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Around the Block from Coinbase Ventures sheds light on key trends in crypto. In this edition, Justin Mart, Connor Dempsey, and Ejaaz Ahamadeen lay out what’s behind the growth of NFT markets.

In 2020, a little over $200 million in NFTs changed hands. This February saw more volume than the entire year prior, with $340 million in sales. Then August blew every record away, with over $4 billion in total NFT volume on top marketplaces. When you factor in platforms outside Ethereum, some estimates show secondary sales alone in Q3 surpassing $10 billion.

Simply put, the exponential growth of NFT markets represent the largest shift within the crypto landscape in years.

At this point, most people are familiar with non-fungible tokens (“NFTs”): unique digital assets representing different forms of media that are tradable over internet marketplaces spanning art, gaming, sports memorabilia, music, and more.

In this edition of Around The Block, we’ll provide a broad overview of what appears to be driving growth within the NFT landscape and what the future may hold for this technology.

NFT art

While NFTs reach far beyond the art world, art is still the category-defining NFT market responsible for much of the volume represented in the above chart. In many ways, the crypto art market mirrors that of traditional art. On the demand side, there are a mix of small and large collectors. On the supply side, there are renowned artists like Beeple, whose works sell for millions, as well as thousands of up and coming artists like Metsa (Maxwell Prendergast) whose work (pictured below) sell from anywhere between $100 and $10,000.

Thousands of artists like Maxwell are gravitating to NFT art because it’s proving to be more equitable for creators than the traditional market. Thanks to the internet and social media, digital artists can have their work reach millions with just a few clicks. And now, thanks to smart contracts underlying NFTs, artists can be automatically compensated every time their work is resold. Compared to traditional art markets where artists often aren’t appreciated until well after their lifetime and where most of the value accrues to wealthy collectors from secondary sales, the appeal of the digital art market for the creators is clear.

But why pay to own a piece of digital art, especially when the very nature of it being digital allows it to be replicated infinite times? In fact, we showcased Maxwell’s work above by simply cutting and pasting in a file without even paying him for it. The answer comes down to actual ownership. When someone buys NFT art, they’re not paying for a digital image but rather a socially-recognized record of ownership of the image registered on a blockchain like Ethereum. So while we can paste Maxwell’s work in this article, we don’t own the NFT tied to the work and therefore have nothing to sell.

As it turns out, many people value owning digitally scarce works just as much as others value owning physical ones. While digital ownership doesn’t come with any unique legal protections, it can be programmatically verified, allowing platforms to enforce rules where only the owner can use an image for certain purposes (like in a Twitter profile, for example). This programmatic recognition of ownership is key to the baseline utility and value behind NFTs.

Generative art

The rise in popularity of NFT art has in large part been fueled by a sector known as generative art, with the demand for it coming primarily from crypto native investors. Generative art is defined as art created via the use of an autonomous system. A prime example of generative art is CryptoPunks, which is also arguably the first significant NFT art collection.

The CryptoPunk collection consists of 10,000 unique characters generated algorithmically through computer code created by a studio called Larva Labs. They built their program to randomly spit out pixelated characters each with varying traits — different hair, hats, etc. The program also generated three special types: 88 Zombies, 24 apes, and 9 aliens. After running the algorithm, this randomly generated assortment of characters were linked to Ethereum smart contracts and became traded and valued in part based on their rarity. One of the 9 alien punks with a unique mask and beanie, dubbed “Covid Alien”, recently fetched $11.75 million at auction.

Art Blocks is a popular platform for generative art. Rather than creating and selling individual pieces, ArtBlocks allows artists to create algorithms that produce works of art before allowing collectors to “mint” a limited number of pieces. This is a novel process for creating and distributing art where both the buyer and the artist don’t even know what the algorithm will produce before the piece is minted.

On ArtBlocks, a collection titled “Fidenza” by artist Tyler Hobbs is currently among the most valuable. Hobbs uses a flow field algorithm to produce unpredictable non-overlapping curves that are randomly colorized. This method produces digital works of art that have sold for as much as $3.5 million and look like something you’d see at the MOMA.

Crypto culture & NFT art

But why are some pixelated characters or colorful non-overlapping waves selling for millions, while other similar pieces of NFT art sell for significantly less? The answer is tied to the unique culture that has developed around crypto and NFT markets.

CryptoPunks and Fidenzas, for example, each have historical significance for the crypto community. CryptoPunks are credited with helping create the ERC-721 token standard that is the foundation of the entire NFT market. Fidenzas were the first well-executed and visually-appealing collection of on-chain generative NFTs.

In this light, the asking price for these works makes more sense given their cultural significance for investors in crypto, which has been among the best performing asset classes of the last decade. For a growing subculture of crypto-native users, these rare NFTs serve as a status symbol, akin to a traditional collector owning a Picasso or a Rembrandt. Instead of being displayed in one’s home, they’re displayed prominently in online communities and on social media platforms like Twitter and Discord.

As crypto culture bleeds further into the mainstream, so too is crypto art with celebrities like Jay-Z and Odell Beckham Jr. now prominently displaying their CryptoPunks on social media. Snoop Dogg also recently claimed to be a formerly anonymous NFT collector named @CozomoMedici with a $17M NFT art collection.

To recap, the rise of NFT art has been made possible by provable ownership recorded via tokens on blockchains like Ethereum. NFT art has attracted artists from all over the world, leading to an explosion in the variety of art work available. Pieces with cultural significance within the crypto community tend to fetch higher price tags, but we’re already seeing crypto and mainstream culture merge, led by various influencers.

NFT gaming

Despite the growth of NFT art markets however, the highest grossing collection of NFTs comes from a different category altogether: gaming. Just as NFTs let people own unique works of digital art, they allow gamers to truly own in-game items. This gives players a real economic stake in the games they play.

When you buy a typical game item, all you’re really getting is the experience of using it. When you buy an in-game item that’s also an NFT, you get an asset with resale value that can be taken with you to other games and experiences. Add in the ability to receive crypto for winning, and you get an entirely new model for gaming called “play-to-earn.”

