Now that we are in the hangover phase of market cycles, I thought it would be a good idea to brush up on some of the history of financial bubbles, with the idea that I might be able to gain some insights from similarities and differences between them and crypto.

While I am of the firm conviction that web3 isn’t only speculative fervor, it’s difficult to say that it isn’t a core part of what makes it tick. This phenomenon isn’t going away in this space or in our society, so it could be useful to understand it, in hopes that we don’t get caught in the exuberance.

In this article, I’ll be sorting out my takeaways from the book, and reflect on how it compares to similar patterns found in web3/NFTs.

1. Scarcity / The Urge to “Flip” is a Hell of a Drug

The story really began when the creator of Beanie Babies, Ty Warner started boosting sales with the “retirement” of certain models of Beanie Babies, indicating that they would become scarce and a collectors item. People began picking them up and collecting them and soon enough “flipping them” which kind of got out of hand, when people began making obscene amounts of money with them, which made more people want to buy them, further increasing it’s price, until it’s inevitable drop.

This dynamic should be familiar to anyone who spends any amount of time in crypto. Whether it’s NFTs, meme coins, governance tokens, Bitcoin, people are motivated to buy when they see the price go up, with the hope of it going up further, and this force is one that deserves respect and study, because there is a lot of money to be made and lost here.

2.  Reflexivity: It’s all about Media Narrative

One of the driving forces behind the rise of Beanie Babies was the media covering the craze. People watch the bubble being covered on TV, and some are onboarded into becoming Beanie Baby collectors. TV stations see that this boosts ratings, and covers it more, directly strengthening the narrative and contributing pumping the bubble it’s looking at.

Now, more than 20 years later, this dynamic is now on steroids on Twitter and other social media apps. One influencer sweeps a floor, another follow, more tweet about it, prompting more people to do the same, a self reinforcing narrative. Because of this, it’s important to remember, sometimes what actually separates a wildly successful project that mints out and one that fails dismally is just RNG with media narrative.

3. The Shovels are More Profitable than the Gold

Some of the most profitable players in this escapade were not actually people who traded Beanie Babies, but those who facilitate them. These included guides, Ty Tag holders, and even eBay. Of course we see this pattern continue to play out in web3: many of the big winners in the NFT space are not NFT projects they are the newsletters, analytics dashboards, marketplaces, YouTube channels either making trading easier or trying to prognosticate the “top”.

5. Partnerships are the Force Multiplier

In hindsight, one of the greatest mistakes Ty Warner made was to shelter the brand of Beanie Babies, rather than partner with other companies and make Beanie Baby mugs, T-Shirts, hell, even TV shows. The few times he did make partnerships, one with McDonalds, one with a Baseball teams, the customer engagement was intense.

It goes to show why web3 companies don’t have sales teams, they have business development ones. Very few web3 brands are able to exist in a pure vacuum, they typically have to work with other projects in order to produce joint effort results, like for example Polygon’s collaboration with Reddit.

6. Asymmetric Information: The First “Alpha”

One of the most fascinating tactics Ty used to push the speculative market for Beanie Babies was the first use of internet “Alpha”. The company had a website that published cryptic messages about which Beanie Baby models would be retired (and therefore spike in market value). Those who paid close attention to the info drop were often rewarded handsomely – there were stories of people who ran teams: some on a computer with a phone, some in the field with a car, driving to stores to pick up recently retired Beanies.

It's similar to how the game of airdrops, tweets and alpha works in crypto: those who pay close attention to pseudo-insider information are rewarded asymmetrically more than those with their head in the sand. Just by getting the intel to join a Discord, signing up for a free mint or hold a JPEG.

8. Ergodicity: If You Make Your Money Like a Sucker, Be Prepared To Give it Back like One

The ending for the vast majority of Beanie Baby collectors was not a happy one. People who “invested” into Beanie Babies typically saw an appreciation the value of their stuffed animals to hundreds if not thousands of dollars then watched as the vast majority of them dropped to 5$ in the aftermath when people started to lose interest and realize how big the glut was.

To me, it’s a lesson to remember how bad things can really get in the next few months. I’m also reminded of all the horror stories on Coinfessions, of people making millions of dollars from thousands from crypto, then losing 99% of it back to about how much they had before. People who make their money taking blind risks are at risk of giving back their earnings if they don’t recognize they are making blind risks.

9. Not all Consumer Demand is Built the Same

One thing that really stuck with me was how, by the peak of the bubble – hardly any children (the Beanie Baby’s target audience) wanted to buy them anymore : it were only the adult hustlers who were trying to flip an extra buck at these toy stores snatching them up. When the bubble was over, no one, neither the adults nor the children, wanted anything to do with them. I can’t help but feel there is something really sad and tragic about the whole thing for Ty Warner, who set out as an entrepreneur to make the premiere plush toy for children (which Beanie Babies had every potential to become), a pure and noble purpose, but lost his way in his equally, if not more powerful drive to make money: and in the end, he made billions but he lost his way.

This is very much a lesson for web3 founders. If the demand for your product is based on purely speculation and not the actual value of your product, you are going to have a rough time when the music stops playing, because your users are going to leave. Are you in it to build a product that people love using? Or are you in it for your convictions around decentralization, innovation and open networks? Or are you here simply to make a buck like a run-of-the-mill rugger relying on a bubble and people’s greed? If you are not the latter, it’s a good idea to always ask yourself why people are buying your product.

