Reflecting on the combination of Web3 and sports Who really needs who?

Exploring the Synergy between Web3 and Sports Examining the Mutual Dependence

Author: DefiOasis; Source: Geek Web3

Introduction: Web3’s enthusiasm for sports is well reflected in FTX. Previously, they spent $135 million to acquire the naming rights for the Miami Heat’s home court for 19 years, and made Curry a shareholder of FTX and its brand ambassador. Coinbase, FTX, Crypto.com, and others have also directly advertised during major sporting events like the Super Bowl. Fan tokens, player NFTs, and Web3 sports games have also become topics that fans enjoy discussing in recent years.

However, a series of scandals related to Web3, such as the FTX explosion, seem to have ended the honeymoon period between the sports industry and Web3. Sports stars who had associations with FTX were implicated, the Heat terminated its naming partnership with FTX, and the Super Bowl banned any cryptocurrency-related company from advertising in 2023. The poor performance of the Crawley Town Football Club, which introduced Web3 governance, has also raised doubts about Web3 in the sports industry.

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At its core, is it really that sports events need Web3, or is it Web3 that needs sports events? Do native Web3 products such as cryptocurrencies and DAO governance really make sense when combined with real-world commercial scenarios like sports? This article by DefiOasis will critically discuss this topic and objectively explain why the relationship between sports and Web3 is not as sweet as it seems.

Sports and Web3 Collision

Throughout history, humans have had an innate desire for competitive sports activities, even mentioned in the Bible when the origin of “Israel” is discussed (the ancestors of the Jews, Jacob, wrestled with an angel and was recognized, hence being named “Israel,” which means “one who struggles with God”). In modern times, sports have gradually become a mainstream form of entertainment and have a huge market.

In 2022 alone, the NBA’s revenue exceeded $10 billion, and the National Football League (NFL) in the United States reached an astonishing $18.6 billion in revenue. According to Deloitte’s “Football Finance Report 2023,” the annual revenue of the top five European football leagues exceeded €17.2 billion, and FIFA’s World Cup financial report showed that the 2022 Qatar World Cup generated $5.769 billion in revenue, with over 5 billion viewers, accounting for 62.5% of the global population.

The powerful attraction of sports naturally attracts the attention of many Web3 companies. From the OKX logo on the sidelines of the Etihad Stadium of Manchester City to the Crypto.com Arena, which is the home of the LA Lakers, and the collaborations between Messi and Bitget, Suarez and Binance, all demonstrate Web3 companies’ determination to establish connections with sports stars and fans. Apart from collaborations such as inviting celebrities for endorsements, unique scenarios such as fan tokens and player NFTs have also emerged within Web3.

Sports Fan Economy: From Collectibles to Gamified NFTs and Fan Tokens

It can be said that NFTs are one of the best ways to bring sports IP onto the blockchain. The mainstream sports NFTs primarily focus on collectibility and gamification, which are highly popular among young people due to their inherent social and trendy attributes. Famous accounting firm Deloitte optimistically predicted that the trading volume of sports-related NFTs will exceed $2 billion in 2022. However, according to LGDoucet, the founder of TheFirstMint, sports NFTs traded around $100 million on the primary market and approximately $700 million on the secondary market in 2022, which is less than in 2021.

The Decline of Collectibles into NFTs

(Among the leading sports platforms in terms of trading volume in the first half of the year, game NFTs represented by Sorare and collectible NFT platforms owned by DapperLabs are still predominant.)

The transition from collecting to NFTs was the first step for Web3 to enter the sports industry. Previously, football star Cristiano Ronaldo collaborated with Binance to release multiple personal NFT series. Even today, we can still see traces of collectibles in the traditional sports world, such as player cards. Whether it is collectible NFTs, physical cards, or player cards featuring prominent stars, their value depends on the fame of the players.

Among the physical player cards auctioned for over $1 million, there are big-name stars from various fields, such as Mickey Mantle, LeBron James, and Patrick Mahomes. The rarity and aesthetic design of the cards are additional factors that enhance their value. When collectibles are presented in video format, the worth also depends on whether it showcases memorable moments of the players.

(Memorable moments of players add value: LeBron James’ highest-selling moment of becoming the all-time leading scorer fetched nearly $20,000)

In the realm of sports collectibles turned NFTs, DapperLabs is the uncontested leader, and its collaborations with NBATopShot, NFLAllDay, LaLiga, UFCStrike, etc., cater to the needs of fans from different top-tier sports leagues. It can be said that DapperLabs and its associated products are the epitome of the LianGuainini-style collectible card gameplay.

