A Framework for the Community Fund
Despite a decrease in overall venture investment activity since the beginning of the year, gaming is proving to be slightly insulated given the fundamental tailwinds for this industry (Konvoy). Blockchain gaming specifically has continued to raise >$1b in Q1 2022 (DrakeStar). Across the hundreds of blockchain gaming companies that Konvoy has seen in the past 60 days, one theme that remains consistent is every founding team’s emphasis on the importance of engaging and rewarding their community. As these web3 gaming companies mature, one thing that we look forward to evaluating is the efficacy of community fund allocation compared to overall player base health.
This week, we are evaluating the current community fund structures in place and we are proposing a new framework for how to think about balancing community-forward strategy with ensuring successful execution of the game’s economy.
When looking at some of the top blockchain games (see above), on average, ~40% of tokens are allocated for player rewards (LinkedIn), which are more widely referred to as “community funds” or “community token allocations.” This is wildly different from traditional startup cap tables where at IPO, institutional investors own the majority of the company. However, this category noticeably holds the biggest delta across all token allocation categories, ranging from 25% to 73%.
Tokens are typically allocated from this community category to active participants in the game ecosystem (i.e., pools of early or very active Discord users and high engagement users in alpha/beta). There is not a one size fits all approach to allocating nor is there a widely adopted framework for how to calculate the optimal token allocation. New people are entering the market everyday and it is becoming more and more important to be able to separate the price speculators (increasingly seen as unhelpful to the game’s success) from game supporters (gamers, value-add investors, team members, core partners).
Critique of the current structure: The goal of a community fund is fairly simple - 1) to foster a tight relationship between the development team and the player community; and 2) to reward players for early support and their continued contributions toward bettering the experience for all players. However, here are a few reasons why the current system is deeply and structurally flawed:
- The action of handing out free tokens, and its outcome, do not align with the goal of a community fund: Being awarded tokens is not a guarantee that you will continue to be an active contributor to the ecosystem. Similar to what we are seeing with many NFT projects, there are motivated people on the hunt for early projects for the sole reason of securing whitelist spots with the intent to resell. According to a16z, 81% of projects return >2x from a mint price of 0.05-0.10 ETH (a16z). These individuals join these communities solely to extract value.
- A majority of holders do not use them in game: This is already obvious when looking at wallet activity for active games. Sanbox’s token, SAND, has ~140k holders, however, only 1-2k wallets (~1-2%, wow)a few thousand wallets transact with SAND every day (Etherscan). This begs an important question: are players truly benefiting from the majority of token drops? Inactive holders are not players and the lack of activity in these wallets shows that there is no benefit to granting tokens to these people if they do not meaningfully contribute to the project and only plan to dump at an attractive price. Actual players, on the other hand, will make decisions based on the quality of the game (in conjunction with financial motivations).
- Lump sum vs award-based contribution: Awarding tokens upfront is similar to some companies with creator funds (Meta with Horizon Worlds) that have below market revenue share terms (~50%). Continued contribution and engagement should be rewarded over time; granting too many tokens up front to seemingly early adopters can have the unintended consequence of restricting rewards to future users who may add more value to the ecosystem. Second, for the most part, many tokens today do not (yet) have governance power, so they act much the same as a typical currency so there are limitations on utility and value to the recipient (e.g. receiving $10k versus a building that can be lived in, rented, modified, and sold). So when thinking about rewarding and empowering players to continue to receive value and in return contribute to a game economy, we see granting pure currencies to early adopters as a less useful option.
- Less capital for the game developer: Over the past couple of weeks, we have seen the crypto markets take a hard turn. There will be hundreds, if not thousands, of games that die because they run out of capital, rendering their tokens valueless. Unless there are tokens set aside for future fundraising from institutional capital, development teams pursuing token-value creation will have no viable vehicle to raise capital. Companies need to have the flexibility to re-allocate tokens if needed. Reallocating even 5% of the token allocation to raise capital has the potential to raise millions and extend the runway for the team another couple of years through any tough times ahead. Additionally, it’s important that institutional token investors have longer lockups (2-4 years) to provide added stability to the token price.
Konvoy proposal for token structures in gaming:
Introducing structural requirements: In order to ensure that incentives are aligned with future players, we recommend considering the following options for those who receive tokens from the community fund:
- Introducing token lockups and unlock periods to match that of institutional investors (which should be >2 years)
- Introducing a tier system - free tokens have a longer lockup period vs participants in a token sale - purchasing tokens should give immediate access.
- Introduce locked staking that will last through game release to add token stability and ensure commitment to the long term vision
- Introducing limitations on selling to be after game release (e.g. tokens can only be sold 90 days after release)
- Contribution-based token rewards - players must participate in community events, beta testing, knowledge testing
Consider alternatives: Outside of tokens, there are better alternatives that have the potential to be more rewarding to a larger portion of the highly engaged user base. For example boosting earning potential versus flat earnings (increasing the rate of reward or the probability of rare drops, removing the developer share of revenue for a set period of time or a percentage of sales) or introducing a revenue share structure to include players as part owners outside of the token structure. Additionally, a game could simply drop NFTs to their players vs currency tokens.
Calculating the right community token allocation: While we do not want to prescribe an exact percentage allocation for the community because every game will have a different number of users at a steady state and a different proportion of high priority users based on gameplay, we do think that this pool is overinflated today and should be closer to 15-20%. Consider the following:
- Since Roblox monthly active users make up 4.8% of all gamers and Fornite makes up 8.7%, conservatively, a game can aspire for 1% of gamers as monthly active users at a steady state in traditional games. About 40-50% of these players will be high engagement users (TechRepublic)
- In 2-3 years, we predict there will be 20-30m blockchain gamers (up from what we estimate is currently 3-5m web3 gamers, based on the ~1.2m Unique Active Wallets estimated in March combined with a recent influx of 1.7m players to a single game). Assuming a game hits full release around that same timeframe in 2-3 years, rather than 1% market capture, blockchain developers will likely be aiming for 5-10% (1-3m players total)
- Assuming 50% of these users receive $100 USD of rewards during their lifetime (or ~5x the average LTV of mobile games in the west), at a $1b market cap, this is a 5-15% community fund. A Community Fund can also be replenished through revenue generation or use of the treasury, it does not have to end when the community fund has been allocated to the players. A strong economy will have incentives for players to recycle those earnings back into the ecosystem.
The above analysis is why we conservatively propose a 15-20% community fund for blockchain games going forward (vs the current ranges of 25-73%). This will set the games up to thrive for the long term better than the current structures in the market.