10. The Death of the Bubble is Deterministic, How It Dies Is Not

It’s commonly agreed upon that the end of the Beanie Baby bubble was when Ty decided to try to retire the entire line and delusionally attempted to start a new one around a new product line. The book makes a point that all bubbles end, but people typically point to a few key events that triggered their death as the primary cause in hindsight, but in reality, even if those events didn’t happen (Ty never retires it), the tide was already moving against the plushie bubble. To illustrate this, many people point to market manipulation as the killer of Terra, but in reality, the system was not sustainable from the start, and was bound to spiral eventually. Again, in hindsight, the same can also be said for the entire market: if Azuki’s founder didn’t confess to being a rugger and Terra didn’t collapse, something else would have woken up the bear – bubbles are ephemeral by nature.

11. Steve Job-esque Psychos Are Great for Juicing Business Numbers, If that’s all you care about

The main character of the story, Ty Warner, is portrayed as a talented but troubled entrepreneur who had some toxic traits because of a rough childhood. Despite this, he proved to be an exceptionally talented salesperson and product designer for stuffed animals, but with trust and ego issues when dealing with others exhibiting traits similar to that of accounts of Steve Jobs, abrasiveness, obsession with perfection, a need to become possessive of ideas and take credit but dazzling abilities in sales, persuasion and a knack for understanding what consumers want. Unlike Steve Jobs’s story (to an extent), this came at a cost of his personal relationships, where, by the end of the book he is depicted as a lonely, broken man with a lot to regret. 

There is a narrative here about “power and success, at any cost” and that the psychos are good at business because they lack less profitable traits such as conscientiousness, empathy and humility (Some studies show psychopaths/sociopaths are over represented in C-Suites).

While the argument can be compelling, I personally am in the (arguably naïve) Gary Vee school of “being a nice person”, and karma is quickly becoming the best traits the world is selecting for. In the simultaneously more open (public tech, social media) and more closed (pseudonymity) environment of web3, it’s unclear whether a Steve Jobs styled asshole-genius would succeed, but hey, who knows.

12. There is No Such thing as History, It’s Just Stories based on True Events

Finally, even though this kind of historical, journalistic, chronicler styled narrative is my favorite genre to read, it’s important to keep in mind no story, no matter how rigorously documented with evidence and interviews is without bias or is completely “true”,  whatever that means. One of my favorite quips (by Nassim Taleb? I think?) is “A biography will tell you more about the author than the subject” and so it’s important to keep in mind that author of this book has the full influence of hindsight. Additionally, its important to also be aware that the book relies a lot on interviews and hearsay, which is also tainted by hindsight and our ever pliable memories.

Ironically, this was also a pretty big theme in the book: how Ty Warner, the creator of Beanie Babies was, like most founders, constantly revising his origin story to make it more interesting or put himself in a good light, a master storyteller.

All that said, my hot take is that the veracity of a story is (to an extent) completely irrelevant to how effective it is at accomplishing what it’s designed to achieve. The art of storytelling is the art of chiseling away at the truth until it can inspire, encourage, entertain, persuade, charm or move.

So in the end, it doesn’t matter if the book can’t be 100% accurate. What’s important is that there are useful or entertaining narratives that can be taken away from.

Final Thoughts:

Crypto is not just another Beanie Baby Bubble. There is a lot of interesting tech and use cases still in their infancy and crypto isn’t just going to go away like Beanie Babies did. That said, it’s also important to remember the individual crypto projects do not have this luxury and when markets are build around speculation, not value, they are brittle. After a few cycles, it’s clear that speculation itself isn’t going away, so we have to be careful how we ape into things when the floor can collapse right under you.

As someone who is relatively new to this game, the game of speculation is still a foreign, exciting aspect of web3, but it should be handled thoughtfully and carefully.

My first real exposure to GameFi secondary markets and the experience I built almost all of my understanding of NFTs and the potential of what GameFi could be would be trading card games, chiefly  Magic the Gathering. For the uninitiated, it’s a game where people build their own decks of physical, nonfungible pieces of cardboard with drawings, text and numbers on them and play against each other and putting them on a field in a turn-based fashion.

Cards originate in these things called “booster packs” and vary in rarity. There are thriving secondary markets like Channel Fireball, TCGplayer and eBay that enable the trading of the cards in a permissionlessly interoperable manner (you just physically hand them to the other party). Card prices range from pennies for commons to tens if not hundreds of thousands of dollars for grails from OG sets like the famous Black Lotus from some of the first sets.

The value of these cards vary based not only on collector demand for their rarity but also their utility in both casual and competitive game settings such as tournaments. Competitive players have to be very careful if they wish to maximize their value because some of them play competitive formats that “rotate” with each newly set of released cards, which means the cards they take to tournaments now will become illegal to play with in a few months. Even in non-rotating formats, Wizards of the Coast also reserves the right to outright ban cards that are deemed too oppressive and with each new set, the metagame can shift in a way that your deck is more or less powerful against the field, impacting the value of your cards.

I suck at trading, I want to game

Trading card games like MTG gave me a taste of what it was like to trade assets but for me, I never really looked to play the trading game, I was more interested in the game itself as a consumer. I only have one W that I’m pretty proud of, which was when I arb’ed the prebuilt Jeleva Commander Deck, Mind Seize (now worth ~67$ in market value). I bought it at MSRP at 30$ at a Target and sold one of the cards in it to a classmate for 40$. I also remember I took a pretty big L in Vegas to a pro trader when he cleaned me of a 70$ Amonkhet Invocation Cryptic Command for a ton of commons and bulk rare I wanted to build another Commander deck with. You live, you learn.

