The Rise of Digital Nations
A deep dive into virtual worlds and digital land
February 8, 2022
FLYING FALCON HAS INVESTED IN DIGITAL LAND, DECENTRAL GAMES, AXIE INFINITY AND RONIN. THIS STATEMENT IS INTENDED TO DISCLOSE ANY CONFLICT OF INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE DIGITAL LAND OR ANY TOKEN. THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE DECISIONS BASED SOLELY ON IT. INVESTING IN ANY CRYPTO ASSET IS A MAJOR RISK. THIS IS NOT INVESTMENT OR FINANCIAL ADVICE.
Today is the one year anniversary of our $1.5M million purchase of the most rare digital land in the Axie Infinity virtual world. This same plot of land is now roughly valued at north of $15 million. To celebrate this day, we have published a paper on virtual worlds and digital land, with a focus on Decentraland, Sandbox, and Axie Infinity, to help those who are still a bit skeptical about this new digital landscape or are just unfamiliar with the developments happening. We hope this paper can serve as a go-to resource to help on-board and welcome more people to the world we are collectively building.
Throughout 2021, we witnessed a historic rise in crypto mainstream adoption centered around NFTs. In general, the NFT scene in 2021 was centered around 2-D digital imagery used as a social media profile picture (PFP) for the purpose of gaining clout and being a part of a like-minded, online community. Athletes, celebrities, artists and even major brands all joined in on the movement by acquiring these high-profile NFTs. Prior to the mass adoption of NFTs as PFPs; online identities were disassociated with shared interest groups; however, 2021 provided a view into the evolution of a cultural movement with the formation of newly established online communities using the same NFT collections as social constructive building blocks.
Over the coming years, we believe NFTs will experience a rapid increase in community and utility which will primarily come through engagement in virtual worlds. Digital land within virtual worlds will be used as a platform for all online communities to assemble as one and express themselves through their digital avatars. Land will be the core infrastructure for the next layer of true social experiences, coordination and more engaging community interaction. For the individuals that already own community driven NFTs such as Bored Ape Yacht Club, Cryptopunks, and CyberKongz, digital land will be the bedrock for where you can display your personality and digital identity in an interactive way beyond a Twitter profile.
We believe virtual worlds are becoming digital nations. The key properties of these digital nations are user-controlled governance and decentralized ownership of the underlying land and assets as NFTs. Citizens of such virtual worlds can be sure that the value they create can primarily be kept by them, the user, as the users are the owners of these digital nations, rather than a single centralized gatekeeper. Market participants are purchasing land to own a piece of these digital nations, motivated by similar entertainment, social, and economic value that drives the value of traditional nation states.
As digitally native communities begin to assemble in these worlds, we will begin to see, and are already seeing, traditional retailers look to market their businesses within these digital nations for the revenue potential from a new way of interacting with consumers. We will see large-scale event organizers put on virtual first experiences such as festivals and concerts. Further, we will increasingly see these virtual worlds capture the minds of gamers as these economies will look and feel similar to traditional games, except that the land and digital assets are owned by the users enabling a more democratized and player-first economy. We believe those that get their stake early in this new paradigm will have a competitive advantage over the coming years.
Decentraland (DCL) is a fully immersive 3-D virtual world that has led the way and opened the door for society to enter the virtual world. DCL is pioneering the decentralization model, as anyone can run a server, the code is open source, and ownership and governance data is stored on the Ethereum blockchain. DCL officially launched to the public just two years ago and was the first virtual world to create a unified community where users bought land, designed their land, and developed digital products to be traded and shared amongst the community. The core DCL team provides the tools necessary for users to develop their digital real estate, build online communities, and implement new online business models. User-generated content is at the core of Decentraland.
Decentraland experienced substantial growth during 2021, ending the year near 500,000 monthly active users. One of the most successful start-ups to date within the DCL ecosystem is Decentral Games (DG). DG pioneered a new business model by developing virtual entertainment centers, similar to Las Vegas, on their virtual land creating a new economic engine powering much of the growth within the DCL nation broadly. These virtual entertainment centers include casino games, nightclubs, festivals, and play and earn games.