Axie Infinity and its 1.8 million users are currently the NFT gaming world’s crown jewel. In Axie Infinity, the Pokemon-like characters needed to play the game are themselves NFTs. Players receive crypto when they win battles, leading many in emerging markets to turn playing the game into a full-time job. Early collectors of Axie NFTshave seen their characters go from originally selling for $5 to nearly $500 in August. Total sales for these in-game NFTs recently crossed $2B, making it the highest selling NFT collection of all time.

The real promise of NFT based games, however, comes from the combination of ownership and composability. Composability is an important crypto concept referring to how one protocol is natively interoperable with another — i.e. a token generated from MakerDAO can be traded on a decentralized exchange like Uniswap. Applied to gaming, this concept means that an in-game item created in one game can be used in a game created by a different developer — e.g. you can take your Axie character with you to a different game altogether.

Projects like Decentraland, Sandbox, Somnium Space, CryptoVoxels, and TCG World are all creating virtual worlds where different gaming experiences can collide. These virtual worlds feature NFT “plots” that anyone can purchase and develop a game on top of. Thanks to composability, we may for example see someone build an arena in Decentraland where you can battle your Axie NFT against a Loot-equipped character.

The intersection of DeFi & NFTs

Thanks to composability, NFTs are also already interoperable with certain existing crypto infrastructure. This sets the stage for a collision between NFTs and existing DeFi primitives, which can bring greater utility and liquidity to the space.

Just as it’s commonplace for wealthy collectors to post their works of art as collateral in return for a loan, the same is becoming possible with NFT art and gaming assets. NFTfi is one example of a project that lets users post their NFTs as collateral for a loan, or offer loans to others to gain use of their NFTs. This means an NFT collector can pay a small fee to temporarily turn an NFT into liquid capital that can be put to use yield farming. On the other side, someone can post some capital to borrow an Axie NFT that can in turn be put to use earning yield in the game.

NFT collateralized loans are just one example of what’s possible when you combine NFTs and DeFi. Look for this space to grow rapidly as NFTs mature.

Crypto’s social layer

Beyond art and gaming, NFTs are enabling the formation of new kinds of online communities and crypto powered consumer applications. For example, with Bored Ape Yacht Club, owning 1 of 10,000 disinterested looking Ape characters grants access to an exclusive community that includes admittance to a discord channel plus rights to new NFT airdrops and merchandise. This means that buying a Bored Ape unlocks access to a special club — one that’s even attracted NBA all-star Stephen Curry. Bored Apes helped pioneer this model but there are many NFT projects now employing it.

There is also promise for NFTs to create new kinds of relationships between entertainers and fans, particularly in the world of music. Catalog, for example, lets artists sell unique tracks directly to fans in the form of Wav NFTs. This lets fans directly support their favorite artists by purchasing their music directly from the source. Imagine purchasing a limited edition Taylor Swift song before she got famous.

NFTs can also create deeper relationships between fans and creators by conveying rights to exclusive experiences. For example, fans who purchased The Disclosure Face automatically received 4 tickets to any Disclosure show worldwide. On top of that, the purchasers became friends with the artist and Disclosure now regularly performs at their events.

Just as with music, the world of sports and NFTs are also colliding. NBA TopShots, which turns NBA moments (i.e. a Lebron James dunk) into digital trading cards, is already among the top grossing NFT collections. The company behind TopShots also just announced plans to expand into the NFL. Sorare, which just raised a mammoth $680m Series B, has similarly partnered with international soccer clubs to generate NFTs that represent players. These NFTs form the basis of a fantasy sports competition in which users are rewarded when their players perform well.

Social Tokens

Social tokens can be viewed as the fungible cousins of NFTs. Similar to how Bored Apes or NFTs minted by certain musicians convey access to certain communities or experiences, social tokens do the same.

Social tokens are catching on with creators and influencers who seek to create social communities around their individual brands. One interesting recent example is UCLA basketball player Jaylen Clark using the Rally platform to issue the $JROCK token. Holders of these tokens will get tickets to basketball games as well as unique content from Jaylen.

Social tokens are even earlier in their adoption curve, but alongside NFTs, are helping form the backbone of crypto’s social layer.

All roads lead to Web3

Crypto has now introduced several novel innovations to the world: first, Bitcoin and digital cash; then, Ethereum, smart contracts, and a revolution in capital formation; recently, DeFi and a reimagining of the financial system. Now, NFTs and what some believe will be a revolution in digital ownership and social coordination. Put all of these technologies together and you have the foundation for Web3 — an internet owned by its users.

Given the recent rapid rise in NFT values, it is likely that this market will experience boom and bust cycles, similar to previous crypto innovations. Regardless, we’re likely to see a continued cambrian explosion of new experiments that range from brilliant to absurd, as the lines between the digital and physical world continue to blur.

Previous editions of Around the Block

• Loot Project: the first community owned NFT gaming platform
• Axie Infinity, Yield Guild Games & the play-to-earn economy

Retail news

• CoinGecko, CMC, TradingView blocked in China, as crypto clampdown continues
• Robinhood is rolling out crypto wallet and transfer features + hints at DeFi
• Gemini & Binance US poised for multibillion dollar valuations
• Twitter rolling out BTC tipping via Lightning + NFT profile authentication
• Bitfinex pays $24M for a $100K ETH transaction in error
• Huobi to cease service to all users in mainland China
• FTX Moves Headquarters From Hong Kong to Bahamas
• Kraken to pay $1.25M Settlement with CFTC

Institutional news

• Visa unveils “Layer 2” network for stablecoins, CBDCs
• Mass Mutual-owned fintech (Flourish) launches BTC service for RIAs
• Fed chairman Powell says it would be ‘ideal’ to work with Congress on digital dollar
• Bank of England announces members of CBDC working groups including PayPal
• Latin America’s biggest investment bank (BTG Pactual) launching crypto platform
• Cambrian Asset Management is launching BTC/ETH trusts
• Crypto custodian Cobo raises $40M to expand DeFi services
• Invesco & Galaxy team up to develop crypto ETF suite
• Bitcoin fund launched by NYDIG has raised nearly $17 million to date