Among them, NBATopShot is the most popular, leveraging the endorsement of the NBA and its large fan base. NBATopShot reached a peak daily trading volume of over $40 million and consistently ranked in the top five of the NFT trading market. However, the good times didn’t last long as NBATopShot soon declined due to reasons such as oversupply of player cards in a short period, limitation to moments of active players, and the legal action against its parent company by the SEC.

(NBA is the league with high attention in the sports NFT space)

It can be said that the decline of collectibles into NFTs is inevitable. Similar to niche collectibles like stamps, most players in the sports collectible NFT market are a combination of sports fans and Web3 users. When the NFT market cools down and lacks participation from those outside the circle, the trading market enters a state of scarcity. Alongside the downturn in the NFT market and the actions of project teams, the activity level of NBATopShot has been in a slump since reaching its peak in 2021.

(With the cold market of NFTs and the shenanigans of project teams, NBATopShop’s activity has been in a slump since reaching its peak in 2021)

The gamification of fantasy sports with NFTs

Although the enthusiasm for NFTs in sports collectibles has declined, sports itself still has a huge fan base, especially in global top sports leagues. With the entry of DraftKings Reignmakers, Sorare, and others, the gameplay of sports-related NFTs has been upgraded, injecting more game elements. From the slump of collecting NFTs to the popularity of gamified NFTs, sports fans only need a trigger to get obsessed.

According to CryptoSlam data, there has been a significant trend in the past month before October 24th this year, with PFPs shifting towards gamified NFTs. Among the top five on the list, there are two sports game NFTs that have surpassed well-known ones like CryptoPunks and MAYC.

Sports games typically focus on realistic simulation and management gameplay. However, the current mainstream Web3 sports games are more focused on NFT-centered “fantasy sports” management simulations. One reason for choosing this approach is that the realistic simulation games developed by sports game giants such as EAFC and F1 are already very mature. These games have gained recognition from a large number of sports players in terms of cost investment, visual presentation, and maturity of gameplay mechanics, establishing a strong market share on PC and mobile platforms. Therefore, starting from scratch with Web3 sports games and wanting a share in this field is relatively difficult.

(The changes in game NFTs represented by Sorare and collectible NFTs represented by Dapper Labs in the past two years reflect the trends of these two categories: https://thefirstmint.substack.com/p/the-state-of-nft-sports)

DraftKings, Sorare, UltimateChampions, and other Web3 sports games have chosen the perfect “fantasy sports” gameplay, combining real matches with NFT elements. Players can simulate matches by predicting the performance of players and choosing the right lineup. This mode is not new in the field of sports games, as FM (Football Manager) and Basketball Fantasy games have already established mature simulation match mechanics.

But what’s different this time is that the core of Web3 sports games lies in the star card NFTs, which players can trade on the secondary market, making star cards financialized and attracting a large number of speculators. Interestingly, the growth potential and rarity of players themselves affect the price of player cards. For example, young rising stars in the early stages of their careers have great speculation potential, while aging veterans about to retire have the opposite effect. Earlier this year, NBA star Giannis Antetokounmpo’s star NFT sold for 113.888ETH (approximately $186,000) on Sorare.

“Fantasy Sports” has two core elements that keep it engaging for the long term.

1. The ability to update data in a timely manner

Unlike most game fans, the appeal of sports games mainly comes from sports fans. Deep sports game fans have a considerable overlap with real-life sports fans. From EAFC (formerly FIFA) to NBA2K, although they have evolved from stunning debut works to routinely criticized reskins, they still maintain a strong ability to make money, with timely game data updates being the main reason for their success.

In simulation sports games such as DraftKings Reignmakers and Sorare, players need to understand real player data, tactical strategies, and the overall status of the team, which effectively attracts avid fans. For these players, once enough stickiness is formed, timely changes in lineup data are more important than details such as graphics, actions, and gameplay diversity. Although most sports games only undergo minor updates each year, players have a high tolerance and are willing to pay for more timely sports data. If player and team data is not up to date, the appeal of such games will be significantly reduced.

2. An income model favoring rarity

“Fantasy Sports” games take reference from MyTEAM and Ultimate Team players’ preference for the rarity of stars, by dynamically adjusting the player card pool to generate income. This includes frequent increases in the card pool limit (player abilities, salary caps, etc.) to encourage players to buy card packs and participate in drawings, or directly obtain favorite players by purchasing in-game coins.

