Cyber Wolves Investment Philosophy
The Leaders in Crypto Gaming Research
Investment Philosophy
We believe that the future is crypto. While it may be enticing to chase every crypto project, we choose to focus on and be the subject matter experts for crypto gaming. Below we describe what the Wolves believe are the most profitable areas to invest in.
Our investment philosophy is made up of two major parts, the pyramid, and an investment framework. The pyramid represents the overarching projects or technology we want to invest in. This investment framework is a tool that we use to evaluate a project once it comes across our hypothetical “desk.”
We will also be touching on how we conduct our research and what lens we use to evaluate our projects. This will be touching on the total addressable market and the importance of economies. We will also touch on some questions we go through when looking at individual games.
Lastly, we will talk about the state that the crypto gaming sphere is currently in and talk about the future that we want to help build.
So why write this paper? We write this paper in hopes to give legitimacy to investors that want to enter the crypto gaming sphere and start the conversation of “how do we value crypto gaming projects?” This is a difficult task to undertake because the space is so new with limited historical data. This means assumptions must be made in the absence of relevant data.
Though the task is difficult it does not mean the conversation should not be had. The path, at first, should be littered with failures until the process is refined to the point that we can be confident in our price targets and the projects we are investing in.
So let us begin.
The Pyramid
“The Pyramid” is a framework that helps the wolves be put in the right frame of mind when investing. The reason we settled on Pyramid, vice pillars, is because we wanted something that represented portfolio allocation. Bottom being a higher position than the top.
Base Layer/First Layer: Technology Stack. The technology stack is what makes the whole crypto gaming sphere run. During the California Gold Rush, few prospectors struck gold or became rich. Most of the people who made the money were those who sold the shovels to the prospectors who were panning for gold. I say this because the most profitable project in crypto gaming might not be the most eye-catching or sexy. It might just be the ones “selling shovels.”
With that frame of mind, we need to pay close attention to who is empowering (selling the shovels) the people creating video games or projects (prospectors). So we need to ask the question, what technologies are essential for crypto video games and web 3.0?
The Settlement Layer. We always need to understand the macro scene at large and what blockchains will be here for the long run. No use in investing in projects, such as video games, that will eventually die if the blockchain it is built on collapses.
Scaling Solutions. All L1s will eventually need a scaling solution due to mass adoption coming for crypto. Lightning network for Bitcoin, Zk Rollups for Ethereum, and talks of needing to scale Solana are brewing.
Rendering is a key piece of technology that is integral for gaming to perform on the long run. Historical rendering such as youtube is vital but also is real time rendering which will help bring gaming and entertainment to new heights.
Decentralized Data Storage. The underappreciated workhorse of web 2.0 is data storage. Centralized parties such as Amazon (AWS) and Google (Cloud Services) control so much of what we do in our everyday lives. That being said, the key issue with the current system is censoring of data and information.
Cross chain compatibility and interoperability is a must. With all development being scattered among different blockchains we need a piece of technology that brings usability of an asset from one blockchain to another.
Examples:
Zk Roll Up projects such as Starkware
Crosschain functionality
Bitcoin: Stacks and Lightning network
Ethereum: Polygon Matic and Immutable X
Solana: No Layer 2 as of right now
Tezos
Cosmos
Second Layer: Platforms. We are committed to finding the best spaces that bring gamers and developers together. Platforms are the dominant businesses within tech and it is safe to assume they will carry their dominance into gaming. To give some real-world examples, you have Apple with the app store, Google with google play, Amazon with AWS and marketplace, and Meta with social media. Also to make it more relevant to gaming you have Steam, Sony, and Microsoft.
Marketplace. Similar to exchanges or NFT marketplaces there needs to be a decentralized marketplace in which people can come and exchange assets for tokens. Opensea fills this void now, but their lack of innovation and terrible tech makes them ripe for disruption. The competition will be fierce in this category and there have been a lot of projects that have taken the stage, Ultra, Gala, Phantasma Chain, and Enjin. Who will win? Careful research needs to be done within each sub community (gamers/developers) and to see who is most loyal.