Ecosystem news

• Fantasy soccer NFT platform Sorare scores $680 million raise led by SoftBank
• Multi-chain wallet XDEFI raises $6 million in round led by Mechanism Capital
• Dapper Labs partners with NFL on digital collectibles marketplace
• Ripple Announces $250M Fund to support NFT projects on XRP Ledger
• Revolut to Launch Crypto Token
• Bitcoin’s Lightning Network capacity reaches an all-time high
• Social token platform Roll raises $10 million in Series A funding
• Permissioned DeFi platform Aave Arc gears up for launch

Tweets

• Chris Dixon on why Web 3 matters
• A sneak peak at Twitters NFT profile verification (using CB wallet)
• Compound Bug allows users to claim up to $80M in COMP tokens
• Axie Infinity is on pace to generate ~$1.4B in revenue in 2021
• Jeremy Allaire: Crypto is in line with US values of openness, transparency, privacy, and free market competition
• Lyn Alden: bitcoin adoption tends to be higher in places that have more restrictions on economic freedom

This website does not disclose material nonpublic information pertaining to Coinbase or Coinbase Venture’s portfolio companies.

Disclaimer: This material is the property of Coinbase, Inc., its parent and affiliates (“Coinbase”). The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Coinbase or its employees and summarizes information and articles with respect to cryptocurrencies or related topics that the author believes may be of interest. This material is for informational purposes only, and is not (i) an offer, or solicitation of an offer, to invest in, or to buy or sell, any interests or shares, or to participate in any investment or trading strategy, (ii) intended to provide accounting, legal, or tax advice, or investment recommendations or (iii) an official statement of Coinbase. No representation or warranty is made, expressed or implied, with respect to the accuracy or completeness of the information or to the future performance of any digital asset, financial instrument or other market or economic measure. The information is believed to be current as of the date indicated on the materials. Recipients should consult their advisors before making any investment decision. Coinbase may have financial interests in, or relationships with, some of the entities and/or publications discussed or otherwise referenced in the materials. Certain links that may be provided in the materials are provided for convenience and do not imply Coinbase’s endorsement, or approval of any third-party websites or their content. Coinbase, Inc. is not registered or licensed in any capacity with the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission.

The Coinbase Ventures Guide to NFTs was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Around the Block from Coinbase Ventures sheds light on key trends in crypto. In this edition, Justin Mart and Connor Dempsey explain what Loot Project is and why it’s interesting.

Pictured below, is a Loot bag: A text file consisting of 8 phrases overlaid on a black background. As it turns out, this text file is also an NFT, “Loot Bag #748,” and it sold for 250 ETH, or about $800,000 at current prices.

So what can you do with it? Not much… for now, at least.

Dungeons & degens

On August 27th, Dom Hoffmann, who notably co-founded Vine, introduced Loot. A project consisting of 8,000 NFTs full of words that depict “randomized adventurer gear.” Closer inspection reveals items that a character might wield in a game like Dungeons & Dragons. A Short Sword, or Divine Robe of the Fox, for instance.

While we’ve seen a lot of NFT drops over the last few months, two things set Loot apart. First, these NFTs could be claimed for free. The claimee simply had to pay the standard Ethereum gas fee. The other more obvious differentiator: these NFTs are just a bunch of words.

Despite the glaring lack of chimp or penguin art, once claimed, these plain text NFTs quickly started selling for tens of thousands of dollars. At the time of writing, $230M in Loot has changed hands.

Loot NFTs under the hood

One’s knee-jerk reaction might be to dismiss Loot as just another symptom of speculative NFT fever. Loot does, however, introduce an interesting new NFT primitive. Before we get to what makes it interesting, it helps to understand a bit more about what a Loot NFT is.

Instead of just being a single provably scarce image, each of the 8 items within a given Loot bag has smart contract readable parameters. On top of that, each of the 8 items has its own rarity within the broader Loot universe.

Returning to Bag #748, while 6 of the 8 items are deemed “common”, the Short Sword and the Divine Robe of the Fox are decidedly rare. The Short Sword appears only 325 times across 8,000 Loot bags while the Divine Robe of the Fox appears only once.

Ok, so we have NFTs with Dungeons and Dragon-ey words on them that are smart contract compatible, with some words appearing less frequently than others. So what?

A community owned gaming platform

People appear to be excited about Loot not because of what the NFTs are, but what they could be. These NFTs were released into the wild and left to the interpretation of anyone who found them interesting. Anyone can build something using Loot NFTs as a foundation.

A sound analogy comes from Avichal Garg at Electric Capital, who likens Loot with a 52 deck of cards. Where on its own, a deck of cards is just 52 pieces of paper with pictures on them. With a bit of ingenuity, it’s also the foundation for thousands of games, from Poker, to Hearts, to Crazy 8’s.

Similarly, Loot and its 8,000 NFTs can serve as the foundation of an entire gaming metaverse. The ideal end state being an entire ecosystem of games where Loot items like the Divine Robe of the Fox serve different functions: think Dungeons & Dragons in the metaverse. Whoever builds something on top of Loot NFTs can determine the function served by a given item.

By building the foundation of a game, without building a game itself, Loot leaves its fate in the hands of a decentralized community. Whether or not one thinks it will be successful, it’s an intriguing idea to many.

So what are people building?

Early Loot experiments

For one, the image I showed above ranking the rarity of Loot bag #748 comes from an application built by someone named @scotato in the Loot community. By pasting your Loot contract address into 0xinventory.app, NFT owners can see the rarity of their Loot bag (note the ranking system was also devised by the community).

Another project called Lootmart will allow Loot holders to unbundle their Loot Bag into individual NFTs to swap items with other Loot holders, complete with AI generated images of individual items.

Similarly, lootcharacter.com was created to generate pixelated characters based on Loot bags. Here’s Bag #748.

