Galaxy Interactive Partners: Eight Thoughts on Web3

Original Title: "Digital Co-Ops"

Author: Richard Kim

Compiled by: Mr. Xizao, MarsBit Intern
I started investing in crypto games in 2018, and I believe that once opened, the game economy and virtual worlds will never close again. Under the combined influence of content, creation tools, open markets, and technology, the "sovereign individual" hypothesis seems to have become an unstoppable reality. I am indeed surprised by the speed of all this development: the industry is evolving rapidly… but where is it headed?

Due to factors such as scammers, speculators, and low industry standards, I have questioned my beliefs. Recently, I have been questioning whether tokens can maintain fundamental value rather than being treated as illegal securities. Now, it is most important to acknowledge failures, learn from mistakes, but not to be overwhelmed by noise and negativity to the point of forgetting how fun all of this is.

The role of long-term, scalable Web2 consumer platforms in driving the adoption of Web3 has been underestimated. They are often overlooked because crypto natives tend to overestimate decentralization, viewing it as the "end goal." However, like privacy, I don't think decentralization should be seen as a target; rather, it should be viewed as a "means" to achieve a true purpose: self-expression, community formation, and financial opportunities. Experienced intellectual property (IP) creators can play a significant role in fostering communities and IP development that consumers care about. Those who dare to take a long-term perspective and pay to gain value will thrive, as their economic structures have exponential potential compared to their closed counterparts.

When evaluating investment opportunities in Web3, several urgent practical questions arise:

1. Is it really worth integrating Web3 into consumer relationships?

2. Will the next wave of Web3 adoption be initiated by current crypto enthusiasts or native believers?

3. Are we two steps ahead, one step ahead, or one step behind in this movement?

4. Is all of this just another way to destroy retail?

5. Web3 aims to enable and enhance capabilities; why does it feel so inhumane?

Over the past few months, I have drawn some insights while contemplating these questions:

1. The Opening of Web3 is Creating Digital Cooperatives:

1) Transparent governance structures; 2) Ecosystems that reward creators/developers; 3) Effective means embedded to exchange value through digital collectibles.

1) Transparent governance structures. Establish a set of on-chain rules that prevent developers from unilaterally changing the system's rules. Transparency in governance plays a crucial role in fostering participation and facilitating open-world activities.

2) Ecosystems that reward creators/developers. Create the potential for contributors to reap the fruits of growth. The role of open-world game developers will shift from closed-loop designers to founding contributors of open ecosystems.

3) Exchanging value through digital collectibles. NFTs have the potential to create "status-as-a-service" businesses for game environments and social structures.

2. There is a Good Balance Between Creating a Rewarding Community and a "Community" That Exists Only for Rewards.

1) Warm cryptocurrencies

2) Community thinking

3) The stream of consciousness of social tokens

3. Sustainable Economic Design.

1) Token economics can be summarized by a simple principle: more tokens flow into the community treasury than flow out.

2) Mechanisms that limit staking and other supply-side factors (especially in inflationary scenarios) are less important than generating demand.

3) Functional tokens (1 vs. 2 vs. N): The exact model is less important than these two points: first, flexible design; second, tokens earned through participation rather than purchase.

4) A good way to create participation/retention hooks is to separate NFTs as the primary channel for speculation from "earned input" tokens, which also maintains flexibility and designs a sustainable economic model.

4. On the corporate level, Asia is more willing to experiment with Web3 than the West.

1) For early Web3 adopters who are leading in team size or international influence (like Com2us), a data-driven approach can yield useful learning outcomes (such as token issuance, user experience adjustments, etc.).

2) Companies conducting token presales are merely integrating tokens with player experiences (while retaining most of the economy in fiat microtransactions); although this is a preliminary attempt at Web3, they are unlikely to succeed, especially those tokens valued at billions that "freely" use existing IP without truly establishing a creator-centric content world.

