The DeanBeat: Blockchain gaming companies raised $476M in the first half of 2021

We knew that gaming grew during the pandemic, and game investments and acquisitions have seen a boom as well. If you combine games with blockchain, then that can only get hotter, right?

That question has some truth to it. In the first half of 2021, 24 crypto/blockchain gaming companies closed investments valued at $476 million. Just three companies — Forte (which raised $185 million), Animoca Brands (which raised $89 million in the second quarter and more subsequently), and Mythical Games ($75 million) — accounted for 75% of the total, according to a report by InvestGame.

InvestGame found 489 closed and announced deals involving game companies in the first half of 2021, with a total value of $50.2 billion. This includes investments, acquisitions, and public offerings. And it’s an unprecedented number for games, with the amount topping four times the numbers for game deals in the first half of 2020.

Crypto gaming investments were just 5% of the deals and 9% of the total value. In fact, we should note that Zynga’s announcement this week that it was paying $525 million for a single game studio, StarLark, which makes a single mobile game, Golf Rival — and that’s more than all of the money that went into crypto gaming in the first half of the year.

Still, you could argue that blockchain gaming is just getting off the ground. Blockchain gaming exits don’t generate a lot of money yet, since many of the companies are too young for acquisitions. And so those exits (and maybe IPOs) are likely to happen in the future. In that respect, most of the money pouring into blockchain games is taking the form of startup investments. And so the amount is impressive in that way. And it’s continuing, as we’ve seen with OpenSea (an NFT marketplace) raising $100 million at a $1.5 billion valuation in the third quarter. And this was all before Ethereum did its “hard fork” to reduce fees, clean up the environment effects, and grease commerce this week.

NFT craze

The common thread behind these companies is nonfungible tokens (NFTs), which aren’t exactly the same as crypto but are in the same universe. Like cryptocurrencies, NFTs rely on the transparent and secure digital ledger of the blockchain to authenticate digital items. The blockchain can verify the uniqueness of a digital item. For games, that means players can earn, buy, and sell not just an in-game item but a one-of-a-kind in-game item. It can be auctioned off to the highest bidder and enable the player to make money from the game.

Dapper Labs figured out how to monetize this quality with CryptoKitties, where players raised, bought, and sold digital kittens like Pokémon collectibles. The digital artists jumped aboard, too. Dapper Labs built on this by selling NBA Top Shot NFTs and that finally took off like a rocket in late 2020.

This year, NFTs exploded in applications such as art, sports collectibles, and music. NBA Top Shot has surpassed $700 million in sales. And an NFT digital collage by the artist Beeple sold at Christie’s for $69.3 million. Gaming has a couple of new unicorns, or startups valued at $1 billion, in Animoca Brands and Forte. The market peaked in May and then its suffered as Bitcoin came crashing down and brought down other blockchain valuations too. But while Bitcoin is still volatile, NFTs are now selling at a rate of $213 million a week, back at a level previously seen at the peak in May.

Dapper Labs, the CryptoKitties and NBA Top Shot company, is reportedly raising money at a $7.5 billion valuation.

Going mainstream?

NFTs are broader than games. DappRadar, a Lithuania-based app store for decentralized apps (Dapps), has more than 500,000 monthly users. It has more than 5,265 Dapps from more than 20 different blockchain protocols. More than $1.5 billion worth of NFTs traded on the store in the first quarter, an increase of 2,627% over the fourth quarter of 2020. The DappRadar Q1 21 Industry Report found the blockchain industry as a whole grew 158% year-on-year, reaching a million in daily active wallets across all blockchains.

Stephen Ip, a founder of a blockchain tech startup, said in a message that everything has lined up to spur investment. He said decentralized finance (DeFi) has now increased the amount of public users with crypto wallets such as MetaMask, which has been an essential tool in letting people cash out the cryptocurrencies that they can earn.

NFTs in games will have some useful applications. Players could create NFT avatars and establish their ownership of the digital asset. If the game shuts down, a player could take the NFT avatar and items to another game — something that I heard Ecco the Dolphin creator Ed Annunziata tell me in 2018. Avatar portability is something that would be useful in the metaverse — something I heard Epic Games CEO Tim Sweeney mention in 2016.

Play-to-earn

Players could also craft their own NFTs, like in Animoca Brands’ The Sandbox, a user-generated content sandbox world. They can buy and sell these items, much like in Second Life. The companies can presell land, or virtual real estate, that players can develop. And players could also earn NFTs rewards while playing a game, like in Axie Infinity, which touts the “play-to-earn” model.

I wrote a story about how Yield Guild Games has created a guild of players who are playing Axie Infinity. Many are impoverished people with smartphones in the Philippines. They can earn money in the game, earning more than several times the minimum wage in the country. That has put food on the table at a time when the pandemic has devastated the economy, as we saw in a documentary about the phenomenon.

Axie Infinity can afford to pay out money to players in part because it collects fees at the outset. These days, creating a team of three Axie characters can cost $1,272 in U.S. dollars. Within a seven day period in May 2021, Axie Infinity, a popular blockchain-based play-to-earn game, saw users spend a massive $6.69 million on in-game NFTs.