A community member also spun up an ERC-20 token called Adventure Gold ($AGLD) while he was waiting at an airport. Anyone with a Loot bag could claim 10,000 $AGLD. FTX created spot and futures markets for the token and it hit a high of $7.70, meaning Loot holders were essentially gifted tokens worth $77,000 at their peak.

The idea behind $AGLD is that it can serve as an in game currency woven into a game that gets built some day. But like Loot itself, its value is up for interpretation. This didn’t stop people from incorporating it into other budding Loot projects, including a Loot themed “choose your own adventure” story, where $AGLD holders can vote on the direction of the story.

In Chapter 1 of, “Holy War Lore”, $AGLD holders were allowed to vote on whether a man wearing a Divine Robe should put on a Demon King’s crown to absorb his powers (they voted that he put on the crown). In Chapter 2, the crown gets the man into trouble and there’s currently a vote on how he should handle the situation.

These are just a few examples of what the grassroots community of Loot enthusiasts has created so far. The Loot discord reveals wide ranging discussion with distinct channels for builders, artists, writers and a whole lot more.

Creating value from chaos

To recap, Loot is interesting because it inverts the typical gaming and community development path. The Loot creator simply built the foundation of a gaming universe and threw it into the wild to see what others would do with it. And so far, it has energized a diverse community, with a host of new Loot projects in development.

This excitement, coupled with the current NFT bull market sent Loot NFTs soaring, with the cheapest Loot bag trading for $23,000 today. There are however, no guarantees that anything resembling a real game or real utility ever gets built on Loot. Owning a Loot bag is a bet on future utility, which is up to the community to build.

This is the challenge that Loot faces. Can a decentralized community channel its enthusiasm into creating inherent utility in owning a Loot bag? That utility could come from creating strategy games similar to Axie Infinity where Loot items can be used in combat, artwork and avatars exclusive to Loot owners, or from some other application yet to be cooked up.

We are just two weeks into the project, so imagination is required today, but the appeal is tangible.

The cost of entry

A key question surrounding Loot is “Why would game developers build games that incorporate Loot bags when only a select few can afford them?” Developers build games that appeal to the mass market, but the vast majority of gamers are priced out of owning a Loot bag today.

The question of incentives lies at the heart of Loot’s future. Are there answers? Yes — a few. First, game developers who build on Loot have the benefit of bootstrapping their game with a core, passionate community of Loot enthusiasts. Second, and more importantly, there may be unique ways to incorporate Loot without pricing out the majority of the market. We can take inspiration from Axie Infinity and Yield Guild Games. When Axie NFTs got too expensive for most players to afford, lending markets emerged that let players borrow the NFTs needed to play in return for a portion of the winnings from Play to Earn games. We could see the emergence of Loot DAOs that devise similar solutions. Synthetic Loot is another solution being explored. Synthetic Loot lets anyone claim a pseudo Loot bag that can’t be sold or transferred but can be used in Loot games, should a developer choose to allow it. This in theory can open the door for more players.

While many questions remain, we’re in the early stage of a radically new kind of project that’s completely inverted the typical game development model. A self organized grassroots community is now tasked with taking Loot’s foundation and building something real, with all of the tools that crypto, NFTs, and metaverse economies have to offer. The burning questions surrounding Loot’s future make it one of the most captivating experiments in crypto; one that will be fascinating to watch play out over the coming months and years.

Coinbase news

• Kate Rouch Joins Coinbase as Chief Marketing Officer
• Coinbase updates investment policy to increase investments in crypto assets
• Coinbase secures first crypto license in Germany
• Coinbase Protocol Team Advances Crypto Community

Retail

• ​​Binance.US Hires Ant Group Exec to Succeed Ex-CEO Brian Brooks
• Robinhood announces new crypto DCA investing feature
• OpenSea bug destroys $100,000 worth of NFTs, including historical ENS name
• FTX strikes ambassador, equity deal with NBA star Steph Curry
• El Salvador launches Chivo wallet as bitcoin becomes legal tender
• You can now mint NFTs on crypto exchange FTX
• Twitter testing the ability to display Bitcoin and Ethereum addresses on profiles

Institutional

• FTX.US acquires crypto derivatives exchange LedgerX
• Mastercard acquires CipherTrace to boost crypto security and compliance
• Former CFTC Commissioner, Brian Quintenz joins a16z Crypto’s advisory team
• Panama lawmaker introduces proposed crypto regulation law
• Bitso Is Providing the ‘Core Service’ for El Salvador’s Chivo Bitcoin Wallet
• Australia, Malaysia, Singapore and South Africa will test cross-border CBDCs
• SEC Sets November Deadline for Final Decision on VanEck Bitcoin ETF

Ecosystem

• Ethereum scaling solution Arbitrum launches mainnet and raises $120 million in new funding
• DeFi trading platform dYdX opens access to its governance token
• Liquid staking protocol Lido now supports Solana’s SOL token
• Eden, priority transaction network for Ethereum, raises $17.4 million in token sale
• SubQuery, indexing protocol for Polkadot ecosystem, raises $9 million in SAFT sale
• SEC is investigating decentralized crypto exchange developer Uniswap Labs: Report

Tweets

• Burniske on how ETH maximalists are becoming the new BTC maximalists
• Avichal Garg breaks down what makes Loot so compelling
• An on the ground account documenting Bitcoin Day in El Salvador
• The TLDR on the growth of Axie Infinity & Yield Guild Games

This website does not disclose material nonpublic information pertaining to Coinbase or Coinbase Venture’s portfolio companies.

