Folius Ventures Discovering the North Star of Web3 Games – Crossing Liquidity Exhaustion, Identifying Entrepreneurial Competition Patterns and Potential New Opportunities

Folius Ventures Uncovering the North Star of Web3 Games - Overcoming Liquidity Exhaustion, Identifying Competition Patterns, and Exploring New Opportunities

Currently, there is an oversupply of capacity on the supply side and a lack of liquidity on the demand side in the Web3 industry. After two years of development, the shortcomings have gradually become apparent. This research report examines the competitive landscape of the Web3 gaming industry and the existing viable business opportunities.

Original author: Aiko

Report Summary

Against the backdrop of improving global gaming industry standards and oversupply of capacity, Web3 has become one of the ways for game manufacturers to recover costs due to its high profitability throughout the lifecycle, attracting many Web2 teams. However, currently there is an oversupply of capacity on the supply side and a lack of liquidity on the demand side in the Web3 industry, and the shortcomings have gradually become apparent after two years of development. Therefore, this research report examines the competitive landscape of the Web3 gaming industry and the existing viable entrepreneurial opportunities.

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For teams that are still in the Web3 product development stage, it is necessary to have versatile capabilities as an industry with imperfect infrastructure but extremely high profitability. Most middle-tier teams have a huge gap in understanding compared to top-tier teams, and they need to quickly recognize the gap and accelerate their learning and iteration speed. At the same time, new business models continue to emerge, and teams can fully utilize Web3’s commercial innovations and seize market opportunities. They can also take advantage of changes in the distribution landscape, seize traffic-oriented super apps and traffic entry points, or independently create their own market and become a super app.

In addition, for teams that are still exploring and observing, they can first seize the parallel opportunities between Web2 and Web3, especially in the leisure game and AI-driven player groups, when Web2 customer acquisition costs are high and there are bottlenecks in the business model. Secondly, they can learn a lot from past successful/hot projects to gain insights and use them skillfully in operations. Thirdly, they can develop products that meet the entertainment needs of more users and have long-term business models on top of high traffic entry points. Fourthly, there are still opportunities for gamification and commercial innovation based on new forms of assets. Lastly, for full-chain games, it is recommended that teams focus on building excellent open-source racecourses instead of reinventing the wheel, as there may be opportunities to start the next wave of trends. Finally, in the future, the Crypto agent (crypto+AI) field is also likely to be dominated by traffic, and teams should adhere to a traffic-oriented path. In the near future, on-chain AI agents will inevitably tend to cooperate with high-quality traffic entry points.

In line with our previous two research reports, this attempt is to summarize the cyclical changes in the industry and provide some more universal, macro, and feasible advice for entrepreneurs at different stages. During the writing process, we deeply realized that the industry has entered a challenging period, with slow progress in infrastructure and a lack of market liquidity, making entrepreneurship not easy. However, we hope that developers can find some methodologies and inspirations for coping with the market downturn in this article, and we sincerely pay tribute to the relentless seekers who keep moving forward.

For many game companies limited by copyright and user acquisition costs, Web3 is indeed a good choice.

Web3 provides business leverage throughout the entire lifecycle of the game: NFT/FT/taxation. Compared to traditional development methods, web3 is indeed an effective way to increase game profitability and achieve globalization.

Supply-side: However, in the context where industry standards in both the East and the West have been raised, web3, as the only outlet for excess productivity, has taken on many surplus production capacities, and after two years of development, problems have gradually emerged.

Demand-side: We have entered an era of liquidity scarcity, with limited stock markets, scarce attention, and fast transfers. Therefore, at this stage, teams should focus on polishing products and incentive models, strive to break through barriers and attract customers, in order to catch the express train of abundant liquidity.

What is the current competitive landscape of web3 game startups?

An analysis from four dimensions: industry profitability, team awareness, business models, and the market.

1. As an industry with high profitability but imperfect infrastructure, web3 allows versatile teams to reap the greatest benefits, but teams without versatile capabilities will face double hardships and higher error rates.

2. There is a huge gap between mid-level and top-tier companies, and most companies may not yet reach the threshold of mass adoption, requiring teams to have strong evolutionary capabilities and iteration speed.