The Web3 Upgrade for TCGs

Magic the Gathering is what I hope web3 gameFi will resemble. There are thriving communities of gamers, traders and businesses built around these assets and there is a true sense of ownership of your collection and deck because, well, you literally own the cardboard. The company has had a history of shrewdly managing the economy to balance the interests of players and collectors alike with measures such as limiting supply of some cards for collectors while reprinting others in high demand for the players. But web3 NFTs has tangible advantages over web0 cardboard. While there are some new mechanics you can try in web3 like play-to-earn, staking etc, the most obvious advantage gameFi games will have over physical TCGs is liquidity in secondary markets. Physically go to stores where you can trade/sell cards is time consuming and while you might get better more value for your cardboard, you usually don’t find what you are looking for. The Internet helps, because it’s quite a hassle to ship physical pieces of cardboard around the world. You can either sell it immediately at -70% it’s market value to an aggregate buyer or wait a few weeks for someone to make an offer for it on eBay for -10% it’s value (with you usually paying for shipping).

The Central Bank of Yugioh: Thoughts on Stewardship, and (De)Centralization in Games

Hyper Inflation and Banhammers

I discovered Magic the Gathering because I was disillusioned with my experiences with a different TCG I played in middle school: Yugioh. Some of you might know it from the anime. For it’s publisher, Konami, rugging Yugioh players was basically it’s business model. Popular cards were banned every month, with the value of decks dropping upwards of 99% (again, sound familiar?). Furthermore, powerful (and valuable ) cards were often reprinted in “tins”, where acquiring them was guaranteed, essentially hyperinflating their supply and, again, cratering the price.

Oh, yeah, while there is nothing new about gamers complaining about balance and power creep, Yugioh is a special case. From what I hear, most tournament Yugioh games nowadays end on the first turn, with entire essays written on the cards in size 5 font.

Every Ship Needs it’s Captain

This illustrates how important stewardship / governance is when it comes to gameFi. Tokenonomics is not the only thing that needs to be calibrated: You also need to keep the game refreshing without power creeping too hard and you need to maintain a diverse, interesting metagame. The truth is, all successful games have needed some centralization for this, much like a ship needs a captain and a crew. Yugioh highlights how this centralization could be a vulnerability – the game assets are just jpegs, who determines what they do in the game? If they are too strong or weak, should you buff/nerf them?  It doesn’t matter if you set up a DAO for the game to do this, or you could just do this the old fashion centralized way, but a job is a job – it can either be botched or aced, and it will either make or break the game.

F to Pay Respects: MTG Arena

Magic the Gathering has had an extraordinary run of 30 years and is, by far, the most Lindy of all physical trading card games. I believe there is a future for the game but, sadly, it is starting to show it’s age. From what I hear, bans are more common, power creep has spiked and the pro scene is stagnant. In an attempt to keep up with the times, Wizards released MTG Arena, which, sadly, leverages the MTG brand and players to utilize the same work-to-play tactics to extract value from it’s player base. Unsurprisingly, the secondary market is also nearly nonexistent, so sadly, MTGA is generally seen by many in the broader MTG community as an extractive, exploitive ploy by a corporation trashing their brand and community in a desperate bid to become more relevant while squeezing as much margin from it’s audience as possible. That said, this may be the opening that web3 based TCGs can find their footing and adoption.

Final Thoughts

In order to understand where the technology is going, it’s important to understand the precedents, and pretty much everything in web3/crypto has a precedent and gameFi just happen to be the one that happens to be the one I’m most familiar with. Magic the Gathering is only the best example (IMO) of many, when it comes to GameFi. You have organic MMO economies in Runescape and Eve Online, markets for CSGO skins, boosted MOBA accounts (lol this one is a stretch) and, of course, poker. There is a lot of possibilities for NFTs and crypto in this world, many of which we can’t even imagine. Sometimes in web3 we get distracted by and become cynical with the sheer volume of crashing / rugged projects promising fantasies and it's easy to forget that innovations we are preaching are often nothing more than fresh takes on systems that already work and exist. Remember, it’s not an if, but a when, because the underlying systems have already existed for decades (in the case of gameFi) to millennia (in the case of human economies). Indeed, to be able to understand the future, we must study the past.

Before I get accused of FUD-ing, I want to preface this by saying I am very impressed with Gabriel Leyton, Limit Break and DigiDaigaku and I have assigned them a high probability of success. Hearing him talk about his ideas on a podcast interview was an incredibly eye opening experience and I became a little obsessed with digesting them. However, biases from my own experiences kicked in and I had some cognitive dissonance that I hope to use this write up to work through. This is because Gabriel Leydon has been a pioneer of the Free-to-Play model of video games, which is the model of video game monetization I grew up on and I realized had some proto-opinions about, which I’ll do my best to explore here, one by one.

Free-to-Own: ..what?

