The core rationale to partnering with Immutable from Polygon’s perspective is that they are at their core primarily a scaling solution and operator of core infrastructure (as opposed to Immutable which is an exclusively focused web3 gaming platform). Seeing Immutable pulling ahead as this single-minded gaming-only platform, Polygon took the strategic decision to join forces and allow each company to better focus on and dominate their own lanes and layers in the emerging web3 technology stack.
There is continuing pressure at the margin from other L1s and L2s but the Immutable Polygon partnership is proving to be a formidable combination. For example, Merit Circle, a large web3 gaming community with a $100m treasury recently announced “their migration from Avalanche to Immutable”, citing the Polygon/Immutable zkEVM scaling solution and ease of onboarding with Immutable Passport as the motivation for the move.
Why We Forecast Immutable Could Be Among the Platform Winners
Much of the work on web3 gaming to date has focused on a snapshot of the market today or looks at games on various platforms using absolute numbers. We are at such a nascent stage of development that this provides only a murky view into where the market is headed. We believe Immutable is the platform most likely to emerge as one of the primary winners in web3 gaming primarily for the following reasons (detailed below):
- Venture Dollars: Games developing on their platform have secured one of the largest shares of venture funding
- # of Games: They appear to be winning the largest share of high quality games who have announced which platform they will be on
- Warchest & Token Value: $IMX is ranked the number one game token and a top 30 token overall and these tokens provides an unrivaled multi-billion dollar funding pool for the Immutable ecosystem
- Complete Solution: We believe Immutable provides the most complete solution for games wanting to integrate web3 elements into their experiences and players wanting to access those benefits
- Team: They have the team and backers to succeed
- Other metrics: Early indicators, while incomplete and noisy, do suggest Immutable already has a lead
1. Venture Dollars Invested
Games developing on Immutable’s platform have secured one of the largest shares of venture funding among all other chains or ecosystems in web3. The latest data we have on VC funding by ecosystem is from Dec 1, 2022 (see chart from Delphi Digital, below, and note that funding dropped in the year through Dec 1, 2023 to $1.18B from $7.6B in 2022 so the distribution of funding across chains likely hasn’t changed dramatically.)
Using the 2022 data from Delphi Digital, Immutable has the second largest amount of total funding after Ethereum and the largest among the L2s or Eth side chains; also, given the partnership between Immutable and Polygon we surmise that some, if not all of their individual game projects will be hosted on their combined ZK EVM platform, in which case they are the clear number one winner of for total VC game funding. This is a good leading indicator of where the future well funded games will launch and therefore which chains will see future game economic activity.
2. Number of Games Announced
The number of games announced by chain tells you which platform game developers think will have the most other games, the most players and that provides the best services and infrastructure. However, many of the reports detailing these figures are misleading because most games have very little activity. For example, only an estimated 5% of blockchain games show an active daily player count above 100 users. So the key is to identify where the high quality potential game hits will be launching.
One way to look at this is to say that with 70% of the TVL on Ethereum, that the highest quality games will likely look to launch on the Ethereum chain–this being the ecosystem with the most users and the most money by a long shot. The caveat with that analysis is that it is too costly and slow for popular games to operate directly on the Ethereum blockchain and therefore the important figure isn’t Ethereum itself but rather who is launching on which layer 2 or Ethereum scaling layer. The following figure from Game7 shows the breakdown of game announcements (note this figure does not include 80+ games on Immutable that are still in stealth and therefore not included).
While less useful (given that 95% of games have fewer than 100 users per Delphi Digital), another way to assess which chain or ecosystem has the most games is to look at the absolute number of games developing on a particular chain, L1 or L2. Game7’s report shows Polygon as the number one chain by this count, with over 250 web3 games live today. The difficulty with using their data is that Polygon has partnered with Immutable so we believe it is likely that some, if not all, of those games launched prior to the combination of Polygon and Immutable’s game efforts will ultimately operate on the Immutable Polygon ZK EVM. Furthermore, there are over 10,000 game developer signups on the Immutable chain (per the chart from Immutable’s LinkedIn feed, below), and over 200 games in the “well-funded” category, which may imply higher quality gameplay. These figures, if added to the Game7 charts, would swamp every other chain — adding up to thousands of games to Immutable’s count.
The number of high quality games being built, current quantum of dollars backing games in the Immutable ecosystem and the game developer signup figures suggests that Immutable is well positioned to be among the leaders in web3 gaming.