3) Some teams have rich experience in building "simulation life games" (such as strategy games or simulation games), especially studios in China, like QooApp, which focuses on Web3 games and recently completed a massive token sale. Similar games have successfully converted and retained payers by measuring their social status in monetary terms. These teams have the potential to build great blockchain games, as the demand for "identity-as-a-service" is precisely what is lacking in today's crypto games.

4) Due to restrictions on fiat transactions for gambling and virtual goods, South Korea is innovating rapidly in Web3. Additionally, due to the reputational damage caused by Terra, Korean companies need to implement sustainable Web3 reforms in financial technology (super apps for payments), entertainment (earning while enjoying), and gaming (sustainable creator-driven ecosystems and massive multiplayer online games (MMOs)).

5. In the long run, single-function cryptocurrency financing is unlikely to have a favorable risk/reward ratio. We believe the opportunity lies in supporting experienced development teams to build sustainable economic models (without needing to consider token equity warrants).

1) In single-function tokens, we can clearly see a structural oversupply of venture capital, with a large amount of capital directed towards developers without P2E game production experience.

a. Many projects reach billions in FDV before product launch, for example, Bethesda sold to Microsoft for $7.5 billion, while Illuvium's FDV valuation before product launch was 50% higher than $7.5 billion. Cryptocurrency investment decisions are more influenced by FOMO and short-term trading than by fundamental factors (e.g., does a 12-24 month lockup justify a 60% discount? Or is this token really worth $4 billion out of $10 billion in spot?).

2) In many venture capital projects, we have not yet seen large-scale token unlocks, which will inevitably have a substantial negative impact on token spot prices. For many tokens, buyer demand is insufficient to absorb the large liquidity released by unlocks.

3) As long as a project's economic system includes both fiat-based and crypto-based components, teams that raise a large number of tokens without equity will ultimately create structural conflicts between equity holders and token holders. We believe the best practice for companies conducting private sales is to sell equity through token equity warrants to align the interests of equity and token holders.

6. Regulatory compliance will become a major differentiator for token projects and drive more companies to shift towards NFT-focused Web3 attempts.

1) NFT trading will become an important area for capturing Web3 value, with its usage fees and sales proceeds flowing to equity holders (rather than token holders).

2) Given the attention of securities laws on tokens and the structural inflexibility brought by white papers, we see the market increasingly leaning towards equity/NFT-based models rather than token-based models.

a. As issuers of virtual currencies need to conduct KYC/AML verification for token transfers, the appeal of tokens to scalable game developers will diminish. In the context of NFTs as digital collectibles rather than currency, these concerns seem less significant (though not without questions).

b. We also believe that a model where tokens can only be earned and not purchased will become the norm. Blind token sales create significant supply disruptions, preventing designers from creating balanced economic models.

3) Securitized tokens will become a hot topic, this time centered on retail investors. Embedding securities-based cash flows into token usage, such as usage fees + fan tokens, especially in music, sports, and film, will drive mainstream acceptance of securitized tokens. Compliant issuers like Republic will be well-prepared for such a future.

a. Since retail investors gain utility from collecting these NFTs that exceeds pure financial value, securities-type tokens are more likely to succeed through a favorable social environment and trading games related to retail ownership within the collecting community.

b. The key is to balance the design of digital collectibles so that their functionality is no longer "single" (basic financial value), but rather function + (collectible value forms a sufficiently large participation premium, making NFTs not just "tend towards face value" in terms of use value).

7. Performance marketing is a pain point for Web3, and guilds have the potential to address this issue.

1) Guilds play an important role in guiding users to gain Web3 gaming experiences, while also optimizing several user experiences related to cryptocurrencies (e.g., custody, fiat exchanges).

2) "Single sign-on" is an important concept for Web3; for guilds, it can combine on-chain analytics with off-chain player data (recorded by SDKs integrated by game developers). We see major publishers creating global "super guilds" to build reliable platforms, similar to how Facebook attracted significant consumer attention for mobile apps and games.