Last year, DG collaborated with Amnesia Night Club, the world-famous night-club in Ibiza, and held a 12-hour virtual music festival on their land with DJs such as Benny Benassi and Paul Van Dyk. While it remains early, the festival enables participants to listen to live-music in a more immersive and social setting when compared to watching a stream on Twitch or Youtube. We do not believe virtual festivals will replace in-real-life (IRL) festivals, but we do believe it can serve as a complimentary experience especially for those who have limited access to IRL festivals. In the coming years, we expect the majority of music performers to perform both IRL and virtual worlds. We expect most major clubs and festivals to build out digital equivalents within virtual worlds.
In January of 2022, DG generated over $3M in revenue primarily through NFT sales. DG is now seeking to generate additional revenue through approved partner advertisements from the likes of crypto-native and traditional companies. We believe DG is a prime example of a start-up business leveraging digital land and tools at their disposal to build a highly profitable business.
Many traditional businesses will see the success of DG and others and begin to utilize digital land as a core component to enhance their digital presence and brand identity. For example, Samsung made a splash by launching their New York retail store inside the Decentraland nation, which enables them to reach a growing digitally native audience that is outside the traditional realm. We believe these virtual worlds will enhance the shopping experience by creating a more social and engaging experience. It’ll look like a hybrid of brick-and-mortar and ecommerce, perhaps being the holy grail of the shopping experience. Retailers will need to continue to adapt and get creative, such as selling NFTs that have value in the virtual world and/or are redeemable for IRL items and experiences. It’s not taking the old ways into the new ways – It’s about creating an entirely new experience.
“The metaverse empowers us to transcend physical and spatial limits to create unique virtual experiences that could not happen otherwise. Innovation is in our DNA, and we can’t wait for you all to experience this burgeoning virtual world.” – Michelle Crossan-Matos, Senior Vice President of Corporate Marketing and Communications at Samsung Electronics America.
We are excited for what is to come in 2022 for the Decentraland nation. Given it’s early days, the user experience at times is laggy and slow, though we expect this to improve with time and look forward to the new desktop client, VR research and mobile app that are all in the works.
Sandbox is a newer land based world that is similar to Decentraland with a greater focus on gaming. Similar to Minecraft, there is no set objective and players are encouraged to create their own games forming mini-economies. Unlike Minecraft, however, Sandbox sets to provide creators with true ownership through non-fungible tokens, the underlying land, and in-game assets.
Sandbox’s promising ecosystem has yet to fully reveal their true potential to the public; however, we have seen Sandbox obtain a number of key partnerships with a bevy of land sales by some of the largest brands and most notable celebrities. In addition to the growing digital landscape, the team has released the Alpha version of their world with hopes of obtaining mainstream adoption.
As seen through the chart above the number of landowners has grown by ~260% since March 2021. This trend will likely continue through 2022 as demonstrated with the launch of Mega City, a cultural hub and community partnering with some of Hong Kong’s most reputable individuals within the film, arts, entertainment, finance, real estate and gaming sectors. This cultural hub should provide an opportunity for new users to purchase land within the Mega City to leverage all the new developments coming into the space.
As the digital nation continues to grow there will be a proliferation of PFP NFT projects that leverage Sandbox to create a more immersive and collaborative experience for their community. For example, Cyberkongz originated as a standard 2D NFT sale where owners could display their NFT’s as PFP’s through various social media platforms. Since the launch of the PFP NFT, the community has partnered with the Sandbox ecosystem to create a “CyberKongz VX ” version where members will be represented in the virtual world as their 3D Cyberkong avatar. This provides the community with a more immersive digital experience bringing far more utility to the underlying NFTs. As Cyberkongz continues to expand within Sandbox by investing in multiple land estates, they are essentially creating a new digital home for their residents to socialize, collaborate and coordinate with other members in their community and the Sandbox digital nation more broadly.