3. Value of Token & Warchest
Immutable has >$230M on their balance sheet plus one of the largest token warchests in the industry (valued at $3B+ as of Dec 21, 2023). The tokens, per the whitepapers, are specifically earmarked to be spent attracting and retaining the best games and the most players.
They have launched and hold three of their own tokens ($IMX, $GOG, $GODS). The primary token ($IMX) supports a Fully Diluted Value (FDV) of ~$4.7B (as of Dec 21, 2023). $GODS (native token of Gods Unchained) and $GOG (native token of Guild of Guardians) supports a Fully Diluted Value (FDV) of ~$178 and $214M, respectively (as of Dec 21, 2023). These tokens support grants to help games fund their development, rewards players for actions that support the ecosystem, and, we conjecture, might fund other ecosystem services such as bug bounties, smart contract audits, gas/bridging/liquidity pool subsidies, or perhaps investments in regulatory submissions/thought leadership/lobbying.
Immutable and Polygon have also announced a $100M venture capital fund in partnership with King River Capital that will fund promising web3 games, game studios and game related infrastructure companies.
As figure 2 (in above section) shows, Immutable outranks all other game related tokens on a fully diluted market capitalization basis by a wide margin. In addition, the second and third ranked tokens, Internet Computer and The Sandbox, are not game / game platform tokens. One can assume token market capitalization is a key signal as to which platform investors believe will yield the highest value or be the leader in the long term.
4. Complete Solution
What does this “complete solution” for game developers and players look like? The Immutable group has designed its product suite exclusively with game developers and gamers in mind. And, having originally started as a game development business (with their Gods Unchained game), they have built a large suite of offerings specifically tailored to meet the needs of this community. In contrast, almost every other competitor also hosts DeFi apps, social apps and marketplaces and anything else they can think of.
Immutable, by focusing on the platform layer and allowing games to integrate web3, often with just a few lines of code, is effectively allowing games to replicate a seamless web2 user experience while delivering new features only possible using blockchain technology. More specifically, Immutable’s purpose-built platform for web3 games includes a suite of blockchain developer and user tools such as a proprietary wallet that works across their entire ecosystem (called Immutable Passport), simple fiat on/offramp technology (called Immutable Checkout), NFT minting and trading SDKs, an open orderbook that works across chains and games (including atomic settlement and the avoidance of problems such as front-running which are endemic to other non-platform solutions from competitors), bridging solutions, the scaling ZK infrastructure necessary to operate games on the blockchain (via partnerships with Starkware and Polygon), and Data API’s (tools to query onchain data from offchain apps). See the diagram below for an overview of their product suite.
As an example of the kind of value they have operating at the platform level versus a marketplace app which sits on top of a platform, Immutable are also able to enforce royalties at the protocol level, solving a problem that has bedeviled NFT marketplaces in recent years.
As part of providing a turnkey solution for their game developer partners, they operate an in-house game studio that seeds, advises and licenses game IP from third parties. They also have a consulting arm that advises game developers on how to build an in-game token economy and integrate NFTs and web3 elements into the game experience. And, as mentioned above, they have a multi-billion dollar grant making capability to help fund the best games.
Example 1: Passport
Let’s explore the wallet that Immutable offers to its partners and their users as an example of one of the components of their turnkey solution for players and game developers.
Setting up a crypto wallet today is an inscrutable experience for the typical user, with the average set up time for a self-custodied wallet taking over 30 minutes. In practice, this means that most users simply give up and simply don’t bother with the confusing morass of ‘crypto’. Anecdotal evidence from industry participants suggests a 95%+ drop out rate at the self-custody crypto wallet setup stage. With Immutable’s wallet, in contrast, anyone with a mobile phone or email address can set up a wallet. They can do so with any currency and start earning assets in games in less than 10 seconds, all without having to know what an NFT, seed phrase, crypto wallet or blockchain is. See the screenshots below that show a typical implementation of Immutable’s “Passport” in an upcoming game called Shardbound (the entire process of wallet creation clocks in at ❤ seconds from the first screen shot to the last; demo and walkthrough review link here).
The primary wallet competitor operates outside of the game vertical and needs to work across every dApp and EVM category compatible blockchain and is largely optimized for DeFi rather than games. As a result, users typically need to juggle multiple wallets and the struggle to transfer assets between them. With Passport, users have a unified Apple App Store experience that simply works.