8. Reputation and "soulbound tokens (SBTs)" constitute the "commitments, certificates, and affiliations" of social relationships in the Web3 network, and they have the potential to bring 0 to 1 innovations in cryptocurrency, which are crucial for individual participation in decentralized economic models.

1) While the public has invested heavily in NFT infrastructure, we believe this market is largely oversaturated, and there is far too little focus on genuine innovations regarding which new financial primitives can represent digital ownership beyond exchanges, lending, derivatives, and aggregators, such as unsecured lending based on credit scores.

"Tribal ownership" will allow more people to re-recognize Web3 art and digital collectibles. What NFTs currently lack is cultural and historical context. Bringing traditional art collectors into Web3 will lead to the next wave.

Access through hardware wallets and Metamask is unrealistic. A multi-signature DAO inviting "small groups" to participate in curation serves as a credit endorsement in this field.

As traditional art collectors and museums enter NFTs, facing a vast collecting market, we believe digital art is the art category with the most potential for growth.

With a comprehensive social background, vertical markets will significantly enhance NFT trading volume, extending from art to fashion, photography, music, film, and various categories that consumers crave. The unifying theme is "community," which serves as the creator, curator, and business engine of digital collectibles, along with collective mythology that makes these collectibles an ideal form of expression.

When we consume, we are all seeking self-expression: something that represents our values and identity, whether it be fashion items, art, or music. Historically, consumption has been one-directional, a top-down approach from seller to buyer. Due to the scarcity of NFTs, consumption is now cyclical, dynamic, and investable.

Art Blocks is a leading example of a top-down curated digital collectibles sandbox. FXHash, as an extension of the "community curation" hypothesis, is equally intriguing.

The extension of this concept is "Headless Brands." There are currently no major UGC-driven brands; we believe that fashion brands that integrate physical, digital, and social communities are ripe for experimentation.

"Traditional brands are directly planned and designed by companies, but the rise of networked media challenges the centralized management of brand identity. New decentralized organizations based on blockchain take this further by spreading their own brand narratives through rewarding users."

Guiding Principles

To translate these ideas into a practical manual guiding investment decisions, I believe it is necessary to distill my thoughts into several guiding principles, which also encapsulate my worldview.

Trust unites the community.

Money accompanies disloyalty.

A community without trust cannot exist.

Community currency can exist.

As long as it is not constituted by money.

But rather becomes a part of it.

→ Note: Tokens will accumulate significant network value over time, but practices like presales and pursuing speculative profits contradict this goal. A model where tokens can only be earned and not purchased is more likely to cultivate the right "money mindset" compared to overly relying on presales and speculative frenzy, while also purifying the intrinsic motivation for community formation.

Production is greater than promises.

Participation over ownership.

Abundance is greater than scarcity.

Create and collaborate rather than game or torment.

Innovation triumphs over flashy design.

P+P=P^2 surpasses PvP, and also PvE.

→ Note: Build the community first, without presales. Emphasize earning tokens through participation rather than hoarding and their scarcity. The conversion of creators and payers is more enduring than mechanical "play to earn." The flexibility of the economic system is paramount. Emphasizing social connections in the gaming economy and user-generated content can transform linear connections into exponential economies. PvP is more sustainable than PvE (because buyers have sustained demand for skill-based games and identity-driven simulation games), but not as much as a thriving UGC world.

Flexibility of virtual inputs (currency, resources) is greater than rigidity.

For virtual outputs (status goods), rigidity is greater than flexibility.

→ Note: Separate the tools needed by designers for flexible game balancing (tokens, resources, virtual currencies) from those aimed at accumulating ecosystem value (NFTs, financialized baskets of NFTs). Transaction fees should flow back to the community for long-term ecosystem development.

Delay monetization rather than immediate realization.

Adjust based on usage fees, not monetization through presales.