Disclaimer: This material is the property of Coinbase, Inc., its parent and affiliates (“Coinbase”). The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Coinbase or its employees and summarizes information and articles with respect to cryptocurrencies or related topics that the author believes may be of interest. This material is for informational purposes only, and is not (i) an offer, or solicitation of an offer, to invest in, or to buy or sell, any interests or shares, or to participate in any investment or trading strategy, (ii) intended to provide accounting, legal, or tax advice, or investment recommendations or (iii) an official statement of Coinbase. No representation or warranty is made, expressed or implied, with respect to the accuracy or completeness of the information or to the future performance of any digital asset, financial instrument or other market or economic measure. The information is believed to be current as of the date indicated on the materials. Recipients should consult their advisors before making any investment decision. Coinbase may have financial interests in, or relationships with, some of the entities and/or publications discussed or otherwise referenced in the materials. Certain links that may be provided in the materials are provided for convenience and do not imply Coinbase’s endorsement, or approval of any third-party websites or their content. Coinbase, Inc. is not registered or licensed in any capacity with the U.S. Securities and Exchange Commission or the U.S. Commodity Futures Trading Commission.

Loot Project: the first community owned NFT gaming platform was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Around the Block from Coinbase Ventures sheds light on key trends in crypto. In this edition, Justin Mart, Connor Dempsey, and Hassan Ahmed explore the growth of NFT games and the play-to-earn economy. Plus, a look at NFT marketplace activity and the Poly Network exploit.

We’re at an exciting time in crypto: one in which cryptonetworks are blossoming into full-fledged virtual economies. Nowhere is this more on display than with NFT gaming.

At the forefront of NFT gaming sits Axie Infinity and its play-to-earn model: a model that pays people in crypto to play a fun video game. With over one million daily active users, Axie Infinity has exploded in popularity in emerging markets and is showing the potential to be a trojan horse for on-boarding the next generation of crypto users.

On top of that, Axie Infinity and play-to-earn gaming has spawned its own thriving financial services sector.

The rise of Axie Infinity

Over the last 30 days, Axie Infinity generated a head turning $343M in fee revenue. This is more than any app or protocol in crypto aside from the Ethereum blockchain, according to Token Terminal.

So where’s that revenue coming from?

How Axie Infinity generates revenue

The Axie Infinity economy consists of a governance token (AXS) and a second token called Smooth Love Potion (SLP) that serves as an in-game currency, along with NFTs that represent both game characters and virtual real estate.

The gameplay itself is often compared to Pokemon, where players battle “Axies” (pictured below) against those of other players. Different Axies have different strengths and weaknesses, and the strategy of the game comes down to playing to your Axies strengths better than your opponent. Players get paid in SLP for defeating opponents. Additionally, players can compete daily quests to earn additional SLP. Axies can also be “bred” together to create new Axies which can in turn be sold to other players for profit.

Every time an Axie is traded, a plot of real estate is sold, or two Axies are bred, the protocol takes a fee priced in a combination of AXS and SLP. Rather than go to the developers, this revenue is placed in the Axie treasury, which has ballooned to nearly $600 million.

An emerging markets phenomenon

While the protocol revenue numbers alone depict the emergence of a new breakout crypto application, what’s more exciting is where Axie Infinity is taking off: in developing nations where players can often earn more playing the game and selling SLP for their native currencies than they can with a typical day job.

With an estimated 50% of daily active users (DAUs) coming from the Philippines, the game is also picking up steam in other emerging markets like Indonesia, Brazil, Venezuela, India, and Vietnam.

Created by game developer Sky Mavis in 2018, Axie started picking up organic traction in the Philippines in early 2020 after a few players realized they could make legitimate incomes by playing. When Covid lockdowns hit and many were put out of work, more were encouraged to give it a try. A documentary on the game’s growth called PLAY-TO-EARN went viral in May 2021 and DAUs went vertical soon after.

Business models of the metaverse

Unlike many mobile games, Axie Infinity is not free to play. To get started, players need to obtain 3 Axie Infinity characters. In the earlier days of the game, the average Axie was selling for under $10. With the game’s rapid growth and the broader NFT rally, the average Axie is now selling for nearly $500 according to CryptoSlam.

Given Axie’s base within the Philippines and other emerging markets, a $1,500 entry tag is a non-starter for most would-be players. To mitigate this barrier to entry, an informal market emerged in which NFT owners began lending players the NFTs needed to play the game in exchange for a cut of their winnings. This is done through QR codes that let players use Axie NFTs in game without the lender having to cede ownership on-chain.

This informal market has blossomed into a formal play-to-earn financial services sector. The largest and most prominent player is a project called Yield Guild Games.

Yield Guild Games (YGG)

Founder Gabby Dizon likes to say that Yield Guild Games is one part Berkshire Hathaway and one part Uber.

Just as Berkshire Hathaway is a holding company for a multitude of businesses, YGG is essentially a holding company for play-to-earn gaming assets. Starting in 2020, they’ve been buying up yield producing NFTs, governance tokens, and ownership stakes in promising gaming projects and protocols.

Similar to how Uber pairs people who want to earn money driving with people who need rides, YGG pairs people who want to make money gaming with the NFTs they need to earn in play-to-earn games. In many parts of the world, people are opting to work with YGG over Uber simply because it pays more.

YGG recently released its July Asset & Treasury Report that offers an interesting glimpse into the new kinds of business models NFTs and play-to-earn games are creating.

YGG by the numbers

Within YGG, there are scholars and community managers. Scholars receive NFTs that they in turn put to work earning crypto. Community managers recruit and train new scholars. 70% of winnings go to scholars, 20% to community managers, and 10% to the Yield Guild Games treasury.

According to the report, 2,058 new scholars joined YGG in July bringing the total to 4,004. In the same month, YGG scholars generated 11.7M SLP by playing Axie Infinity, which equated to over $3.25M in direct revenue. From April through July, scholars and community managers have earned a cumulative of $8.93M.

From its cut of all SLP earned by scholars, YGG earned $329,500 in July and a total of $580,000 since April. YGG’s expenses currently outstrip revenue, as they spent $1.62M in July alone “breeding” new Axie’s to meet scholar demand (breeding can cost anywhere from $200 to $1,200 per Axie).

The YGG Treasury

The YGG treasury consists of tokens and stablecoins held in a wallet, NFTs, and venture investments made in various play-to-earn games. The project has been funded by a $1.325M seed round led by Delphi Digital and another $4.6M round from a16z. They also raised $12.49M from the sale of the YGG governance token, while holding 13.3% of its outstanding supply.

