On which public chain is GameFi 2.0 most likely to occur?

Original Title: 《AC Capital: Where Were GameFi 2.0 Happen》

Author: bittracy, AC Capital

I. Development of GameFi in the Past Year

In 2020, DeFi flourished on Ethereum, with protocols like Uni, AAVE, and Compound establishing a complete financial system for the decentralized world. By 2021, the on-chain infrastructure had reached a high level of stacking, making GameFi timely. The explosion of Axie Infinity drove the decentralized world into a frenzy again, with "Play to Earn" igniting Southeast Asian users' enthusiasm for blockchain games. Project teams raised funds by selling NFTs to attract users, subsequently adjusting the payback period to draw in more participants.

At the beginning of 2022, StepN pushed this model to the peak of the current bull market. However, behind this frenzy, the Ponzi logic of GameFi remained unchanged: the prosperity of the ecosystem relies on the incremental funds provided by subsequent users. After the market turned bearish, the number of new entrants in the industry decreased, and games could not maintain high returns in the long term, leading players to gradually exit. Although developers hoped to attract users through playability, in reality, protocols lacking investment returns could not achieve ideal results.

With the wave of GameFi past, a narrative-driven NFT market has emerged. This article will take a longer-term perspective, discussing the anticipated GameFi 2.0 and which public chains possess the best ecological niches. We will summarize the public chain ecological environment and future development main lines, and the topics we will discuss include:

• What will GameFi players need, and what are the potential possibilities for GameFi 2.0?
• The ecological environment of public chains and how to match the needs of GameFi
• Which public chains occupy better ecological niches?

II. Changes in GameFi 2.0

What changes can users expect from GameFi 2.0? After reviewing the current wave of GameFi, we believe that players' potential demands for "GameFi 2.0" include the following points:

• Market Liquidity: What is the most important condition for the rise of GameFi 2.0? My answer is: loose capital liquidity. As a highly stacked protocol, blockchain games require support from market liquidity. As a practitioner, Bittracy sees that the current secondary trading of blockchain game tokens has shrunk, players cannot obtain sufficient economic incentives in games, and project teams lose motivation to continue operations, while investment institutions also cannot exit. When the market lacks liquidity support, it is difficult for GameFi to gain user support.
• Fresh Experience: It cannot be denied that there is significant room for improvement in the playability of current blockchain games. However, in the second half of 2021, high-quality games did not successfully attract players to take over the market. Instead, StepN, which entered the fitness scene, shone brightly in 2022. Bittracy is not optimistic that top-tier AAA blockchain games will become the leaders of GameFi 2.0. Firstly, players are unlikely to accept overly complex protocols, making it difficult for AAA games to easily integrate into Web 3.0, which is mobile game-centric. Additionally, if developers compete around game quality, it would be akin to "using one's weaknesses to attack the strengths of others," as blockchain games struggle to compete with Web 2.0 games in terms of quality. We can see that StepN has a significant functional gap with Keep, but that does not affect its success. Innovating protocols that provide fresh experiences and economic incentives to Web 3.0 users through appropriate economic models is what we look forward to.
• Meaningful Asset Rights: When game assets become NFTs, users can assert rights over game characters with the help of technology. However, technical rights assertion and economic rights assertion are two different matters. The premise for economic rights assertion to have practical significance is that the assets have lasting value. When game development encounters difficulties, game assets often lose their utility and cannot maintain lasting value, rendering rights assertion meaningless. Currently, GameFi has yet to form NFT assets that do not rely on Tokenomics incentives and subsidies. Communities cannot hold and recognize the value of game assets for entertainment, reputation, or collection reasons. Therefore, there is still much room for improvement in the current token economic model and game modes. Sustainable GameFi should establish a flywheel cycle of token rewards and economic construction to achieve value recognition beyond economic incentives. If users can gradually accumulate the value they create in games into the economic system, that would be fantastic!
• Community Governance Voice: The community should transform the local optimal under multi-party games into a global optimal. Currently, project teams are the absolute leaders in game development, making it difficult for players to participate in game governance through DAOs. During game operations, players often sell off NFTs and tokens to maximize their interests. In an environment where governance mechanisms are imbalanced, it is common for players and project teams to engage in short-term profit-seeking behaviors, such as adjusting reward parameters and using scripts to farm, harming the long-term interests of the protocol. The community should give "healthy users" more voice, coordinating governance rights between users and project teams. A healthy governance model should be: Build for Valuation, rather than engaging in Valuation Extraction. Under a sound governance mechanism, users can have corresponding voices in governance, and all parties in the community will strive for the global optimal, leading to healthier GameFi development.

III. Development of Mainstream Public Chains

After this round of market fluctuations, investors have recognized the value of GameFi. It is certain that GameFi will continue to create value as an important part of the market. Public chains, as the core carriers of decentralized applications, are the Beta for seizing investment opportunities. This section focuses on comparing the development status of various public chains and considering where the exciting GameFi 2.0 is most likely to occur, which will also be our focus moving forward.