3. There is an endless stream of business model innovations. The more liquidity-depleted the era, the more it requires new ideas and changes. Web3 business models change with market trends and new asset forms, and teams need to innovate in full understanding of the market and economic models.

4. The momentum of attracting users through L1/2 and platforms is gradually weakening. Super ecosystems and traffic entry points that surpass individual L1/2 are rising and expected to compete in the next cycle. Project teams need to quickly find a good position or actively explore new paths for user acquisition.

So, in a liquidity-depleted cycle, what other directions are worth exploring for web3 game teams?

1. Find parallel opportunities between Web2 and Web3 games, catching up with new user consumption habits and AI experiences when the customer acquisition cost in Web2 is high and the commercialization enters a bottleneck.

Phenomenon 1: Faced with the same user group, the customer acquisition cost of Web2 has increased again.

The growth of the global Web2 gaming market in the past 23 years has benefited to a large extent from casual games such as match-three puzzles, simulation management, and casual casino games. However, the cost of buying traffic in these gaming categories is high. After the popularity of “The Road to the Great Thousand”, the cost of acquiring traffic for traditional H5 mobile games has tripled. Web3 faces the same user habits but with cheaper customer acquisition costs and higher profit margins. Recommendation: Teams developing casual games can consider not relying on platform-based strategies to compete for user retention, but instead leverage the large traffic and quick attention shift characteristics of casual games to continuously release products and import traffic and liquidity into new games through methods such as mutual advertising and token swapping in self-built DEX.

Phenomenon 2: The gacha business model has reached a bottleneck with no room for innovation.

The gacha business model, introduced from Japan to China ten years ago, has experienced a decline in player spending power, especially in the past six months after the relaxation of domestic game approvals. On the other hand, games like “Nishuihan” have achieved success by adopting light payment models and having a large number of daily active users (DAU). Recommendation: Web3 offers more opportunities for commercialization and is suitable for commercial innovation. It is recommended to read our previous two research reports to maximize the profit space of NFT+token+taxation.

Phenomenon 3: Simplified experience and high-frequency stimulation.

Find a game that can quickly attract and addict players, and then adapt it into a mobile game. From “Vampire Survivors” to “Bullet Shell Agents” to “Crazy Knights”, several games that originated from a gameplay prototype have ranked among the top ten in WeChat mini-games. It can be observed that the realistic art production pipeline for AAA games and the battle for second-dimensional industrial capacity have become more simplified. However, when users become aesthetically tired, they tend to choose high-frequency stimulating mini-games to kill fragmented time. Recommendation: Based on gameplay prototypes, simplify and design incentives that are more in line with the capabilities of Web3 teams. Furthermore, the closer the gameplay is to the excitement of opening a box, the more similar it is to the economic incentives of Web3 itself. Therefore, more reference templates can be used, and the user profiles will overlap more. Web3 teams can also consider adding idle experiences to their games, giving the game itself a “digital plate string” effect, instead of unlimited gold farming for 24 hours. Therefore, the previously mentioned “energy system” design is also very important.

Phenomenon 4: Developing in parallel with AI and the gaming industry.

There are indeed parallel opportunities led by AI in the gaming industry, but it is recommended not to add physical entities unless necessary. For teams that have come to Web3 due to the collapse of the middle ground or fierce competition in the traditional gaming industry, they should reconsider this industry transformation opportunity, especially in the context of scrutiny system in China and the inability to use large foreign models. It is best to create novel experiences and next-generation products using AI, while directly utilizing Web3 for global distribution and higher leverage in commercialization. Recommendation: Focus on designing from economic, diplomatic, and agency perspectives. For example, the agent based on SLG games mentioned in the article. This also means more AI-driven transactions and profit space.

2. Seize the window period to digest the past verified routines of Web3, and use clever tactics in the early and middle stages of operation.

Early stage:

– Find the right data pool: (refer to Friend.tech) When X (formerly Twitter) incentivizes creators and this incentive sparks social media effects, access this open (API interface or data that can be crawled) data source and quickly complete the financialization (Share) of KOL. Perhaps entrepreneurs in this direction can also explore other data pools that meet the conditions. After all, the core of their business model is to select important offline PoW and traffic and package them on the chain. The purpose of putting them on the chain is to rent valuable data, information, and people.