Yield Guild Games figured out it could recruit a lot of players to its guild by paying the fees (via “scholarships”) for Axie Infinity players. It now has more than 43,000 players in its Discord channel, and it recently raised $4 million, in part to fund scholarships for players, who can start earning NFT rewards after they get over the initial fee and start playing. So far, 4,700 Yield Guild Games scholars have earned 39.5 million Smooth Love Potion, the currency in Axie Infinity, or about $7.6 million, to date. And this week, Yield Guild Games got FTX to sponsor 137 more scholarships for players who can be identified with “FTX” initials in their names.

Sky Mavis, the creator of Axie Infinity, raised $7.5 million from backers like billionaire Mark Cuban in May. But now it’s reportedly raising a new round of funding, and it is closing in on a million daily active users. Data provided by Axie World showed that Axie Infinity earned $196 million in July.

Miko Matsumura, the cofounder of the Gumi Cryptos fund, speculates that the valuation for Axie Infinity will soon be in the billions of dollars.

Just like the mobile boom?

Lots of people are comparing this boom to the early days of mobile games.

“It’s very much like the early days of mobile gaming, you have a core group of developers making content for early adopters in the space,” said Rob Carroll, a mobile game veteran and chief growth officer at the decentralized firm Ruby Play Network. “There are no rules yet, no roadmap on how to develop but people are enjoying it. And as the people come, more developers will make content for them.

“As an example, LandVault, a metaverse developer ran a party last week in Decentraland. A thousand players showed up and had a great time but they needed to have a crypto wallet [MetaMask] connected to play the game.”

This kind of hassle of creating a crypto wallet is reminiscent of hassles in creating mobile games.

“Remember 2011 to 2012, how many mobile gaming investments took place during that time [and beyond that period]? It is playing out in much the same way,” said Yat Siu, the chairman of Animoca Brands, in a message. “Larger companies getting big funding, smaller companies getting lots of seed funding to be the ‘next big thing’ in gaming. The end result will be that it will usher in a big blockchain, the true ownership and economic gaming movement much like mobile gaming grew and completely reshaped the gaming industry from 2011 onwards.”

Game veteran Shirley Lin said the initial wave of creators seemed more interested in crypto’s path to riches than making games. And Matsumura believes the first wave of blockchain game makers didn’t get enough mainstream players because they put more energy into the blockchain tech than the game quality.

“This new cohort of investment will contain an industry transforming game for several reasons,” said Matsumura. “The player base is increasing significantly thanks to Axie and Yield Guild Games. Games studios are getting near-infinite runway by preselling land NFTs. This is a much better risk-reward ratio than Kickstarter, where the people supplying the money take all the risk and get no reward. The big thing will be that software development kits (SDKs) will enable very high quality games to benefit from NFTs and blockchain, so a lot of high quality game experiences will be able to add blockchain for a low cost.”

Sebastian Borget, a cofounder of Animoca’s The Sandbox, said those early games proved their capacity to attract players on a large enough scale to drive revenue at high levels.

“Play-to-earn is more than a concept when a game, with 350,000 active users generates $25 million gross merchandise value per day,” he said in a message. “If you were a VC fund, the number of remaining opportunities to invest into a solid game/product/team and enter the market [that they might have missed in 2018] is definitely shrinking. No one wants to miss out on the next big thing that will set the industry forward for the next 10 years.”

Now companies like The Sandbox are bringing in big brands, like The Walking Dead. Mythical launched an NFT limited edition deal with Burberry this week.

Skeptics and believers

Skeptics out there will help keep our feet on the ground. Steve Peterson, the CEO of Storyphorce, said in a message that crypto gaming may become a big market, which is why we’re seeing so much money invested now.

“However, I’m skeptical about the chances of any of the studios I’ve seen so far, because they all seem to spend their time talking about crypto rather than games,” Peterson said. “If the game isn’t good, people won’t stick around in numbers big enough to justify these investments. These studios need to focus on making great games first, and adding good crypto technology second, if they really want to succeed.”

In these early days, scams are still possible. Animoca Brands today issued a scam alert about “AxieCat”, a project that Animoca said fraudulently claims to be from Animoca Brands. In reality, AxieCat has absolutely no connection to Animoca Brands, the management of Animoca Brands, or any of Animoca Brands’ subsidiaries.

Alexandra Tinsman, a blockchain advocate, said in a message that a few key successes will pave the way for triple-A publishers to unleash the full power of NFTs in gaming.

“What investors find most intriguing about crypto gaming is that it is a new business model, which is where gaming investors have generated good returns in the past,” said Jon Radoff, CEO of Beamable, in a message. “The business model is potentially transformative and very compelling, but of course many games will fail simply because they aren’t fun, not because of any crypto-specific reason.”

So we all have every right to be skeptical, about how this market is overhyped with this crazy valuation. Hopefully, we won’t get overly excited on the sidelines, but we’ll be talking about this at our GamesBeat Summit event in November. If you think this market is overvalued, well, folks, you ain’t seen nothing yet.