We expect celebrities to increasingly purchase virtual land to enhance their brand and better connect with their fans. As one example, this past September, Snoop Dogg purchased a 12×12 land estate with the intention of building a digital mansion. As holders of Snoop’s custom NFT, the mansion will serve as a general hangout where fans and friends can engage with one another. Snoop is leading the way; and, we are confident that we will continue to see celebrities of all types entering this digital landscape, purchasing land to create new immersive experiences uniting fans in ways we have never seen before.
The team behind Axie Infinity, Sky Mavis, is in the process of creating a virtual world full of fantasy, adventure and lore for all to explore based on the cute yet fierce creatures known as Axies. The team has been developing their project for a couple of years now and has seen exponential growth in daily active users (DAUs) within their pokemon-like battle game; however, the virtual world, which is not yet in production, is what we are most excited for.
Axie falls into a unique category with the core team primarily focused on creating and building a viable game that will be the backbone of its entire virtual world. This is similar to the Fortnite approach in the traditional gaming world, whereby it began as a single game built by Epic Games but is now the home of a plethora of experiences. In its current form, Axie Infinity is a battle based game where players battle three Axies against each other in real-time. At approximately 2.1M daily active users (DAUs), Axie is the most popular NFT based game and has paved the way for play-and-earn gaming. We believe by attracting such a large audience within their battle-based game, Sky Mavis will be well positioned to create a substantial player-base in their virtual world at day one setting the stage for a social and engaging experience.
Axie Infinity is being built through multiple intertwined layers with all the infrastructure being built internally by Sky Mavis. In 2021, Sky Mavis put strong developer focus into the core infrastructure layer by creating their own custom sidechain/blockchain known as Ronin. Ronin enables Axie Infinity to better control its own destiny, allows for faster development, and provides fast & cheap transaction fees for its users. To be sure, Ronin does come at a partial sacrifice of decentralization, but this is likely a necessary step for where blockchain scalability is today.
With Ronin now live, the core team is heavily focused on building out the land based virtual world called Lunacia. We believe the core game will likely look like a combination of Clash of Clans and Farmville with major aspects of adventure, fantasy and lore that can be explored by the millions of Axies. The underlying resources, assets and the game itself will be owned by the land holders providing unique revenue generation opportunities that historically were only captured by the core game developers.
The Lunacia nation consists of five distinct land types: Savannah, Forest, Arctic, Mystic and Genesis; with 17,241 land plots released thus far, roughly a quarter of the max supply. The center of the map is home to Luna’s Landing, where community-wide events are expected to take place. Genesis is the rarests and closest to Luna’s Landing, while Savannah and Forest are the least rare and furthest from the center of the map. Land was first sold in January 2019 and returns have ranged on the various land plots from 270x to nearly 1500x. The more rare and more centrally located land plots command higher price points; although Savannah land plots have seen the highest return multiple relative to the initial sale price which is likely due to the lower barrier of entry accessing Savannah land. It is our expectation and belief that land closer to the center of the map within Lunacia will have significant advantages within the context of land gameplay.
The core gameplay around the Axie virtual world will launch in three phases.
Phase 1: Centered around land management and managing resources giving players the ability to develop on their land, harvest, gather, craft and trade resources found throughout Lunacia
Phase 2: More gameplay elements added such as skill trees, social activities and coordination and jobs unique to the virtual world
Phase 3: Additional strategic gameplay. Players will have the ability to defend, conquer and battle with others.
While details are not fully finalized, the Axie Infinity team has leaked potential in-game resources that can be earned while playing which include emerald, ruby, and sapphire, among others. According to the evolving land white paper, resources will spawn across land with land owners having first access. These resources will be tradeable and monetizable within and outside the virtual world and as such turns land into a yield generating asset native to the core game. Further, land owners will be able to earn AXS gaming rewards by interacting with and playing the game. AXS is the Axie Infinity governance/ownership digital asset with a market cap of $3.5 billion. There is 20% (54m) of the total AXS supply reserved for gaming rewards. It is unknown what percentage of this 54m will go towards land (as there are other gameplay modes such as battles), though at a hypothetical 50% this would be north of $1.5 billion worth of AXS tokens collectively for landholders to earn (at current AXS prices). Axie Infinity is flipping the gaming model upside down by allowing in-game resources and governance to be owned and earned by the players.