Game Studios. These are the next generation gaming studios that will produce high end or addictive games such as traditional gaming studios (Nintendo, Activision, Take Two Interactive, and EA). These studios will bring the next wave of gaming by implementing games that will interact with the metaverse and allow players to own their own assets
Guilds. Guilds are a collection of people or a community that have a lot of in-game assets that can be leased out to players for a profit. The relationship is usually defined by three major entities, owner, manager, and a scholar. The owner is usually the investor that puts the money up for the in game asset, such as a team for Axie Infinity. The manager interacts with the scholars and manages the day to day operations of the owner's asset. Think of it as a property manager for a rental property. Lastly the scholar is the person that uses the asset to get a cut of the in game rewards such as the in game token. The earnings are split between the three entities.
Launchpads. Launchpads are the kickstarters of the crypto gaming space, they are used for retail investors to get allocations to upcoming projects. For a launchpad to be successful they need two major things. One, they need a constant inflow of good projects and partnerships or holding their token is useless. This usually rests on the management team and how good they can network with upcoming projects. Second, they have a community that doesn’t sell off their allocation. New projects will not want to work with a community that is known for selling off right when token distribution goes live, which leads to less projects coming to the launchpad.
Third Layer: Metaverse. We believe that the long-term winner in this space is a community-built world that integrates projects across chains.
Digital Assets. Real Estate and in-game assets within the metaverse will be a hot commodity moving forward. Wearables that can go on your in-game character such as a fortnite skin, digital weapons, etc. will all have a major part of the metaverse.
Blue Chip NFTs. Blue chip NFTs will be asked to be a part of games. I liken it to Super Smash Bros, where each character has its own game and history but it is then used to play a collective game.
Fourth Layer: Games. Though these are the highest risks with the most assumptions, it is worth spending money and resources to find the games that will shape the next generation. Below each category is broken down by percentages of revenue generated by genre.
Action Games and Shooters. These games bring almost 50% of the revenue of gaming as a whole. If a game is action or shooter oriented they will have the attention of the Wolves. Looking for the next CS:GO, Call of Duty, Fortnite, or Overwartch on the blockchain.
Role Play and Adventure. This genre will need to have innovation and might not be best suited for blockchain gaming. Keeping our eyes on first movers will be key.
Sport/Gambiling. Professional sports and gaming has always been intertwined. Tokenizing sport characters or teams will be a worthy investment.This section also includes fantasy football or a Draft Kings equivalent.
MMOs. A MMO such as Runescape or World of Warcraft will attract the masses and will be one of the biggest companies in the world.
Evaluation Framework
Thisis the evaluation framework we use to find games worth investing in. Ask yourself these questions to see if a project is worthwile to invest in.
Competitive Edge
Is the technology that they have superior?
What Web 3.0 tech are they employing?
Will it be hard for competitors to duplicate what they do?
Are they the first mover in the crypto gaming genre?
Do they have the traditional network/resources to compensate?
Can they continually out-innovate the competition?
Right Timing
Has the technology been built in web 3.0 to support the business plan? In other words, is it future proof?
How big is their runway?
Is any new technology is being developed to pose a threat to the incumbent?
Right Team
Is the management team capable of continually innovating?
How ambitious of a vision does the team have for their project
What have they accomplished in the past that demonstrate their ability to be successful in their current venture?
Distribution
What is their onboarding process for new users that are not crypto native?
What hardware and software is the project using and is it available to the masses?
Would you feel comfortable recommending the game to your non-crypto game playing friends? If not, why? What milestones need to be met in order to recommend it?
Economic Model
Circulating Supply and the Vesting schedule?
Do they have economists on their team?
What utility does the token have, and is there a strong incentive to use the token within the project?
Is there a strong incentive to hold or lock up the token?
In other words, if there is a strong use case for the token, then it will drive value to the token and keep it from flipping hands/dumping?
Community
How strong is the community? As important as the developers are the gamers and the community are the ones which live inside the digital world. The most popular games in the world - Counter Strike, Fortnite, WoW, and COD - all have a powerful network that goes beyond a simple game.