My first impression of this new trendy tagline was confusion, and it kind of still is. Literally speaking, it makes no sense. “Free” implies the lack of scarcity (JPEGs are free) while ownership implies it’s presence (NFTs are owned and scarce). Even if the stealth mint would be technically free, they are still scarce, tradable resources by default because they are NFTs. This means that it’s only free to the minter until it’s traded, when all of benefits of Free-to-Own (No price anchoring, holders not starting at a deficit/being ROI-minded, etc) seem to evaporate. If the project is successful, I’m not convinced that all minters who got it at 0 will sell at a ridiculous ROI any less than a minter who had to pay to mint. In this model, it even seems that the parent company is even incentivized to encourage these transactions since they take a cut on them.

 It’s clear I could be missing something here about Free-to-Own and I don’t plan on making any conclusions about it any time soon. This is actually a bit of a detour from what I really want to talk about. It’s also possible that “Free-to-Own” was derived as a portmanteau of “Free-to-Play” and “NFT Ownership” which makes perfect sense given Gabriel Leydon’s background. “Free-to-Play” is  generally seen as the last major innovation in web2 gaming, a massive cash cow for investors and IMO legitimately deserves a place in the gaming ecosystem because they make playing games more accessible. However, some gamers (especially Western ones) have a different, perspective on it and often interchange it with the darker, but closely related concept of “Pay-To-Win”. I’m very curious to see if and how Gabriel Leydon and Limit Break will adapt some of their tried and true Web2 “Free-To-Play” and “Pay-to-Win” design tactics to their new projects. I’m also curious how the gaming community will react and how it will affect the adoption of GameFi by gamers.

My Experiences with Free to Play, Pay to Win - Dark Orbit: The Spaceship Rat Race

My first experience with free-to-play was in elementary school with a seemingly innocuous flash browser MMO called Dark Orbit. In this game, you navigate a space ship and simply click on alien NPCs to kill, which rewarded you with resources such as two separate in-game currencies: Credits and Uridium, which can be used to purchase better ships and equipment. However, the game was not purely PvE. There were 3 separate rival factions that the players choose from when they start and high level players of one faction can do quests to “invade” another faction. It was quite painful losing your ship that took you hours to grind for and all your loot when you get preyed upon by a high level PvP’er, but I guess that risk was part of the fun loop of the game, taking advantage of the gambling neuro-circuitry. Today, are you going to bring home a huge haul from farming mobs? Or are you going to get shot down and have to start from square one again?

The game was designed to be free to play, pay to win from the start. Uridium was the premium currency that could be purchased with real cash. Though it could be earned at a rate of maybe 30 per quest you finish, the premium ships you would want to purchase cost anywhere from 15,000 to 80,000, so saving up for them by pleb-grinding wasn’t realistic. It was true you could also win them in this bizarre credit auction system though. You’d have to pay that amount, and if you lose the auction, you don’t get the item AND you don’t get a refund on your credits. It kind of makes sense, because this way it serves as a deflationary mechanic for credits but it was quite painful seeing the number go down from the 1,000,000 credits you spent a week grinding for to 0 with nothing to show for it.

I had fond memories of Dark Orbit for sure: There is something vaguely therapeutic about mindlessly grinding down mobs and I still remember how my heart pounded when I was being chased down by a player with a loadout that would take me 3 lifetimes to grind for without paying dollars. It also taught me some valuable life lessons: like life is not fair and that the rich can buy their way out of basically anything by default.

There is No Such Thing as a Free Lunch: Time as a Tradable Currency, Engineered Ego and Insecurity as Revenue Generators

Free-to-Play games are incentivized to sell as much in-game items and currencies as they can to keep their servers running and the easiest way to do so is to adopt pay-to-win. There are a few exceptions but lets take a look at the default model first.

Pull Out Your Wallet or You Will Suck

After these games are done onboarding you and holding your hand through the tutorial, they let you taste a bit of progress and then progression becomes extremely difficult to play for free. It’s true that you can technically never pay real money on them, it’s a terrible experience unless you do, as you see people zoom past you with their premium equipment. But since you’ve already sunk so much time into them, it can be difficult to quit. This is by design.

Work-to-Play: Is Grinding Fun Anon?

If you still enjoy the gameplay, or feel like you’ve sunk too much time to quit, some F2P games like Dark Orbit are generous enough to allow you to work for your premium equipment. What is work? Work is the trade of time and effort for currency. It doesn’t matter if it’s for dollars, a token backed by a L2, or some value on an account recorded in a SQL database: work is work. Now the question is, are these players having fun, working? This is a real question, because some do but generally, dopamine hits with the paycheck, not the actual work at McDonalds. Again, this is by design.

Ego and Insecurity: The Whales and the Plebs

In some ways, games with pay-to-win mechanics are actually more like real life compared to games that don’t. For instance, they promote and maintain a coherent class hierarchy. People who pay more money are naturally more powerful than those who don’t. Like with any system of social class, this is designed to breed insecurity in those that participate. Those who are trying to play a game like Dark Orbit for free but have disposable income are stuck in a vortex of FOMO and envy:  you either pay up and join the never-ending rat-race to see who can spend the most money on Uridium to build the best ship to fight other players in the same rat race, or see yourself falling behind. Once again, this is by design.

There is also another argument for this actually being a benefit: people who are frustrated in their real life can dump all their money into these games and escape into a power fantasy as a whale, but then it might be better for these people to just get therapy.