ETH: The Metropolis of Innovators

As the birthplace of GameFi, Ethereum boasts the richest ecosystem and the largest developer community, gathering 60% of the market's funds and 80% of its users, which is why I rank it first. To some extent, Ethereum's decentralized attributes are difficult to replicate in the future. The biggest issue with Ethereum is its network performance; high network usage fees pose a significant barrier to user growth. However, currently, gas fees are very low and do not impose a severe cost burden on interactions. In project pitches, developers believe that Ethereum's gas prices are very user-friendly.

Ethereum has been working hard to improve performance: the London upgrade in 2021, EIP-1559 increased the gas limit per block, enhancing block processing capacity. In September 2022, Ethereum completed the Merge, and will subsequently achieve Sharding through Proto-Danksharding and Danksharding.

It is worth mentioning that according to the plan for Danksharding, the roles of information submitters and packagers in the network will be separated: submitters will create Crlist, while packagers will only be responsible for hashing transactions within the Crlist, thus addressing the issue of MEV value distribution. Additionally, Danksharding will establish a data availability sampling (DAS) mechanism to reduce the burden on validation nodes, significantly lowering Layer 2 validation costs.

From a practitioner's perspective, Ethereum is both the most comprehensive public chain ecosystem and an active innovator. If the Ethereum Foundation can unite users and developers, it remains the most innovative public chain. MakerDao, Compound, Uniswap, Punks, ENS. These ecosystems built on Ethereum are already dazzling enough, and users and developers have no reason not to continue following. Where will GameFi 2.0 happen? If I were to answer this question now, it would be Ethereum. According to Vitalik's outlook, Ethereum will focus on Rollup as its main direction, fully supporting the development of Layer 2.

BSC: An Emerging Development Zone

In 2020, many exchanges hoped to replicate Ethereum's success in DeFi, and BSC had many competitors at the time, such as Heco and Okchain, but Binance took the lead. Looking back at this bull market, BSC did not miss any application innovations, and its excellent network performance was sufficient to accommodate the overflow of the EVM ecosystem. With Binance's efforts, BSC Chain successfully established an independent DeFi ecosystem, launching StarSharks, MOBOX, and Tiny World shortly after Axie Infinity.

After the rise of "Move to Earn," Binance successfully persuaded the StepN team to deploy this then-popular protocol on BSC. BSC's core competitiveness lies not only in the financial support from its backers but also in the blood transfusion from investment teams like Binance Venture and Binance Labs to the public chain ecosystem, with keen market judgment and efficient execution driving rapid growth in network TVL, Dapps, and users.

Looking ahead, BSC has strong competitive advantages in terms of funding, ecosystem, and users. Additionally, BNB has completed full unlocking, with most held by Binance, meaning there will not be severe selling pressure during bear markets. The value center of the public chain remains stable; although somewhat centralized, the developer community does not need to worry about insufficient incentives.

Solana: An Old Town with Chronic Issues

Solana was the best-performing public chain during the Layer 1 wave in 2021. Before the explosion of GameFi, Solana had already established a rich infrastructure to support the gaming ecosystem. From a performance perspective, Solana decouples time and state through POH, thereby enhancing the network's block generation speed. Moreover, Solana's capital team provides significant support for developers in ecological construction, and in terms of the number of code repositories on GitHub, Solana ranks second only to Ethereum.

However, in the past year, Solana has experienced several severe outages, with the network unable to generate blocks for several hours. Due to Solana's use of the Tower BFT structure, consensus must ultimately be reached through a Leader node. When large-scale transactions occur on-chain, the computing power of the Leader node reaches a bottleneck, potentially leading to network congestion. In certain specific situations (such as hot NFT auctions), users may use bots to continuously submit information to increase their chances of being selected, causing the Leader node to handle a massive amount of validation information, which may trigger network outages.

Bittracy is not optimistic about Solana's ability to maintain its prosperity for three reasons: First, the emergence of Aptos and Sui will divide Solana's developer community. For security reasons, developers may abandon Solana in favor of Aptos, weakening Solana's developer base and affecting the ecosystem's innovation capacity. Second, Solana's success has relied on the support of investment institutions like FTX and Multicoin, and after the launch of Aptos, the resources supporting Solana from investors will be affected.

The reasoning is simple: if parents choose to have a second child, the attention and care the first child receives will inevitably decrease. Finally, Solana has yet to resolve its network congestion issues, and many developers express disappointment with Solana's network environment.