When interacting with the discord/community do you have a positive feeling that the community will be here for the long run?
Marketing
Do they have major influencers covering their projects?
Do they have a marketing strategy that will get the attention for mass adoption?
Durability (5-10 years)
Will this project be around for 5-10 years?
Potential future of the game and it being incorporated into future derivatives or the metaverse.
What are the short term and long term competitors?
Can they acquire significant market share of their target market?
Key Insight
What does the team fundamentally understand that other teams don’t?
Resources
The Wolves pride themselves on their ability to find a project early by using the tools and methods that we have developed in the discord and the youtube channel. Here are the vehicles we use to conduct our research and produce our key insights.
Twitter. If you are in the crypto space, you are most likely on twitter. Following well known and not well known influencers in the space is important to measure sentiment of the overall gaming space. I also advise people to follow people that disagree on crypto video games, political views, and macro economics. Also follow people that are not in your particular industry to get different key insights on a particular subject. Find pain points to always test your convictions and develop key insights.
Crunchbase. This is a tool that provides us with funding of projects or to see what venture capital money has been moving to. In our discord we discuss projects found and write detailed reports on the possible success of projects that are in the early stage so we can allocate a percentage of our portfolio to the project when or if it comes out.
Medium. This website seems to be the destination for crypto projects to educate their community or have major announcements on the development of the project. Disclaimer, projects have been lying on their partnerships so don’t take everything they say as gospel.
Blockchain. A tool to find wallets and metrics on wallets. We often track whales on projects that we are interested in. We also use etherscan to keep track on major influencers to see what they are buying, selling, transferring.
Discord. We use discord to go to AMAs and attain a whitelist early. For projects that we really like we try to educate the underlying users and investors. On some occasions we will partner with the team to provide information to the user base.
Cyber Wolves Discord. This is our secret sauce and we will not disclose how we conduct business in our discord, but I will say we have established a culture that everyone works together and shares ideas and projects. It is a closed community of people that want to do right by crypto video games and crypto. If you are interested in this paper and what we are doing you are free to apply on this google form: https://t.co/BHjGu4LSQV
Telegram. Telegram is a necessary evil. It seems like outside of the United States it is what is used to communicate with the community of a certain project. We use it to inquire about subjects that are not readily available on medium, discord, or on the whitepaper/website.
Youtube. Due to the length of production, once a project or token hits youtube it is usually too late. We usually use youtube to validate our thesis and to sell into strength.
If you use these resources and the framework we provide you above you can do quite well in the crypto gaming space as a one man/woman show. Though I encourage everyone who wants to take this seriously to be in a discord or a community that splits the workload which is outlined above. I vote for you to apply to the Cyber Wolves, but if not, get a group of people together that you trust.
Crypto Gaming’s Current State
Before we talk about crypto video games, we need to talk about the total addressable market (TAM) of the whole gaming sphere because this gives context to what we will address down below. According to Newzoo Global Games Market report for 2021, published July 2021, we are currently at 3 billion gamers worldwide which generated 175.8 billion in revenue. The current unique wallets that are playing blockchain games is roughly 1.6 million according to Dappradar. Though Dappradar doesn’t have data for all games, they cover Axie and Splinterlands which covers most of the gamers playing currently.
To dig a little deeper into the topic of TAM, we must talk about service available market (SAM) for each genre of game. This is data from Statistica in 2018 that goes over total sales by genre of game, though dated, it still provides useful information as investors.
Action: 26.9%
Shooter: 20.9%
Role Playing: 11.3%
Sport: 11.1%
Adventure: 7.9%
Fighting: 7.8%
Racing: 5.8%
Strategy: 3.7%
Other: 4.6%
With this information we now need to ask ourselves how does crypto gaming start to have a rise of newcomers coming to the space? The two major points we have identified are influencers and education. Unfortunately, we have seen Ubisoft receive backlash for the release of their NFTs. We as a group don’t think the initial adoption of crypto gaming will come from the top (AAA studios) due to the mistrust the players have from centralized parties such as ATVI, TTWO, EA, and Ubisoft with the introduction of microtransactions and paywalls.