However, the mainstream gameplay of Web3 sports games like “Fantasy Sports” also has some flaws. For example, due to the longer game cycle, continuity is weak, making it difficult to ensure that players maintain sufficient interest throughout a complete season that lasts for a year. Additionally, the “entry fee + prize pool” gameplay is often considered to have a gambling-like suspicion, such as game entry fees, player selection (similar to betting), and sharing the prize pool, which resemble gambling behavior. On the surface, players need to make rational predictions about player performance, but in reality, luck plays a significant role. Furthermore, the high entry barrier of the game is not friendly to new fans or non-fans.

Other sports blockchain games, apart from Sorare and DraftKings, have yet to make a splash.

Previously, FIFA and EA’s relationship broke down due to problems with their excessively priced contract, resulting in the release of four different modes of Web3 games, but these games were not attractive enough to fans. Specifically, they had significant differences in gameplay, graphics, and player image rights compared to mature Web2 sports games. In the future, with the attempts of AAA-level sports games like “Goals” to enter the Web3 space, this situation may improve.

The New Direction of Sports NFTs

In addition to the aforementioned scenarios, the combination of NFTs and real-life sports opens up new possibilities, such as NFT tickets.

NFT tickets have already been utilized in the music industry, primarily to prevent ticket scalping and counterfeiting. However, most NFT tickets are one-time use and have a relatively short validity period. Once the NFT ticket is used for entry, its value is mainly limited to its collectability, except for rare NFT tickets (e.g. a debut performance by a star or a collaboration with a celebrity).

Sports events, on the other hand, offer the potential for long-term use of NFT tickets, such as team season tickets. For clubs with a large fan base, team season tickets are highly sought after. NFT tickets can serve as a form of team-based POAP (Proof of Attendance Protocol), where clubs can implement loyalty programs similar to an “odyssey.” These programs may include purchasing team merchandise, tracking the number of times attended in a season, retaining or eliminating season ticket holders, and allocating seat positions for the next season’s tickets.

Clubs can also provide benefits to NFT holders with high loyalty points, such as autographed player apparel or offline meet-ups. In July of last year, Paris Saint-Germain sold three NFT tickets for a combined value of over $220,000 in a tour match conducted in Japan, granting buyers unique privileges.

Although NFT tickets are a great solution, sports fans cover all ages throughout the year, and NFTs have a smaller audience. Additionally, sports fans, especially older and more conservative individuals, tend to be slower in adopting new things. Therefore, at this stage, NFT tickets are more suitable for limited promotion.

NFT Governance

The decentralized nature of Web3 enables democratic decision-making for sports teams. In the past year, due to political reasons, the former owner of Chelsea Football Club, Roman Abramovich, had to sell a portion of the team’s shares. Some fans wanted to protect the club’s interests and, during this transition period, initiated a crowdfunding campaign to purchase 10% of Chelsea’s shares. They established ChelseaDAO with the hope of participating in key decision-making for the club.

(During a turbulent period at Chelsea, fans wanted to raise funds and establish a DAO organization to take over certain club affairs.)

Due to various reasons, ChelseaDAO could not achieve its goal. However, not far from England, Crawley Town Football Club has launched a small-scale democratic “revolution” with the help of NFTs. A Web3 capital collective called WAGMIUnited acquired this club, which competes in the English League Two. They allow fans to participate in the team’s development through Web3-based governance (with NFTs as the core), introducing voting for decision-making on player transfers and allowing season ticket holders and NFT holders to vote together.

Although this management style is very democratic, it seems to have little to do with the club’s performance. Crawley Town has had a fluctuating season, with multiple changes in coaches, and ultimately achieved a difficult 22nd place finish in order to avoid relegation.

The poor performance of the Crawley Town team may be related to the lack of professional knowledge among fans in sports management. This is also a common problem with DAO management – community voting relies more on common sense rather than professional expertise. Additionally, due to information asymmetry, information about the team’s day-to-day operations and locker room management cannot be fully known to the public.

It can be foreseen that when the team hands over overall decision-making to fan DAOs, this democratic management style lacking innovation and a long-term perspective will have difficulty improving the team’s performance.

Club Fan Tokens: A New Attempt to Empower Fans

In addition to NFTs, fan tokens are another business model related to sports fans. Compared to NFTs, which have limited liquidity and passive exposure to price fluctuations, fan tokens actively give governance rights to assets. Previously, there were fan groups hoping to operate clubs through “DAO + tokens.” Fan tokens provide such an opportunity, allowing fans to participate in some governance activities, such as deciding the captain’s armband, club bus design, pre-match songs, and other matters, giving fans some level of influence.