Free To Play Without Pay-to-Win: Cosmetics and Leeg of Legends

Western gaming companies have caught on to how these tactics can violate our sense of justice and fairness and have come up with the solution of free-to-play. Currently the most popular (and arguably the most successful) model for Free-To-Play games in the West is to have the game be fun and free then sell skins and cosmetics off the massive traffic. Many of the most popular games now follow this pattern: Leeg of Legends(my current vice), Fortnite, Apex Legends etc.    

Proto GameFi and Semi-Pay-To-Win: Trading Card Games

A genre that is technically pay-to-win but are a bit more honest about it are trading card games(TCGs) like Magic the Gathering and Hearthstone. Tabletop cardboard is not free-to-play by any measure but these games have quite a lot of skill expression and once you pay up a bit, then, you are generally on a more level playing field. Sure, digital free-to-play TCGs like MTG Arena and Hearthstone still use predatory tactics such as making you grind for in-game currency, but least it’s less blatant as being able to stat check someone with your wallet in an MMO. I personally feel like this genre is the most natural when it comes to web3 adoption (like Parallel and Splinterlands) but that’s probably another article.

Gaming Culture, Free-To-Play, and GameFi Adoption

It was fascinating to hear Gabriel talk about how different gaming culture was in China on the podcast and how far GameFi and gatcha mechanics have developed there. That sense of outraged justice and unfairness doesn’t seem to have as much reach as it does in the West. However, here the hate. is. everywhere.(These are 3 separate links). I think gamers over here are sick and tired of having the wool pulled over their eyes of playing a game that is advertised as “free-to-play” but can’t be enjoyed unless you make microtransactions. They have developed a natural suspicion of anyone who is trying to market anything that smells like this as and are on a constant lookout for in-game purchases and pay-to-win mechanics that are simply traps to extract value from the insecure. Personally, if I am playing a free-to-play game, I have a rule where I judge it by the fun I have playing it for free.

It also doesn’t help that some gamers play games to escape the cruel reality of the world, a cruelty that is etched in unfairness. Pay-to-win games brings that unfairness back to games: the rich pay for whatever they want, the poor are weak and helpless, a pattern that is extremely easy for web3 games to fall into unless they intentionally avoid it.

Free-To-Play, Pay-to-Win As Original Sin

It can be also argued that this is part of the reason why GameFi, web3 and the emerging genre of Play-to-Earn is struggling to find adoption amongst traditional web2 gamers. It’s not that gamers have no precedent to work with. When gamers see NFT based games, they intuitively smell microtransactions, lootbox gambling mechanics, and the Free-to-Play, Pay-to-Win traps. Unlike degens, gamers are not primarily motivated by making money, they want experiences and the vast majority of Free-to-Play games are, sadly, intentionally terrible free experiences designed to extract value.  

Trespassing on Sacred Ground: Video Games as Both an Art Form and a Business

Gabriel also had an interesting section where he talked about how many game designers are inept when it comes to designing economies and businesses around the games they make. This makes sense, as multiplayer games are hella expensive to develop and maintain, especially if you are making it free to play: someone is going to have to pay to keep up the servers, develop new content and maintain the databases.

However, the opposing view (which doesn’t not perfectly represent mine as I’m exaggerating for dramatic effect) is that games are a form of art before they are businesses.  After all, it’s a beautiful medium that combines the storytelling of a novelist with the aesthetics of a painter and the melodies of a musician into an immersive, interactive experience. Plenty of successful games are also developed by a single person out of love (eg. Stardew Valley, Undertale). It can ask unnerving philosophical questions like SOMA or making unspoken political statements like This War of Mine. People who treat video games as purely a business are extractors, not true creators and are more likely to use underhanded tactics like taking advantage of social insecurity and Pay-To-Win rather than making positive experiences.

Treating video games as too much of a business can put you in deep water with people who think like this, which is something I see with many web3 games. You are trespassing on sacred ground with the intent of making an extra buck for you and your investors - like pimping out the Pope in front of Catholics.

What does this all have to do with Limit Break and DigiDaigaku?

Given Gabriel’s track record, I have high confidence that he will make a lot, a lot of money for himself and his investors. However, while he has a celebrated history of making financially successful games, all of them have had controversy amongst gamers as he aggressively pushes the envelope on the microtransactions and (arguably predatory) pay-to-win mechanics that I have discussed.

But how will Leyton apply his skills to the new web3 world? Will gamers outright revile and reject his tactics like they do with Free-to-Play, Pay-to-Win of web2 as predatory traps that use “freemium” as a honeypot to lure in players with the ultimate goal of empty the wallets of the insecure but well funded? Or will new social norms come to replace the traditional gamer’s expectations and it will resemble something like China’s gaming ecosystem as described by Leyton and these models will moon? Will “exit liquidity” be the saving grace for the pay-to-win model as players now have the option to sell their assets to other players and no longer have to deal with the entrapping feeling of sunk cost? DigiDagaku floor @ 50 ETH wen? I have no fking idea but I’m super interested to find out.  @olesnakey

In the past few months, I’ve learned that the hardest part about breaking into on-chain analytics is finding something you can make. It is dreadfully intimidating to see beautifully organized charts and graphs detailing how people are using arcane protocols you barely understand – and even more so to see the never-ending SQL used behind it that you can barely read. So, it was really hard for me to stay motivated, especially if I didn’t have concrete goals to focus on. After all, web3 is a bit of a sandbox: do you want to explore deFi lending protocols? gameFi? Specific NFT collections? Hacks and theft? The Merge? For the beginner analyst, the crypto world is your oyster, but only in the most overwhelming way possible.