– Batch invitation system: (refer to STEPN, Friend.tech) Invite people gradually in batches and complete product testing in various stages. Let the fomo social explosion of entry serve as a prelude to economic incentives. Slowing down the speed of user entry in the early stage actually extends the overall operational life of the project.

– NFT trading experience: (refer to Memeland, Matr1x) Considering that the previous wave in the NFT market has left enough cases and gameplay, this game can be operated in an NFT-driven manner with many playbooks to refer to, and even has a relatively complete industrial chain (with NFT trading hands – whitelist intermediaries -kol) as the core. (1) Early stage Twitter and alpha community marketing, creating deep community engagement with white users; (2) The plate has low liquidity and good control to create wealth effects; (3) The expectations of several consecutive NFT series can continuously help improve prices; (4) Both issuance and speculation can help the team make money without spending a penny; (5) Finally, it relies on the product + FT airdrop + cash flow.

– Buying volume / regional arbitrage: (refer to Axie, Hooked) Conduct UA delivery testing in multiple channels, seize the opportunity to convert low-cost users in low-volume regions to the chain, and establish local promotion and distribution systems (guilds) with token incentives. Compared with the average income level, the token wealth effect is more obvious, bringing opportunities for dissemination and breaking the circle.

Middle stage:

– Rolling service logic: (refer to STEPN) Many people now approach web2 vendors to acquire IP with the story of “web3 issuance”, but what many traditional vendors fail to realize is that not only web3 can be seen as a global issuance method, but you can even reissue it on each chain. Given the significant differences in liquidity, user profiles, and traffic support on each chain (especially in the era of high TVL), cross-chain issuance of new assets is like building a new mining pool for users. Users will continue to enter new chains to earn money from entering early. Or similar to rolling service in traditional games, starting from a new starting line to practice a new account, verify one’s strategy assumptions, and obtain positive feedback.

– Casualization / fragmentization of operation: (refer to BAYC) For mature IPs, games can be viewed as a lever to enhance community cohesion and attention during the operation stage. Therefore, the key lies in high frequency and asset fomo, and there is no need to go to great lengths to produce AAA and lengthy games.

3. Relying on high traffic entry points, create products that meet the entertainment needs of more users and have long-term business models. In other words, spread the existing entertainment needs and web2 business models through new traffic channels and join the web3 incentive layer.

Telegram bot:

After Unibot quickly became popular, many entrepreneurs have entered the TG bot track to create imitation platforms. However, currently, we only see minor adjustments being made to the strategies and performance of trading bots and GPT-type bots. Although trading bots have quickly risen by meeting the trading needs of crypto users, their business models are single, and there is a low ceiling for UI/UX and trading strategy optimization. Additionally, the user base has not yet surpassed ten thousand, making it difficult to truly break through and attract customers. Therefore, new TG bot entrepreneurs need to think outside the box and try to create products that are more in line with the habits of the general consumer and establish a long-term and stable business model. One low-cost method for trial and error is to directly spread web2’s proven business models (gambling) through new traffic channels (Telegram) and integrate them into the web3 incentive layer (token+NFT), with Rollbit being an example. In addition, the following ideas are for reference only:

Examples:

Games: By following the development process of WeChat mini programs, we can see the gaming capabilities that TG bots can provide and the gradual education of users from shallow to deep. It is recommended to conduct multiple placement tests and identify user profiles based on main user distribution areas (India, Russia, the Middle East, etc.) and game preferences. It is speculated that TG users would be receptive to elemental games, and breaking through and growing would rely on social and viral games, while crypto users would be more accepting of card games with cultivation and PvP elements. [Simple elemental games] – Connect, Tetris. [Social gathering games] – Pictionary, Werewolf. [Comparison and viral games] – Jump, Sheep. [Placement card games] – Currently leading the WeChat mini program rankings, such as The Way of the Great Thousand, King of Salted Fish, etc.