As of the end of July, the YGG wallet’s holdings stood at $415M, with the majority stemming from the YGG token ($373M). The YGG token is part of Yield Guild Game’s plan to transition into a community-governed DAO.

The price of YGG has tripled in August, meaning their treasury currently stands at over $1B.

Much of YGG’s capital has been put to work buying NFTs that can earn yield from play-to-earn games. By the end of July, the YGG treasury had amassed 19,460 NFTs valued at over $10M across 12 play-to-earn games. Axie Infinity NFTs comprised close to 90% of that value.

YGG has also made early stage investments across 8 play-to-earn games via SAFT (Simple Agreement for Future Tokens), and locked in ~$1M for yield farming in blue-chip DeFi projects.

Play-to-earn in the real world

A key element of the YGG model is that players are lent NFTs with zero downside risk and without having to put down any upfront capital. In return, they surrender 30% of their winnings but retain the majority — a critical hook to onboarding a new class of crypto users that have historically been priced out.

In fact, some players in the Philippines are earning 5–10x what they were making from their previous jobs. New homes have been purchased, charitable acts have been made, and even shops are accepting SLP as payment.

Beyond the wealth Axie Infinity has created, the game’s popularity has served as a means for getting a large new class of users comfortable using crypto applications. As these 1 million users interface with cryptocurrencies, NFTs, digital wallets, and DEXs, it’s not hard to see this new cohort as natural users of other DeFi and Web3 applications.

Play-to-earn sustainability

If Axie Infinity is its own digital nation, game developer Sky Mavis serves as its Federal Reserve. Where the Fed has various tools it uses to influence the economy, Sky Mavis can adjust the SLP issuance rate and breeding fees with the aim of keeping the Axie economy healthy. Just like a real economy, digital economies have to consider the effects of inflation.

ETH has been flowing into the Axie economy due to high demand for Axie NFTs. Increased demand for Axie NFTs has led to rising Axie NFT prices. Higher NFT prices have made breeding more profitable. Breeding requires fees paid in SLP & AXS, leading to a rise in token prices. With rising SLP prices, playing becomes more profitable, encouraging others to join. A powerful positive feedback loop no doubt — but what if market conditions change?

Winning Axie Infinity battles and quests yields SLP, inflating the SLP supply. And since breeding is priced in SLP, additional supply of SLP equates to cheaper breeding fees to create new Axie NFTs, inflating Axie NFT supply. These dynamics could have an impact on NFT market prices, which in turn may have a direct effect on the economics for players — a possible negative feedback loop.

Ultimately, Sky Mavis has to keep the SLP supply in-check while improving overall gameplay to keep its player economy and ETH deposits growing. They must also offset the number of players seeking to extract a profit with players who are pure consumers — i.e. playing for the fun of it.

Playing the Long Game

While Sky Mavis works to keep the Axie economy strong, Yield Guild Games is banking on the continued growth of play-to-earn gaming as a whole. By replicating its model for Axie Infinity across new games, it seeks to build a play-to-earn empire. Over the long run, founder Gabby Dizon sees YGG as the “recruitment agency of the metaverse” that ultimately competes with the Ubers of the world for labor. A future straight out of Ready Player One in which millions of people earn a living in the digital world in order to cover expenses in the physical one.

Final word

With the exploding revenue of Axie Infinity, the emergence of DAOs like Yield Guild Games, and the multitude of play-to-earn games on the horizon, it’s clear that this trend has legs. With DeFi, NFTs, and now crypto gaming, we’re rapidly evolving past the original crypto killer app of speculative trading and into a universe of expressive new apps and models. We’re in fascinating times as crypto’s utility phase marches forward with a full head of steam.

Quick Hits

OpenSea Hits $3B monthly volume

In the month of August, NFT exchange OpenSea hit $3B in monthly volume as over 1.5 million NFTs changed hands. Its August volume alone exceeds that of every other month in its history, combined.

OpenSea’s August volume is on par with $3B in gross sales Etsy put up in all of Q2: another sign of just how big the NFT market has grown relative to other online marketplaces in a very short timespan.

Data from The Block shows how dominant OpenSea’s dominance over the NFT landscape really is.

Notably absent from this exchange landscape are any kind of decentralized venues for trading NFTs. This follows past market cycles in which centralized exchanges found product market fit first, before ultimately paving the way for decentralized alternatives (think Uniswap during the DeFi summer).

The DEX market for NFTs is still nascent but one we’re watching is the recently launched Punks.house which is a permissionless venue for trading CryptoPunks made by Zora. We’re also seeing NFT markets begin to decentralize themselves, with NFT art marketplace Super Rare making the first move with the introduction of its RARE governance token. Many suspect OpenSea will eventually take this route as well.

Lastly, while OpenSea is a centralized for profit entity, its code is open source. It wouldn’t surprise us to see a low-fee competitor forked from OpenSea emerge in the coming months.

$611M whitehat hack?

In the largest DeFi hack to date, an attacker drained over $611M from the Ethereum, Binance Smart Chain, and Polygon blockchains. Then in a surprise move, he returned almost all of it.

The hack was done by exploiting vulnerabilities on the Poly Network, a cross-chain interoperability protocol that connects different blockchains. These types of networks are usually among the most complex, owing to challenges in getting two different blockchains to talk to each other in a secure, safe fashion (it’s hard enough getting one blockchain to be secure!). And complexity is the enemy of security because added complexity increases the surface area for attackers to find exploits.

In this case, the hacker tricked Poly Network’s smart contracts into thinking that the hacker’s address had permission to unlock the $611M+ across chains (detailed technical analysis here, simple explainer here). But in an odd turn of events, the hacker ended up returning nearly all of it to the Poly Network team (sans $33M USDT frozen by Tether).

There remains speculation around the hacker’s motives to return the funds. Security firm SlowMist stated that they were able to identify the hacker’s IP and email addresses, so some think the funds were returned because the hacker knew they wouldn’t be able to launder that much money undetected. The hacker, on the other hand, conducted an AMA and stated that they did it, “for fun.” And in a separate twist, the Poly Network team offered the hacker a job as their Chief Security Officer in addition to sending a $500,000 bounty for returning some of the funds.