Gaming Public Chains: Polygon, Flow, WAX, IMX, Robin

• Polygon: It may be somewhat inaccurate to place Polygon here, as the most successful Layer 2 or Side Chain of Ethereum, Polygon's achievements in GameFi are particularly remarkable. Firstly, its compatibility with EVM allows developers to easily migrate Ethereum protocols without expending too much effort. Polygon effectively accommodates the overflow from the Ethereum ecosystem, collaborating with leading protocols to establish infrastructure. Furthermore, to better enhance the public chain ecosystem, the development team established Polygon Studios to incubate GameFi protocols. According to Footprint's statistics on public chain GameFi volume, Polygon far exceeds its competitors.
• WAX: Established in 2017, WAX is one of the best-performing veteran public chains in this round of market fluctuations. The development team has made notable achievements in network performance, economic models, value cycles, and ecological construction. Firstly, WAX's blockchain structure is very similar to EOS, with excellent performance sufficient to support the high throughput required by games. Secondly, WAX's value is supported by on-chain NFT economic activities, which enhances the gaming experience while ensuring that WAX holders benefit from ecological development. More importantly, to enrich the on-chain ecosystem, WAX has established cross-chain bridges to be compatible with Ethereum, achieving deep integration between WAX and Ethereum through WAXE, WAXG, and WAXE-ETH. WAX Labs has successfully incubated games like Farmers World and Alien Worlds. However, as the market adjusts downward, the trading volume of blockchain games has severely shrunk, and WAX has also entered a period of low development.
• Flow: Thanks to Dapper Labs' strong resource capabilities, Flow's NBA Top Shot exploded in popularity in 2021, attracting a large number of users to the community. However, during the rapid development phase of GameFi, Dapper Labs did not keep pace, and the team failed to timely empower Flow with its Web 2.0 resources, leading to stagnation in ecological construction. Due to its incompatibility with EVM, Flow is not as friendly to developers, making the description of Flow's past two years as "high opening and low walking" very appropriate.
• Ronin: After Axie Infinity ignited the wave of GameFi in 2021, Ethereum's network performance severely hindered the game's development. The Axie Infinity team migrated the protocol to Ronin, significantly increasing network capacity and doubling user numbers. As of now, Ronin remains the highest trading volume gaming public chain. Although Axie Infinity is the biggest winner in this round of GameFi, Ronin is more like Axie's standalone chain, and after the market entered a downturn, several games launched by Ronin performed poorly and struggled to retain players, with most users choosing to withdraw Ronin assets back to the Ethereum mainnet via Bridge. Ronin has not demonstrated innovation and incubation capabilities in GameFi.
• IMX: Immutable X is a Layer 2 based on Ethereum, relying on StarkWare's ZK-Rollup, allowing IMX to ensure security while expanding network performance. Some of IMX's designs are very impressive, such as users being able to mint/transaction NFTs with zero fees, and the network adopting Validium validators to achieve high throughput. Due to its strong investment lineup and excellent network performance, the project was highly anticipated upon launch. However, compared to WAX, which is also a GameFi chain, IMX's later operational development has not been satisfactory. As of now, the flagship project ILV has yet to launch, and during the bear market, the network's transaction volume has lagged far behind other public chains like Polygon and WAX. By the end of 2022, a large number of tokens from institutional rounds will be released (equivalent to the current circulating tokens, doubling the circulating supply), and although the founder claims to continue locking up for another year, the tokens from institutional rounds will still be released (accounting for 50% of the circulating supply). In a high-inflation environment, uniting the community will become increasingly difficult, and IMX may have missed its best development opportunity. When the development of an economy stagnates while the currency is rapidly inflating, the only possible outcome is capital flight and currency depreciation.

IV. Which Public Chains Occupy Better Ecological Niches

Where does the value of public chains lie? From a profit model perspective, GAS & MEV are the main sources of income for public chains, meaning that developers and users need to pay fees to public chains to run programs. If this logic holds, then the higher the TPS of a public chain, the less revenue it will generate, and its token value will be lower, which contradicts the actual situation. Therefore, we cannot simply measure the value of public chains through GAS & MEV income.

From Bittracy's perspective, the value of public chains lies in their ability to create network value, with tokens being more akin to non-inflationary currencies in the public chain economy. Specifically, the development of public chains comes from the growth of on-chain economic activities. When assets are created, the role of public chain tokens is to accommodate the economic value created by developers. The value of Ethereum comes from the economic ecosystems it has built around DeFi, NFTs, and GameFi, as well as its role as the value support for countless EVM Side Chains / Layer 2s. Countless NFTs, DIDs, and Token assets are priced in ETH through AMM, meaning that ETH is the monetary expression of the digital assets created by Ethereum.

So how can public chains achieve value creation? Some public chains choose to attract users through excessive inflation to stimulate on-chain economic activities, but the abuse of the minting power actually harms the interests of users and developers and is difficult to sustain in the long term. The path to value creation should be: public chains can drive network ecological construction through their own innovation capabilities, achieving value creation and economic activity growth. This can unite users and developers to form a community and achieve high-quality development of the network ecosystem. Therefore, Bittracy believes that those public chains with clear development directions, excellent innovation capabilities, and low inflation may have better odds in GameFi 2.0.

V. Conclusion

AC Capital achieved good results during the GameFi wave in 2021, and we will continue to help outstanding developers turn interesting ideas into reality. To this end, we need to find investment opportunities with higher odds. This article does not include public chains like Aptos, Sui, and Cosmos, not because they are not good, but because these public chains do not yet have mature DeFi ecosystems, communities, and the connectivity and significant technical risks of some emerging public chains make them lack suitable evaluation systems for analysis, which also does not apply to our predictions for the future.

References

1. https://foresightnews.pro/article/detail/11194
2. https://mirror.xyz/hiweiwei.eth/b_BRjFAfaVuY7S1jm8FJTwwtq1KTd55LYQ-ZUQtj9-o
3. The Mystery of Public Chain Valuation by Mint Venture