Liquid funds remain optimistic about Web3 gaming and blockchain uses for AI
Nobody still knows how to value L1 tokens
Spartan Group CIO Kelvin Koh | Ben Solomon Photo LLC for Blockworks
This is a segment from the 0xResearch newsletter. To read full editions, subscribe.
The following is the third and final part of a multi-part series on the state of crypto liquid markets, based on several conversations with liquid funds. You can find part one and two here.
Which crypto sectors are the most reviled by the average person in the industry?
Anecdotally, gaming and crypto x AI projects seem to make the easiest punching bags. If I had a dollar for every time I heard “crypto games aren’t fun…”
The liquid funds I spoke to, however, had much more lukewarm and varied feedback. Though some were uninterested in gaming, others expressed optimism.
“The Web3 gaming space is very challenged at the moment and is most overlooked or under-owned,” Spartan co-founder Kelvin Koh told me.
“We need a big hit game for people to pay attention to Web3 gaming again. Off the Grid, Maplestory Universe and FIFA Rivals are three games we are watching closely.”
Off the Grid in particular has continued to average about 552k daily players after its big bang launch. Its active player base has cemented the GUNZ chain as a top 10 chain based on active addresses and transaction count, according to Delphi Ventures, an investor in the game.
1kx was another fund that expressed greater optimism for Web3 gaming.
Traditional free-to-play mobile games have an incredibly high entry barrier and require millions to breakeven. But a Web3 game that leverages the power of token incentives can greatly reduce that barrier of user acquisition, 1kx partner Peter Pan told me.
“A game like Pixels raised $4 million in their first year and was able to go to market within 18 months. They spent $70 million in token incentives on user acquisition and made about $25 million back — that’s roughly a 30% return on spend that would never be possible for a Web2 startup managing the same budget.”
Despite the early days of crypto x AI, a few funds also expressed hopefulness for the sector. At the very least, most acknowledged that in the long run, blockchain would enable AI in some specific use cases.
For instance, one crucial way that blockchain tech can support AI is in the area of “identity,” Pantera’s Cosmo Jiang said.
“Infinite agents and bots will exist thanks to AI. So there will always be a demand to know what is truly human. What better way to create a global, permissionless, censorship-resistant identity solution than using a blockchain? World [formerly known as Worldcoin] is doing something critical here.”
When it came to more mature token sectors within DeFi (DEX, lending liquid staking), there was general agreement among the funds I spoke to that these were markets with proven PMF and ways to perform valuations.
This however also crucially means that token valuations in DeFi were increasingly tethered to financial reality and less susceptible to speculative valuations than, say, memecoins, as one investor told me.
This is in stark contrast to L1/L2 tokens, which saw more disagreement on how they should be valued.
The valuations of most existing L1 tokens (on a P/E ratio basis) were far beyond what a fundamental analysis would explain, and poised for a harsh correction to the downside, one investor told me.
Another believed that L1 tokens were still erroneously being valued as a comps to bitcoin, which has become more of a store of value.
Here’s what Blockworks head of research Ryan Connor had to say on L1 valuations:
“The reason, all else equal, for the higher valuations for L1 and L1-like things is because they are platforms, and platforms can be money-making machines. So all else equal, theoretically, you’re pricing in higher growth. Solana, for example, can 5x its revenue in the next 12 months to above 10b. That’s incredible earning power. You can’t say the same for AAVE.”
Get the news in your inbox. Explore Blockworks newsletters:
- The Breakdown: Decoding crypto and the markets. Daily.
- Empire: Crypto news and analysis to start your day.
- Forward Guidance: The intersection of crypto, macro and policy.
- 0xResearch: Alpha directly in your inbox.
- Lightspeed: All things Solana.
- The Drop: Apps, games, memes and more.
- Supply Shock: Bitcoin, bitcoin, bitcoin.