What’s going on here? We can’t know for sure, but it is rare for a hacker to return funds, especially in such a public fashion. Occam’s razor suggests that the repercussions involved with getting caught (if their info was truly identified) were too great to bear.

While it’s disconcerting to see more hacks happening, we should note that this is simply an evolutionary fitness-function in action. Each hack teaches us how to improve, and we learn, adapt, and improve. While bleeding edge crypto protocols pioneering new use cases will inevitably carry more risk, the space hardens over time.

And Poly Network is not alone. Note the other week when Paradigm’s samczsun discovered and reported a vulnerability in SushiSwap’s MISO platform that would have left $350M ETH at risk. Most recently, Cream Finance was exploited in a flashloan attack for $25M.

But for crypto to really succeed, we need security guarantees. Insurance markets are critical.

Retail news

• Binance Tightens KYC Requirements — Leans into Compliance
• The 2021 Global Crypto Adoption Index: Worldwide Adoption Jumps Over 880% With P2P Platforms Driving Cryptocurrency Usage in Emerging Markets
• Crypto grows from 2% to 41% of Robinhood’s total revenue in past year
• Japan’s Liquid Global Exchange Hacked; $90M in Crypto Siphoned Off
• ‘Novi is ready to come to market,’ says David Marcus as Diem’s future remains uncertain
• Facebook Considering NFT Support in Novi Digital Wallet
• Austrian crypto unicorn Bitpanda raises another $263 million

Institutional news

• US Mortgage Lender UWM Plans to Accept Bitcoin Payments
• Galaxy files for ETF that provides indirect exposure to bitcoin
• Bloomberg and Galaxy team up on decentralized finance index
• Former SEC chair Clayton joins Fireblocks advisory board
• Galaxy reports losing $175 million during the last quarter in recent earnings call
• Wells Fargo Launches Passive Bitcoin Fund for Wealthy Clients

Ecosystem news

• Visa Enters Metaverse With First NFT Purchase
• Budweiser buys Beer.ETH domain and a rocket NFT
• Twitter taps crypto developer to lead decentralized social media initiative Bluesky
• TikTok Picks Streaming Service Audius to Power New ‘Sounds’ Library
• DeFi projects could come under SEC’s oversight, says chairman Gensler
• a16z announces $4.6 million financing round in Yield Guild Games
• Avalanche launches $180 million DeFi incentive scheme with Aave and Curve
• Walmart is looking for a crypto product lead
• Polygon acquires Hermez in $250 million deal that includes first-ever token ‘merger’
• Ethereum 2.0 Staking Contract Now Holds the Most Ether: $21.3B

Tweets

• Chris Dixon: Blockchains are the new app store
• Santiago R Santos on play-to-earn and the Future of Finance
• Muneeb on the L1 landscape
• Ryan Watkins on TVL across smart contract platforms

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Axie Infinity, Yield Guild Games & the play-to-earn economy was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Around the Block sheds light on key trends in crypto. In this edition, Justin Mart and Connor Dempsey highlight the latest NFT boom, and Ethereum’s EIP-1559 upgrade.

CryptoPunks & the latest NFT boom

A Veblen good is a type of luxury good for which the demand increases as the price increases, in apparent contradiction with the law of demand. Rolex watches, diamonds, yachts, bitcoin, and now, strange looking pixelated characters that you can find all over your twitter feed.

The OG NFT

In 2017, Larva Labs created a software program capable of randomly generating 10,000 unique, cypherpunk inspired characters — some with rarer attributes than others. When Larva Labs was happy with the output, they linked these characters to an Ethereum smart contract, at which point these 10,000 characters became unique, unalterable assets that could be bought and sold on Ethereum. This would eventually pave the way for the now widely accepted ERC-721 standard which is the foundation of today’s booming NFT marketplace.

While released in 2017 to little initial fanfare, CryptoPunks eventually picked up a bit of steam within the Ethereum community and started selling for thousands of dollars each. Fast forward to April 2021 and the average CryptoPunk was selling for over $30,000, owing to their status as “the original Ethereum NFT.” In June, a very rare “Alien Punk” sold for a record $11.75 million!

Despite the record setting sale in June, the NFT market had cooled a bit with the overall market correction. That changed at the end of July, when a flurry of huge purchases sent the market into a frenzy.

Frenzy ensues

It started when entrepreneur Gary Vaynerchuk spent $3.7 million on one of only 24 rare Ape CryptoPunks — this one sporting a unique orange beanie. Shortly after, another rare Ape CryptoPunk sold for $5.5 million.

As Punks with more perceived rarity started moving, someone swooped in and bought all of the lowest value punks in one shot. This was accomplished through the use of flashbots: by paying a miner 5 ETH, the buyer was able to get all 100 CryptoPunk purchases in a single block. This was done to prevent a front-running attack, where others could see punks being rapidly purchased and front-run the process (this falls under MEV or miner extractable value).

When the buying frenzy kicked into high-gear on Friday July 30th, the 7-Day sales rate for CryptoPunks climbed to nearly $46 million, up from $12 million the day before. By the following Friday, that figure topped $190 million.

The mania was extended to other NFT “Blue Chips” projects like Autoglyphs, Artblocks, and BoredApes, among others. By Friday August 6th, 7-Day sales of all NFTs topped $375m. This exceeded previous highs set in May when LarvaLabs launched Meebits, netting $80M in primary sales upon launch.

USD volumes have since come back down to earth, but not before breaking just about every NFT sales record there is.

So what’s happening here?

It’s hard for some to avoid drawing parallels between where bitcoin was in 2013 and where the NFT market is today.

In 2013, bitcoin started the year at $13 before hitting a peak of $1,156 as early adopters who saw value in it piled in. Simultaneously, most in the mainstream questioned why anyone would pay anything to own a purely digital asset (the “BTC has no intrinsic value!” argument), while others tried to replicate its success by launching dozens of copycat projects.