The initial adoption will come from gamers and influencers moving to crypto games and studios due to owning items and the financial incentive of playing these games. This is because gamers trust gamers and the people they watch. Tracking the amount of influencers on twitch and youtube that will be publishing content on this subject will be a good measure of how much adoption the space will get over time.
Another issue that needs to be addressed within the crypto space and gaming as a whole is the education of what NFTs and crypto are. I see gamers in this current market rejecting something that they don’t currently understand simply because it is coming from someone they do not like or trust. Do I blame them? No. Hopefully this can be remedied through education of the player base, developers, and investors.
I also want to take some time here and address what the current player base and developers don’t like about blockchain gaming (All VALID and can’t be ignored):
Expensive Barrier for Entry.
The barrier for entry to some of these games is too high for the average gamer. They have to put up several hundred several thousand of dollars to get started. This is a legitimate concern - gaming has been moving more towards a freemium model where you can play the game for free and have the option to buy “skins” or “gear”.
I agree with this concern, but I do think as competition ramps up, just like in the traditional markets, the barrier for entry will go down based on competition and deflationary attributes of technology . I also see the freemium model coming to crypto and play to earn, which will make it more accessible for gamers worldwide. The end goal of crypto gaming is to make it feel fun and engaging while at the same time rewarding the player that commits time to playing with crypto.
I also want to break out of my western way of thinking of what crypto games have to be. In talking with our group, which is international, we feel as if two types of communities are born from crypto gaming. One culture is in a frame of mind that a crypto game should have the best of both worlds, both fun and engaging but at the same time also earning money. This culture values entertinment over money.
The other community has their priority on making money and it is more of a job to them. Just like we don’t find enjoyment in our 9-5 but we choose to show up due to the payout in fiat. Also a note, some of these countries are getting paid in US dollars, which most of the crypto is pegged to. This is a huge deal for emerging countries to pay their everyday expenses.
Though I will say if the barrier for entry remains high for the next few years there are reasons to be concerned that the western way of gaming will never adopt blockchain gaming.Play-to-earn games is a pyramid scheme.
In its current state, I don’t disagree with this statement. A lot of people at the top make loads more than people at the bottom. Especially in guilds, where they buy and monopolize digital assets and lease them out to players that can’t afford the game or artificially price people out.
Being critical here is a must, Axie at its current state relies on increased demand of players and the only value proposition is earning, not entertainment. Them having this value proposition makes it a mercenary culture, where people only play when they can make money. This poses an issue due to the fact that if a competitor creates a better pay-to-earn model with more incentives for mercenaries/scholars to become independent they will leave. Once the mercenaries leave the house of cards comes crashing down.
Ok, though I can rip on my community all day, it is not like traditional gaming is perfect. The pyramid is still there, just a lot more sustainable due to being entertainment-focused. Game studios being at the top, game devs, consultants, e-sports, and streamers all get paid way more than the bottom. Also, let’s be real, no one on the bottom gets paid unless they sell on third-party websites or become a master at a game. My question is what happens when crypto gaming becomes fun and on par with current games? Even more, what will happen when gaming as a service dies and gaming as a platform becomes the new normal?
So all that being said we can point fingers at each other all day saying which pyramid is better, but all we want is a happy medium. Gamers can own digital assets that can be used in many games and resold while at the same time having a fun addictive gameplay loop that people can get lost in and enjoy.
Will there be growing pains, absolutely.Play to earn will make devs focus more on blockchain and NFTs rather than game quality and fun factor.
I think this is a short-term pain point. The reason why is because information and technology compound on itself. To make a game in the past was so much more difficult due to having to create every asset available and the game engine it was built upon. I wouldn’t say some of the old games were optimized for being fun. No, in hindsight it was a proof of concept of what could be. Once the technology stack got better to really empower the creator we got the amazing games and experiences we have today.