This is why I was pretty excited when I discovered bounty programs like MetricsDAO’s. Not only do they give me a specific topic to focus on, there are bounties that are tailored for beginners like me and I’ll be looking to do more of these in the future.

This one is about the airdrop that a protocol called True Freeze did a few months ago. The protocol itself is pretty interesting, especially for someone who is as risk averse as I am, but there is still a lot I don’t understand about the project yet. That said, the assignment is mostly about the airdrop which is much simpler to track. The two question prompts were 1) “Approximately 230,000 addresses are eligible to claim FRZ. What percentage of all eligible addresses have claimed the airdrop?” 2) After claiming their allotment in the FRZ airdrop, what do participants do with their FRZ tokens? I will do my best to explore these two questions with simple dashboard I made using Dune.

Here is the link if you want more than the screenshots below (Embedded Dune image links get screwed up on a dark background in Mirror).

What percentage of all eligible addresses have claimed the airdrop?

Eligible Addresses that Claimed

According to True Freeze documentation, the “230,000 addresses” were selected based on meeting a variety of different conditions such as holding certain NFTs or assets, donating ETH to the Ukraine address, or, my favorite, being liquidated on AAVE (I imagine they are trying to say “Man, sorry you got burned by Aave..you should try treating it with True Freeze”). To me, it’s still a bit of a black box exactly which addresses are eligible but I’m sure they have a whitelist somewhere or something like that.

To find the addresses that actually went ahead and claimed the FRZ, you can simply count up the “Claimed” events. Turns out, only ~0.49% of eligible addresses have claimed the airdrop.

Considering how the airdrop is set up, it’s not surprising that only a tiny fraction of the total eligible population of whitelisted users actually went ahead and claimed the tokens. After all, you have to have heard of the True Freeze project, be interested, know about the airdrop, and also know that you are eligible to claim. It’s not a bad approach, since the logic is that people who take action and claim it are much less likely to have the tokens rotting in their wallet. However, proper marketing and education still needs to be done to support it.

Timelines of Claim Activity:

First, I made timelines to track how much was claimed each day and how many claims were made each day.

It looks like the day most claims were made were on 6/29/2022, where it looks like exactly 500 (almost half of the total number) Claim events were emitted. That was the day with the highest total amount claimed as well with a total of ~1,130,629 FRZ. This leads to the natural question of “What happened that day?” but for the sake of expediency, I’ll accept my ignorance and we’ll move on.

Amount Claimed Per Wallet:

It’s clear that the amount a claimer gets is not completely random, with some getting thousands and others getting less than 100 FRZ. The most common amounts being claimed are 80, 77, 93, 147, 139, and 265, in that order. I’m curious though, what was the logic for how much someone gets in their airdrop? How much would you get if you were a LobsterDAO holder vs if you donated to Ukraine? The data certainly reflects a disparity.

After claiming their allotment in the FRZ airdrop, what do participants do with their FRZ tokens?

This question was much trickier to tackle because since FRZ tokens are, well, fungible, I don’t think there is a point to tracking them. So I’m trying to answer it by asking “How many claimers actively obtained or staked their more FRZ after their initial claim? Then I tried to answer that question by counting the  addresses that claimed in the Stake and Transfer events. The result was, it looks like there are 30 addresses that received FRZ after the initial claim and 111 addresses that staked their FRZ.

Closing Thoughts

Truth be told, it felt like the work created more questions than it answered, which I guess could be argued as something that we want. Please be warned that since I’m new there might be inaccuracies because I screwed up the JOIN’s or something. In any case, I’m hoping that this will be the first step to being able to do more with Dune, MetricsDAO and Web3 analytics.

1. Web3 subdomain names like ENS’s have a variety of use cases, chief among which is enabling users to show they are affiliated with a company or a community. 

2. There is already plenty of adoption and we investigated basically all of the projects that have started using subdomains in some form or another.

3. There are some current limitations but these are currently being addressed with new projects in the space by a variety of players in the ecosystem.

What’s in a Name?

My ENS name is olesnakey.eth. It’s derived from my handle, OleSnakey, that I use for games, Discord, Twitter, and pretty much everything else in web2 since I was in 5th grade. It’s named after an old Gmail feature called “Old Snakey” where you can press Shift+7 in your inbox to play a simple game of Snake, which I often did when I didn’t feel like doing anything else. It’s not a good name by any measure. It’s goofy, long, sometimes tricky to pronounce/spell, and some people absolutely despise snakes for whatever reason. That said, I’ve used it for so long that it’s basically become a part of me, and that’s why I’m proud to use it for web3.

There is something special about names that differentiates ENS and other name service collections from other NFTs that are traded. Sure, some people may see using rare ENS names as just a financial flex but they forget that these domain names are fundamentally, well, names. And a name, whether they are a given name, nickname or gamer handle, is just a piece of language that identifies some individual. It also has the potential to communicate so much about that individual’s history, values, personality or affiliations. After all, it’s a safe (but not sure) bet someone has some Japanese ancestry if their last name is “Watanabe”. As we see with PFP based communities, this “affiliation utility” is a native property that NFT ownership can provide, but as we will explore in the report, ENS has an sometimes overlooked feature, subdomains, that can excel at this. 

What are ENS Subdomains?