Lottery: With the increasing number of valuable assets, there are not only consensus-based blue-chip NFT assets (BAYC/punk), but also IP joint assets and real-world collateralization on the chain (such as Pokémon cards on the chain). Combined with various lottery gameplay and dividend incentive mechanisms, there are many ways to play. [One yuan snatch] – Everyone can participate with 1 yuan to have a chance to draw an NFT blind box containing valuable items. [Game blind box] – Similar to participating in a tree planting game to get a fruit blind box or participating in an NFT game to get an NFT blind box for the lottery. [Bargain group-buying] – Group-buy fragmented blue-chip NFTs or directly create a TG launchLianGuaid bot, allowing users to obtain or participate in the lottery at a low price through forwarding and group-buying, taking the whitelist system used in Discord.

Private domain: Both of the first two involve the spread and fission of the TG group, and TG is still in the early stage of content ecology. Therefore, before the completion of the content matrix construction, it is possible to combine DAO+ creator ecology to build a private domain and commercialize it. [Link] – Whether it is in a group chat or in a channel, commissions can be collected for posting links, and the conversion rate can be traced through steps such as clicking, downloading, and forwarding. When rewarding community users, rewards will be directly deposited into their wallets. [Creator Community] – Establish a voting bot in the creator’s community, publish the competition, and those ranked higher can receive token rewards.

4. There are still opportunities for asset gamification and commercialization: Treasure Trove

Background 1: The overall liquidity of the NFT market is drying up, and the NFT market needs new narratives and trading hotspots.

Background 2: At the application layer, the complexity of NFT-driven game assets has already increased. There are multiple types and large quantities of assets under the same IP, which are interrelated, and the ultimate value is reflected in the products and tokens. However, players still need to conduct off-chain transactions in the community or manually collect NFTs that meet the requirements one by one, which is very primitive.

Background 3: At the protocol layer, although ERC-6551 and ERC-4337 have appeared, although the underlying technical issues of account abstraction wallets have not been solved (such as poor stability in supporting wallet generation with private keys), with the improvement of infrastructure, the granularity of accounts and assets in the future will be significantly different from now. Just as ERC-721 and ERC-20 have completely different interaction forms/financial attribute logics, the future form of new assets will be: multi-subject + multi-granularity nested, more difficult to unify valuation. Therefore, based on the future financial interaction forms and scenarios of assets will become more interesting.

5. Full-chain game: Be an excellent open-source racecourse instead of reinventing the wheel, find innovative mechanisms with sufficient wealth effect and productize + gamify them, and ultimately break through the circle to obtain external liquidity.

Background 1: Full-chain storytelling inherits the liquidity from NFT and GameFi. Loot appeared closely after BAYC, Punk, and other NFTs, and its market price reached its peak when it participated in the most in the Dark Forest community, the pioneer of full-chain games. Full-chain gaming games (such as Wolf Game, Sunflower, etc.) also appeared after Axie and GameFi summer, but their FDVs are all below $5M, which is only a thousandth of Axie and a thousandth of STEPN. It can be seen that in the case of the liquidity drought of NFT and GameFi, the possibility of the rise of social gaming full-chain games is small. Even if it explodes, it is probably difficult to break through the circle and obtain customers.

Background 2: In order to prevent the ultimate primitive pos/pow competition of the entire on-chain game and optimize UI/UX, the team needs to dig deep into technical problems and gradually develop the trend of on-chain game technology driving self-built Appchain/L2, going deeper and deeper. The game and test network environment are closed, and there are only dozens of test users, which is prone to reinventing the wheel and lacks universality. Currently, there is no sign of open source, and there is still a long way to go to achieve permissionlessness and interoperability.

By analyzing three previous cases of innovation in on-chain games, the following commonalities can be summarized: 1) The innovation of on-chain games may not appear in the main tasks, but in the side tasks. If valuable side tasks can be identified and productized during this process, it may be possible to create a universal infrastructure. If it can be financialized and gamified on top of the product, it can greatly reduce the user threshold and drive new liquidity. 2) Games that are simple, fomo-driven, and have wealth effects are more likely to drive innovation and break barriers: for example, the dividend mechanism in Fomo3D and the breeding deflation mechanism in CryptoKitty. These are the characteristics of excellent racetracks.

6. In the era of AI agents, traffic is still king. Traffic dominance + crypto agents make it easier to reach a large audience and find good commercialization paths, while backend AI can continue to optimize and modularize, and seek cooperation with high-quality traffic entrances.

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