Fool that I am, I’ve started reading The Three Body Problem hard-sci-fi series by Liu Cixin.
One book down - ever the contrarian - it isn’t as good as I hoped but it certainly raises some interesting memes.
The best is the framing of a VR computer game as a gating mechanic to self-select the sort of intellectuals who would be open to sabotaging Earth in the service of an invading race of aliens.
That game revolves around solving the three body problem: a celestial puzzle that afflicts the aliens’ world, which sees short periods of climate stability punctuated by chaotic eras that eventually wipe out all life on the planet, forcing a reset of evolution.
Interesting times
It’s broadly reminiscent of the cycle of blockchain gaming over the past four years.
Certainly we’re now in a chaotic era when it comes to company and project valuations.
2021 has seen over $1 billion invested in the blockchain game sector, and companies such as Animoca Brands, OpenSea, Dapper Labs, Forte, Sky Mavis and Sorare have either hit or are pending unicorn status.
It’s a fascinating situation not least because on the funding side, we’re seeing an acceleration of capital inflows. It isn’t just the early stage investors or crypto angels piling into this situation. Boring big institutional investors are also in the hunt. I wouldn’t be surprise to hear of pension funds getting into the action either.
But, as much as I think blockchain is going to disrupt gaming, I also think nothing is straightforward about this crazy new world. And currently that’s as much about calculating valuations as anything.
Small slices of something bigger
For example, it’s been a notable part of the narrative around Axie Infinity that it’s posted extraordinary monthly revenue figures.
Axie Infinity’s treasury is up $200 million in July (its 4.25% of all trading + breeding fees).
But, the point about such transaction data is it’s not the standard sales data that an Apple, Telsa, Amazon or Microsoft would post. Granted they are mature businesses, but they are also generating 100% of the revenue of selling things or access to things. It would be extraordinary for their quarterly numbers to drop 10%.
The same is not true for any blockchain game which is reliant on a small slice of volatile transactional activity - both in terms of the number and value of trades and the price velocity of those trades - and the currency ratio of crypto to fiat.
I also point out - not for the final time - that Axie Infinity’s developer Sky Mavis does not get the money its game generates. This goes into a treasury which underpins the game’s AXS token. Sure Sky Mavis has indirect ways of accruing value from AXS, but the fierceness of its dedication to decentralization means that it is only one of agents deciding what happens to that treasury.
And this is something of which equity investors should be especially cognizant. In the world of blockchain games, the performance of a company may be less than the performance of its products, particularly in the short term.
For me, the situation just goes to reinforce that when it’s sunny - now - it is almost impossible not to overvalue blockchain game companies and projects.
After all, number go up is another meme of our era. But it is not the only one.