Example 2: Orderbook
Let’s take their unified orderbook as another example of the many benefits accruing from being among the dominant web3 gaming platforms (should our prediction prove correct). With their orderbook Immutable offers players a far larger audience of potential buyers and sellers. Currently most NFT marketplaces are siloed — when you mint an NFT on OpenSea, only OpenSea users can see and trade your NFT; or if you create an NFT in The Sandbox (metaverse platform) on Polygon, only the few hundred people also on The Sandbox at any given time will see it or be able to purchase it. This fragmentation results in a substantial drop in the overall liquidity of NFTs as there could be countless people who are interested in the collection but would never hear about the item or be able to purchase it as they used a different marketplace/platform.
Another benefit of controlling the cross-marketplace order book is that you avoid the problem of front-running or price surprises. For example, a player might see a price of $2 for an NFT and click buy. Unfortunately, if the NFT is on a different chain or game there is the risk that the price of the NFT itself or estimated gas fee could dramatically change in the time it takes for the blockchains to execute the transaction. One egregious example of this was when buyers went to purchase Yuga Lab’s Bored Ape NFTs. One anonymous buyer of a $5,800 NFT paid ~$45,000 in transaction fees.
As the diagram above shows, Immutable’s open order book instantly allows Immutable NFTs to be available for trading across every game and exchange that is integrated with the Immutable ecosystem. It also means that Immutable can put a hold on the price changing or anyone else buying it in the moments between purchase and settlement.
Already more than half of all trades in Immutable’s orderbook are created on one marketplace and filled on another marketplace. This means that Immutable has been able to achieve double the amount of NFT sales than otherwise would have been realized if users were only allowed to buy and sell NFTs if they used the same platform. Given only 10 or so games were live at the time of this statistic, one can surmise that the number of cross marketplace / platform trades will scale as the number of games launched grows from 10+ new launches into the hundreds and thousands.
5. High Quality Team
Immutable employs a team of approximately 300 people around the world and has a highly experienced leadership team that has a deep experience across blockchain and web2 gaming. On the gaming leadership front, this includes Justin Hulog (Chief Studio Officer — ex Riot Games), Chris Clay (VP Gaming — ex Magic The Gathering), Aakash Mandhar (VP Studio Engineering — ex EA Games) and Jennifer Poulson (VP Portfolio Games — ex Riot Games).
The board and investors include, in addition to our firm, King River Capital, prominent global technology and gaming investors such as BitKraft, Galaxy Digital, ParaFi, Prosus, Temasek and Tencent.
6. Other Metrics
We also attempt to track unique active wallets, number of transactions and the $ volume of NFT transactions across different chains. This data is very poorly and inconsistently reported so we tend to take today’s figures (reported by sources such as CryptoSlam and DappRadar which attempt to collect this information) with a grain of salt. For example, these data providers draw only from on-chain data whereas many (perhaps most) of Immutable’s users are behind various APIs that aren’t yet open to third party data providers. Having said that, and bearing in mind that there is a great deal of noise in the data from these providers, there is a signal of sorts in their data and so we do keep an eye on it. A cursory look at their data shows that in spite of the shortcomings and incomplete data, Immutable still ranks well across these metrics (see screenshot, below, from DappRadar for example).
Conclusion
In this post we explained our rationale for why we believe Immutable will likely emerge as one of the winners in web3 gaming. We began by looking at Immutable’s background and founding vision to help understand why they have taken such an early and commanding leadership position. We then examined six reasons for why Immutable is a frontrunner to continue this leadership streak in the long term. The key points are that Immutable is among the standout leaders of external venture dollars raised by games developing on their platform, number of games who have announced which platform they will be built on, and war chest of dollars to support their web3 game ecosystem. The quality of the suite of tools for games wanting to integrate web3 elements into their experiences as well as of Immutable’s team also stand out as reasons for their potential continued leadership.
We believe there will be other winners in the race to scale or compete with Ethereum. However, with an estimated 70% market share (and possibly a much larger percentage of the high quality games), gaming so far seems to be centralizing on Immutable which uses scaling solutions such as Starkware and Polygon to allow game developers to build their web3 elements ultimately on a fast and economical blockchain scaling solution while still inheriting the security and decentralization and censorship resistance of Ethereum as the ultimate settlement layer for their in game assets.
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.
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