Once someone has created or obtained a second level ENS domain name(take for instance, olesnakey.eth), they have the ability to create as many subdomains under it as they wish (like 2cents.olesnakey.eth ), paying only gas for the transaction. Then they are free to assign them to whoever wants to use them to point them to ETH addresses. However, as of now, the controller also has the right to revoke access to these subdomain names, if they so choose. 

As we will get into in this article, there are a variety of interesting use cases for this, some more intuitive than others. This feature might seem gimmicky and inconsequential to some at first, but here at Double, we see the adoption of subdomains as a potential major defining trend for ENS and other web3 name services as a whole, so we were compelled to research this topic extensively. Through that research, we have produced this report, we will look at the adoption of, use cases, current limitations, on-going development, and future potential of ENS subdomains. 

By the Numbers: A Snapshot of the Adoption of ENS and it’s Subdomains

ENS Names

By every metric, ENS names are a top NFT collection. At the time of writing, on OpenSea, it is closing in on half a million owners and almost 50K ETH in total volume. Of course, it is still not without its competitors. Unstoppable Domains boasts a web3 name service without any renewal fees and there are also plenty of other ecosystem specific name services like Avvy’s .avax names for Avalanche and Bonfida’s Solana Name Service. 

ENS Subdomains

As of the time of writing this article, there are currently roughly 1.9 million second level domains created. However, by comparison, there are only about 155K subdomains registered under second level domains. These all originate from 13K second level domains.

At the time we looked, there were only 69 domain names that have more than 50 subdomains under them. It’s these that we are interested in because many of these subdomains represent projects that are early adopters of subdomains.

Who is Using Subdomain Names Now?

We investigated the projects behind the domain names with 50+ subdomains and group similar ones into categories.

Here is our full list of projects that we investigated.

Our Categories:

1. Wallet and Infrastructure Projects

Example: Argent (argent.xyz)

Crypto wallets recognize that having their users copying and pasting public addresses when they want to make transactions is…not very user friendly because of the hassle and room for error. Because it’s reasonably cheap to provide their users with subdomains (just pay gas!), many of them do, from automatically creating one for the user upon registration to having it be a feature of the wallet.

2. Project Community / Organization

Example: Decentraland(dcl.eth)

Subdomains are useful for metaverse projects, holder communities and games because they can provide a sense of identity and affiliation. olesnakey.eth might be Jesse but olesnakey.dcl.eth would express how Jesse is affiliated with Decentraland. For games and metaverses, these names can also double as gamer tags or handles that show you play a certain game, just like they do for gamers like me in web2. For organizations, if access to these subdomain names is properly controlled, they can also be a source of verification. For example, BDs for projects can show they are legitimately affiliated with the project with a subdomain name issued by the organization they work for.

3. On-Chain Tools

Example: Chainlink (data.eth) 

For developers, subdomains can be used to create API’s that point to contracts that provide information or services. This is superior to public addresses because it’s more convenient for the dev using the product and the service can freely upgrade to a new contract without forcing the people using the service to update as well, since you can just point the subdomain to the new contract.

4. Wordplay

Example: asksfor.eth

There are a lot of creative names that read like sentences you can make with ENS subdomains. For example, jesse.asksfor.eth (plz sir, may I have some moar?). Names in this category can form sentences in this nifty fashion but they don’t have to, they could just look nice, like dev.eth, if you are a developer.

5. Subdomain Registrars

Example: EthSimple (ethsimple.eth)

This category also includes names that are held in Domain Registrar type projects like ENSnow or EthSimple, where the name is held by a contract and anyone can use the service to mint their own subdomain on it for much cheaper than it would cost to register their own second-level domain. It’s also worth noting that there is a lot of overlap between these and the Wordplay category, because many of them will buy up these names and have them listed on the platform so anyone can claim them.

6. Other

Example: Crypto Stamp (cryptostamp.eth)

Not all projects that make use of subdomains fit in those five neat categories so this category is the catch-all for the rest of the pile. There are some unique projects and experiments  in here like eth2phone (eth2phone.eth), and also some that we just couldn’t find any information about or figure out exactly how they use their subdomains.

Notable Projects:

1. Argent Wallet (argent.xyz)

Argent.xyz is the project with the highest number of registered subdomains. Like we’ve already covered, subdomain names are especially useful for wallets but argent takes it one step further by adding additional utility. XXX.argent.xyz is actually a valid URL, and argent takes advantage of this by having the subdomain also link to the Argent profile page in web2 along with being the address to the wallet, which has a number of UX benefits. 

2. Decentraland (dcl.eth)

Decentraland names showcase the potential of subdomain names to function as domain names once they are made tradable and users are able to register them by themselves.  The DCL dev team made it possible, for the price of 100 MANA, to mint their own name on the DCL second level domain. These have become a hotly traded collection in their own right, with a total volume of nearly 1000 ETH on OpenSea. These names also scratch the surface of what you can do with subdomain names in metaverse projects such as using them as teleport addresses to locations or avatars.  

3. Mirror.xyz (mirror.xyz)

As the web3 take on platforms such as Medium, Mirror is unique because unlike many other projects on the list, its subdomains are not designed to be publicly available or easily obtainable through purchase. The subdomains can only be acquired with a $WRITE token which is bestowed by a DAO vote after a weekly writing competition. This subdomain is used to recognize someone as a member of the mirror DAO and gain corresponding privileges and responsibilities such as voting.  Mirror showcases how the scarcity of names can be engineered rather than naturally forming. After all, unlike the 000.eth-999.eth 1K club, There is no mathematical limit to how many subdomains mirror.xyz has, but there is a practical scarcity of how many people can join the DAO, and so these subdomains can be just as valuable as status symbols. 