In addition to the core land gameplay, Sky Mavis plans to launch a software development kit (SDK) enabling user-generated content. With the SDK, Axie community members and outside developers will be able to create their own games and experiences within the boundaries of their land. This will turn the virtual world into a collection of user developed experiences and games all connecting and building on top of eachother. We believe there will be a high incentive for outside developers and community members to purchase land and leverage the SDK to tap into the millions of Axie users.
Just last month Sky Mavis announced their builder’s program. The program provides the tools and resources to allow for the development of mini-games and other content related to Axie Infinity. The builders program has generated significant demand with over 1,800 applications already submitted proving that there is demand to build around the underlying Axie assets. As one example, one builder has started building out “Axie Warcar”, what appears to be a racing-based game with the Axie Infinity assets. The builders are encouraged to monetize their games and experiences, with examples being entry fees and/or new tokens/NFTs. We believe this is an early example of what will happen when the virtual world is launched and the SDK enables a similar experience but on a more immersive and connected digital land.
Valuing Digital Land
We believe scarcity, location, formation of estates and access to resources are the four key drivers to the value of land within a virtual world.
Scarcity: There is a common criticism around “virtual” meaning there could be an endless supply of land. While technically true, each individual virtual world has a scarce supply governed by social contract, and the addition of any new virtual world does not necessarily diminish scarcity value as each world has its own community and content. This is similar to bitcoin, where it has a scarce supply and the creation of other currencies does not diminish the scarcity of bitcoin. We believe over the long-term network effects are likely to grow and build around a few core virtual worlds where scarcity will be an extremely important driver of value.
Location: Location, location, location applies to virtual real estate as well. Land within highly populated areas should command a premium. While the ability to teleport within virtual worlds will likely be common practice, we believe teleportation will lead to more congregation around key hubs rather than less given the ease of travel. In some ways, teleportation in virtual worlds is just a better form of taking a flight IRL. In the real world people more commonly take flights to key areas of interest and we expect the same to happen in the virtual world. We largely agree with Kyle Samani’s tweet on the subject.
Formation of Estates: We believe, in most cases, a premium will be rewarded for land plots that are directly connected to each other (often referred to as an estate) as this could enable larger structures to be built than is possible with a single plot. As time goes on, it will likely become more and more difficult to purchase connected plots especially within highly populated areas.
Access to Resources: Ownership of land that has valuable resources within its boundaries will, all else equal, lead to more value. By having ownership of virtual land, you might potentially be sitting on a mine of resources, similar to traditional landholders who may have access to oil and gold. We see this most commonly playing out in virtual worlds tied to games, whereby landholders may grant rights to virtual resources (in the form of digital assets) that are necessary to level-up in the game economy such as wood, gems, stones, and gold. Having better access to in-game resources can provide players with the tools necessary to complete game objectives and tasks as well as opportunities to develop their avatar’s skills, increase their rank, and upgrade inventory ultimately leading to a competitive advantage for that player. In the context of a digital nation with millions of users, these resources could command a large financial value tradeable within and outside the virtual world making land a yield generating asset within a game.
Globalization has caused a tectonic shift in the state of culture bringing people together in ways we’ve never seen before, opening new avenues for the world to connect through various digital outlets. And, whether we like it or not; due to the current economic climate and global environment our daily lives have shifted even more into the digital landscape. We will work, socialize, play, govern, gather, collect, and trade online more than we have ever before. This is a massive paradigm shift. We believe we are witnessing the acceleration of online native communities leading to the acceleration of virtual worlds and the rise of digital nations.