In this model, clubs can also benefit. Chiliz, as a leading Web3 sports fan project, has incubated fan tokens for many clubs, including AC Milan (ACM), Atletico Madrid (ATM), Tottenham Hotspur (SPURS), and others. Chiliz’s incentive platform, Socios.com, generated $12 million in revenue in 2021 through fan tokens. Clubs collaborating with these fan tokens can receive a share, creating new revenue streams for the teams.

For example, in 2020, Barcelona’s fan tokens sold out on the day of their launch, generating $1.3 million in sales revenue. Part of the revenue was shared with the club, adding to their financial income.

(Socios.com’s partnership with multiple sports clubs)

However, the income from fan tokens is limited in helping the team’s finances. Broadcasting rights, matchdays, and real-world commercial activities are still the main sources of income for sports clubs. Taking struggling Barcelona as an example, according to the Deloitte Football Money League, the club’s revenue in 2022 is almost €640 million. Compared to this, even Socios.com’s revenue for all partner clubs in 2021 is still relatively small.

(Source of Barcelona Football Club’s 2022 income composition: “Deloitte Football Money League 2023”)

At the same time, fan tokens have become “a love-powered tool for fans and a speculative target for non-fans”.

On one hand, token holders have limited involvement and can only participate in a few transactions each season, which are largely inconsequential as major decisions are still made by club executives. On the other hand, fan tokens have lost their long-term investment value and have become a form of gambling. While collectible player NFTs can be sold at high prices due to their rarity, fan tokens don’t have any intrinsic value and can be influenced by the club’s position in the league and performance in matches.

During the 2021 European Championship and the 2022 World Cup, fan tokens of different teams experienced price fluctuations at different stages of the matches. Even during the off-season, transfer operations by the club, the departure of key players, or the introduction of famous players can affect token prices. It can be said that these meme-like fan tokens are guided by fan emotions.

The Web3 and Sports IP in the Cold Winter

In the past, Web3 sports projects actively launched advertising displays, NFTs, fan tokens, metaverse games, and other scenarios targeting fans. These scenarios provided rights and convenience to fans, but they didn’t fully resonate with them.

Firstly, the concept of fan groups itself is complex. Sports fans cover all age groups, with varying levels of cultural understanding and age. It takes a long time for most people to accept new concepts.

Secondly, after witnessing several European powerhouses like Manchester United and AC Milan introducing external capital and running the clubs with the mindset of listed companies, it has caused years of turbulence. Traditional European fans are skeptical of external capital involvement in club affairs, let alone Web3 capital, which is still not widely understood. Although this doesn’t mean that Web3 capital injected into football clubs is doomed to fail, at least the failure of the Greyswood Football Club has left a deep impression on fans.

However, sports clubs have a massive fan base, which is why Web3 capital is unwilling to give up on sports projects. But for Web3 to gain recognition from fans, it not only needs to genuinely benefit fans but also prove its own value.

In the 2021-2022 season, the crypto industry provided approximately $130 million in sponsorship investment to the NBA, becoming the second-largest sponsorship category of the season. Big sports brands like Adidas and Nike have also entered the Web3 space in recent years. Just as Web3 and sports were entering their honeymoon phase, a series of scandals like FTX’s collapse and athletes like Tom Brady and Stephen Curry, who endorsed FTX, being implicated, even the partnership between the Miami Heat and FTX for the arena naming rights was terminated. To make matters worse, Voyager’s bankruptcy and its partnership breakdown with the Dallas Mavericks have further tarnished the reputation of “Web3” in the sports world, leading to a sharp decline in its reputation.

The crypto industry wants to build a massive business empire through sports events, but with a series of negative news popping up, it not only damages its own image but also drags some people in the sports industry down, deepening the generation gap between them and Web3 capital.

Who really needs who? Is it Web3 that needs sports fans, or sports fans that need Web3? Although it is often said that the combination of Web3 and traditional sports can bring new revenue to clubs, it is insignificant compared to mainstream income sources like ticket sales, broadcasting, and fan merchandise; in terms of popularity, it seems that Web3 capital needs to leverage sports events to expand its influence. However, both in terms of influence and revenue, Web3 and sports IP have not yet achieved a “1+1>2” effect. Moreover, from the perspective of finding investors, traditional sports clubs clearly have a preference for traditional capital, while Web3 capital, represented by FTX, obviously lacks this stability.

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