Currently, in the current blockchain gaming space, we are in the building of the infrastructure. Axie brought us very far but we are still quite a few derivatives away from building infrastructure that future projects can use and build upon so creatives can do their thing. At this stage, everyone has to focus on crypto native things due to it not being developed.Quality of video games.
Other than Axie we are currently in year one of crypto gaming development. We are waiting patiently for the next big thing due to games taking time to develop. In our current market conditions, we are seeing mostly cash grabs and rush to market projects, none are sustainable in the 3-5 year time horizon when the competition starts ramping up.
Also, some developers that worked for AAA studios are fed up with the current system and want to venture to do their own thing, I’m hoping some of that talent moves to crypto gaming.
A recent trend that I have been seeing is that a lot of projects that didn’t do well in the traditional sector migrated to crypto video games due to less competition. Though it does raise the bar for game development from the cash grabs, we will see the real talent surface in a few years when noticeable talents that were successful in the traditional markets come to play in crypto.
Bots/hacks ruining the experience.
When it comes to games that are played by millions worldwide the glaring issue is cheating through hacks or bots. If money is on the line it becomes even more of an issue. This will be a huge deal moving forward in the development of games and blockchain development.
Though the Wolves have talked about possible solutions that can be incorporated using blockchain technology, it all seems like a band-aid and not a real solution. In a constant pursuit to find the solution and will most likely talk about this issue extensively over the course of a few years.
A Reflection of the Crypto Gaming Space
We also must talk about the current state in which the crypto gaming sphere is currently in, spoiler alert, it is not good. The space is filled with speculators, a lack of leadership, a lack of responsibility, and lack of product. Let us address each one individually and describe what we want to see in the future.
The first issue that we are facing in the crypto gaming sphere is a lack of products. We understand game development takes time. However if we want to see mass adoption of crypto video games, especially in the western region of the world, we need a game that is equivalent to what gamers are used to playing in traditional gaming. In its current state, crypto gaming’s main pull is play to earn, that is why you see a concentration of players in developing nations playing play to earn. Once we marry ownership, play to earn, sustainable economies, and addictive gameplay loops we will see a steady inflow of new incomers that will be happy they are playing games and being rewarded for it.
Next, the lack of leadership in the crypto gaming sphere is alarming. From the development teams all the way down to the “investors” we breed a culture that does not fair well for the future of crypto gaming. I want to talk about each group of people, developers, influencers, and “investors.” All of them need to take responsibility for their actions if we want crypto gaming move forward.
Most developers are putting out low effort products due to the current demand for crypto video games and, to their pleasure, they have been making a lot of money through venture capital and the speculators (more on them later). What we have been seeing is rushed projects, the birth of “modular release”, or even worse, the promise of a game that may never come just to secure their bag. As gamers, VCs, and investors, we MUST raise our standard of what we give our money to or this cycle will continue. I also do want to mention that there are a few developers and projects out there that are trying to do right by their community and investors. It is our mission to give these projects light.
Next up is the investors, also known as the speculators. I will be the first one to admit, in this current market everyone is a speculator and when we “invest” in a project we are really hoping to not be the last one holding the bag. This drives up the cost of entry and limits mass adoption. As it stands, when you ask an investor why they invested in a project they usually say “I like the art” or “an influencer told me this project is an easy 100X.” This is done without any research or fundamental thesis. Unfortunately, to our detriment, people get away with it and get their 100X, which then attracts more speculators. The music will eventually stop and someone will be without a chair.
Lastly is the influencers, the amount of 100X-1000Xs, actually urgent, get rich now, or “THE NEXT BIG NFT DROP” we have seen on youtube is too much to count. Again, all of this breeds a culture of speculators which then breeds simple cash grab projects. It is a never ending cycle, the music stops sometime and it is all fun and games until someone gets hurt. For every one person that got a 100X there are 100 people that provided that exit liquidity.
I say all this because we must be our own worst critic so we can then improve and become better as a whole. We will try to help build to a better future by education and empowering the people entering in the space. This paper is the first step of it. I hope you enjoyed it, you will be hearing from the wolves very soon!
amazing article
I like your ideas.