The rise of NFTs and CryptoPunks have been met with similar adoption, skepticism, and mimicry as BTC circa 2013. Early adopters are sending prices ever higher while the mainstream questions “why would anyone pay for a JPEG that doesn’t do anything.” Meanwhile, dozens of “NFT avatar” projects have been launched in hopes of recreating CryptoPunks success.

So why are people paying so much money for some pixels? Well, they’re not actually buying the pixels. They’re buying a record of ownership (via a token on Ethereum). A codified representation of their membership in the club of CryptoPunk owners. And with this membership comes social effects — many Punk owners are setting their Twitter or Discord avatars to their CryptoPunks for a measure of stature. Some are even bootstrapping anonymous Twitter accounts with a following through their NFT purchases. In the future, owning a punk could grant access to certain people, events, or even other NFT assets.

On one hand, it’s entirely possible CryptoPunks and other NFTs become integrated into our social fabric in interesting ways, making their social utility worth today’s price of admission. On the other hand, it sure is strange to see NFTs linked to JPGs sell for the equivalent of a downpayment on a house. While it’s too early to tell how all this plays out, what’s clear is that there’s something interesting happening here.

Upgrading Ethereum: a summary of EIP-1559

On Thursday August 5th, Ethereum’s London hardfork and the much discussed “EIP-1559” went live.

EIP-1559 was one of five improvement proposals included in the hardfork, but it captured the lion’s share of attention due to its potential impact on ETH’s value. More specifically, EIP-1559 constitutes a shift in ETH’s economics by adding deflationary pressure on Ethereum’s native asset (ETH). While these implications are real, the actual motives for EIP-1559 were mainly to:

• Improve Ethereum’s user experience by making gas fees more predictable
• Pave the way for rollups and other Layer2 scaling solutions (via more predictable gas fees)
• Improve security by making DOS attacks more expensive
• Disincentivize short-term chain re-orgs

For a technical deep dive, read this piece from Ethereum devs, Danny Ryan and Josh Stark. For most, a TLDR on the UX changes will be sufficient for understanding EIP-1559 and its implications.

A simplified fee market

Before EIP-1559, to send an Ethereum transaction you set a bid based on the amount you were willing to pay to get included in the next block. If you didn’t set your bid high enough, miners would prioritize higher bids and you’d end up waiting a long time. If you were in a real hurry, you’d often end up setting your bid higher than necessary.

EIP-1559 does away with this “price first auction” in favor of a fixed-price sale. Instead of guessing at what price you’ll need to pay to get your transaction processed, the protocol now simply quotes you a price called a base fee. This fee is the same for everyone based on current demand for blocks, removing much of the guesswork for users. If you do want your transaction prioritized, you can add a “priority fee” similar to the current fee market.

Here’s where the economic implications come in: instead of the base fee going to the miners, this fee gets burned. This is done out of necessity — base fees increase as demand for blockspace goes up which is measured by how full blocks are. If base fees went to miners, they’d be incentivized to spam their own blocks to send base fees higher so they can book more profits. Thus, base fees are burned to remove this temptation.

In short, this upgrade should be great for Ethereum users, and less so for miners, where one estimate quotes a 20–35% reduction in revenues from the upgrade.

But what about the price of ETH? Some possible implications

Since ETH is burned with each block, the overall rate in which new ETH is put into circulation is not just lower, it’s quite possibly net negative. In fact, in the few days EIP-1559 has been live, more ETH has been burned than issued. While this is not guaranteed to occur, it’s likely to continue as long as Ethereum block-space is in high demand.

Thus EIP-1559 is thought to be similar to a Bitcoin halving where issuance is reduced (or in this case likely net negative). Some are speculating that this could make ETH more attractive as a store of value — “ultrasound money” if you will. From another angle, revenue formerly given to miners (in the form of net new ETH) is now being distributed to ETH holders by way of deflation.

Important to note that this is uncharted territory. Will this work long-term for ETH as a monetary asset? The future is uncertain, but early indications show that EIP-1559 is at least on the way to achieving its (non-economic) goals.

Coinbase news

• Coinbase — Second Quarter 2021 Earnings Call
• Coinbase is Live in Germany!
• Embracing decentralization at Coinbase
• More ways to buy crypto and cash out, now on Coinbase
• Coinbase’s Bison Trails Adds Developer Tool for Solana Blockchain
• Coinbase: Bitcoin ETF Approval ‘Only a Matter of Time’
• Fact Check: USD Coin is the largest regulated stablecoin in the world
• Coinbase Enters Japanese Market

Retail news

• Square Cash App to acquire Afterpay for $29 billion along with its 16 million users
• SEC Hits Poloniex with $10 million fine
• Steven Cohen’s Point72 Leads $21M Funding Round in Messari
• Voyager acquires crypto custody and payments platform, Coinfy
• Brian Brooks resigns from Binance.US
• Miami set to launch its own cryptocurrency
• FTX enters gaming with League of Legends’ Riot Games deal and NFT focused sports/entertainment marketplace

Institutional

• Circle to become full-reserve bank
• Invesco files with SEC for Bitcoin Strategy ETF
• Rothschild-founded RTI Capital invests in crypto platform Aspen Digital
• Trading and quant shop Jump Trading makes first crypto acquisition with Certus One
• Matrixport closes $100 million fundraise at ~$1 billion pre-money valuation
• Fidelity buys 7.4% Of Bitcoin mining company Marathon Digital Holdings

Ecosystem

• Lone Senator rejects crypto provision in infrastructure bill
• Steve Cohen’s Point72 leads $21M funding round in Messari
• Gensler sets SEC sights on DeFi, crypto lending and more in expansive speech on regulation
• Vitalik Buterin: Things that matter outside of defi
• DeFi platform dYdX is launching a governance token
• DeFi platform Popsicle Finance suffers $20 million exploit
• BSV suffers 51% attack
• Audius reaches 5M monthly users

Around the Block #15: CryptoPunks, the NFT boom, and EIP-1559 was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.