I started a Web3 gaming company so you didn’t have to. Here is a summary of my opinions in the space after raising millions in capital, grinding on a fantasy sports product every day for a year, and hiring (and then firing) a staff of 11 extremely talented people. I’m doing this for two reasons. First, other founders often want to know my opinions about the space. I’m writing it down here so it is easier for me to share. Second, I’m in the business of taking big bets with very public failure. I’m writing this down so I can look back on these thoughts in 4 years and be confidently right or wrong.
This will be a three part series on these topics:
What does the Web3 consumer want
How consumer product founders can succeed in Web3
My outlook on the future of Web3
What does the Web3 consumer want?
Currently, Web3 consumer value comes in two forms—passive income & speculation. There are some squishier value props such as decentralization and digital asset ownership but most consumers will treat these as a nice-to-have.
On passive income, there are two common ways this value prop is provided to the user. The first way is how Circle does it. They ask their customers to store capital with them and provide an APY for choosing Circle. The second way is how Stepn does it. Stepn asks their customers to buy an NFT. They provide rewards to their users when the NFT is activated. Companies make money here by aggregating capital and managing it better than they are paying out in rewards.
On speculation, MagicEden, Coinbase, and Ethereum offer this value prop. The advantage Web3 has over traditional stocks is that Web3 is open 24/7. Now, you can make money by being right at 2 AM on a Saturday. Companies make money here by charging a percent take on each transaction. I’m going to bucket gambling products, such as Degen Coin Flip and Rollbit in here as well.
Web3 users connect with both value props but Web3 gaming should prefer the second value prop. Like my fantasy sports product, many Web3 games try to provide something like passive income. Axie Infinity and Stepn, excluding the marketplace feature, are two well-known examples. These products are failing because they had to both manage capital AND build a game—two completely different skill sets and both equally as hard. Circle can offer a passive APY because their core competency is managing money—that’s all they do. Axie’s core competency is building a game. Games are notorious money pits and every dollar you spend building the game is one less dollar you spend generating yield to support your APY.
We noticed early on that the passive income value prop wouldn’t work. We barely had enough time to build a game let alone generate APY. With this realization, we tried to slowly pivot our game towards speculation but it was an impossible task. Every system within a game is tightly coupled with one another. The reward system has been custom designed to fit the matchmaking system which has been custom designed to fit the combat system. A large directional change in the reward system would require an equally large change in the matchmaking and combat system. We made the painful realization that it would be faster to scrap the current game and build a new one from scratch.
At the time, the passive income value prop seemed like the best one. We honestly thought speculation was more trouble than it was worth. Speculation can create unrealistic expectations and unrealistic expectations can destroy a startup. If we were able to manage speculation then we could manage expectations and be successful. Here are some of the things we did to combat speculation:
We only selected users for our mint whitelist that demonstrated passion for the game. In contrast, most NFT projects will also select an excess of shillooors, flippooors, and speculatooors to guarantee a sell out. Because of this, we didn’t end up selling out on mint day.
Our first NFT was a depreciating asset. You bought a pack of players that you could redeem once a week for at most 7 redemptions. Every time a user redeemed a player, the pack would lose value as value is transferred from the pack to the redeemed player. This hurt our secondary action as it continually dropped the floor price.
Our NFTs retired. We were also intentionally vague about how retirement worked. We did this as we didn’t have the bandwidth to design the retirement system but we knew we needed it for future seasons. This hurt our secondary action as users were unable to properly value the NFT.
Looking back we did an okay job of managing speculation, but the cost was tremendous. By building a product that was hard to speculate on, we alienated our target persona—the crypto native. MagicEden, Coinbase, Ethereum, and every good Web3 product leans into speculation because that’s what crypto does best and is what the crypto native is here to do.
Maybe in the future, someone will invent an easy way to get under-collateralized Web3 loans but for now, Web3 consumers only know passive income or speculation.