→ Note: Implement long-term value adjustment mechanisms, such as cash flows based on usage fees, rather than extractive presales. Earned value should be subject to delayed release to avoid vampire-like liquidity extraction and sales pressure.

Minimize friction rather than maximize decentralization.

Flexibility of delegation rather than structural immutability.

First-party first, UGC second, third-party third.

Centralized content => Democratic patching => Third-party ecosystems.

→ Note: In the early stages of a project, creating economic opportunities is more important than maximizing decentralization principles. Usability and player adoption are crucial, and IP creators should be trusted to guide the content ecosystem, providing more opportunities for UGC. Over time, IP creators can gradually seek to decentralize the ecosystems they have created, inviting creators and developers to expand the IP universe. Due to the difficulty of content creation, a system that is fully decentralized from day one is unlikely to thrive.

MapleStory

One of the projects I am most excited about is Nexon's MapleStory universe extending into Web3. MapleStory has the potential to be seen as a "demonstration standard" for leveraging open economies and IP. The Nexon team has been studying blockchain games for some time, initially seeing a market filled with speculation and short-term profits, which left them feeling frustrated. However, as Nexon Korea's COO Kang Daehyun revealed, "We are curious whether it is the right decision to reject all possibilities of blockchain technology simply due to the superficial and unstable processes in the early stages."

After months of effort, the Nexon team concluded that the core drivers of transparency, open economy, and value acquisition are too powerful to ignore. If the team is to stay true, they need to bet everything: "To convey our sincerity about this vision (rather than saying we are just following the trend because blockchain is hot now), we must use an IP that we cannot afford to lose to challenge ourselves. This will show our sincerity and earn trust." Therefore, Nexon decided to recreate its legendary MapleStory franchise (first created in 2003) for Web3.

So far, four applications have been confirmed.

MapleStory N, an RPG game based on MapleStory.

MOD N, a MapleStory sandbox creation platform.

N Mobile, a mobile RPG; and

N SDK, production tools that allow users to create multiple apps using NFTs.

MapleStory N and N Mobile: Utilizing the IP of the MapleStory universe, players can earn items and tokens through gameplay, which can be converted into NFTs. Over time, scarcity will increase. With ownership, users can create a free market economy. Users can create their own free market economy based on NFT ownership.

Fees generated from economic activities are distributed to the creators of the ecosystem, including Nexon.

Based on the principle of "perfect sharing," Nexon hopes to achieve greater growth through everyone's contributions and efforts, which can expand the entire ecosystem and develop far beyond its existing value.

MOD N: A sandbox game creation platform using MapleStory NFTs and external NFTs. All games created in MOD N belong to the creators. It includes over 30 million assets created over 20 years. Creators are rewarded based on the popularity of their games.

Nexon has the ability to fund development without conducting presales while pricing the economic system 100% in native tokens (with no fiat purchases in-app), allowing it to establish a transformative open economy without any negative impact. For example, 10,000 PFPs reduce digital scarcity, or reduce non-productive plots caused by virtual land sales. (This sentence may have issues; please review it carefully.) First, by establishing a sense of participation, and then by releasing economic value through market mechanisms, I believe Nexon will demonstrate the artistic possibilities of Web3 to the market.

In summary, what I am looking for is the digital-native "lollapalooza effect," where opportunities arise at the intersection of content, markets, and technology, where the multiplicative effects of multiple intersecting trends are as important as the fundamental drivers. As Charlie Munger pointed out:
"When several models come together, you get the lollapalooza effect; this refers to two, three, or four forces all operating in the same direction. And what you get is not simple addition. It often resembles a critical mass in physics; if the mass reaches a certain point, you get a nuclear explosion. If it doesn't reach that point, you get nothing. Sometimes these forces are just simple ordinary additions, and sometimes they combine based on an explosive point or critical mass… The real big effects, the lollapalooza effect, often come from the important combination of factors (which reinforce each other and amplify significantly)."