4. Purrnelopes Country Club (pcc.xyz)

PCC’s subdomain offering is a prime example in how they can provide utility to holder communities. Since these communities are essentially the web3 equivalent of sports teams, you need ways to express your affinity: the new forms of T-shirts, keychains and merch. Using subdomains as your wallet/Twitter name is just that.  

Utility of Subdomains, Generalized

1.  All the properties of ENS second level domains (Wallet Routing, Status)

Everything that is valuable about second level domain names can be valuable for  subdomain names. Yes, it’s worth remembering they still can replace an inscrutable ETH address with a human readable one in crypto transactions. But it’s also worth pointing out that rare ENS names have the NFT property of scarcity and status. Rare and impressive ENS names are collected and traded just like any other NFT and once subdomains are more widely adopted, why would they be any different? Imagine if BAYC launches a campaign where whitelisted holders can mint their own subdomain name on ape.eth. If those were tradable, what would be the market value for those names?

2.  Affiliation

Subdomains can also provide the NFT utility of showing that you are affiliated with a group, project, game or organization. Arguably, they can do this even better than second level domains. Getting tribal tattoos, Decorating with national flags and holding certain NFTs all serve the function of signaling that you belong in a certain in-group and second level domains excel at this because they show that you are a part of a group in a very explicit fashion. This group can be any group of people: organizations, sports team fans or even families. These communities also gain the ability to whitelist users more effectively or even confer privileges based on the addresses the subdomains point to. They will even be able to white list who can register a subdomain based on conditions like whether an address is a NFT holder or not. 

3.  Linking

Sure, all ENS subdomains can link to eth addresses, but there is no reason for that to stop there. As we see with argent.xyz, some are capable of linking to web2 addresses as well. However, in metaverses/games like Decentraland, they can not only serve as the handle, but they also have the potential to be configured to point to certain locations, locations of avatars in the world or programmed to do literally anything else in the ecosystem or game.

4.  Just plain cheaper!

Depending on the price of Ethereum and gas, registering a ENS second level domain can be prohibitively expensive for some. Second-Level domains, on the other hand, are significantly cheaper, with a cost dependent only on gas. Because these subdomains are so much cheaper than second level names, the mass adoption of subdomains can be a driver of the mass adoption of ENS, Ethereum and web3 as a whole.

Current Limitations

1. Gas Intensive

It’s worth noting that, each time a subdomain is created, it’s an on-chain transaction that costs gas. This is usually negligible but for some of the use cases, there could be thousands of users and community members registering subdomains, so, depending on the gas price, the costs can add up for either users or the project.

2. Revocable

In the way ENS subdomains are set up now by default, they are not technically owned by their users as property. At any point, the owner of the second level domain can revoke access to it. While this may be a benefit for some projects who wish to maintain maximum control of their subdomain names, many users are not comfortable with this. After all, why would you pay for something that can just be taken away?

3. Not Tradable By Default

As of now, if a project wants their subdomains tradable, they have to do custom coding, like the Decentraland team did for the dcl.eth subdomains. Many projects want their subdomains tradable, but not all can spare the development time, which makes ENS subdomains underutilized. 

4. Custom Coding Needed for Self Service

One is able to manually create and delegate subdomains through the ENS User Interface but as of now, there is no standard way for users of a project to register subdomains by themselves, it must be custom built by the project, like Decentraland and PCC. If projects wish to adopt subdomains for their users, this, again presents the additional cost in the form of developer time. 

Upcoming Development

1. ENS Namewrapper

ENS’s upcoming Name Wrapper feature will make subdomains more like second level domains - as tradable NFTs. Wrapped names are ERC-1155 compatible and with a new feature called fuses, permissions to to control usage and ownership rights, like being able to transfer and make sub-sub-domains can be better customized and controlled. As ERC-1155 tokens, main domains and subdomains will also become tradable as well in the same collection.

2. Coinbase’s cb.id Subdomain System

Coinbase is working on a layer 2 domain name system for its users built on top of ENS. Once it’s launched, because the company has roughly 98 million users, it may become the largest adopter of subdomains. The logic is the same as it is for all wallets/infrastructure projects we’ve already examined: give users human readable subdomains because it enhances the user experience by making it more convenient to send funds.

3. Double’s Subdomain Subscription (Shameless Shilling Alert!)

We’ve recently launched our own subdomain product: Double’s Subdomains-as-a-Service, which enables projects to give subdomains to their users in a few clicks. All the ENS holder has to do is stake the ENS second level domain name on the contract, then select whether anyone can register a subdomain on it or just limit it to a whitelist. They will even be able to earn royalties from the number of subdomains registered and renewed.

What can you do with subdomains? (By Context)

Web3 Communities

Members of web3 communities generally show affiliation by owning NFTs in the same collection and using it as their profile pictures. Using subdomain names of the same second level domain can also be a way to express affiliation. Access to these domain names entirely depends on the identity of the community: exclusive ones would be inclined to use a whitelist for their names, while more open ones would likely seek to allow anyone to be able to register a subdomain name. 

DAOs

One potential form of manipulation that DAOs have to be aware of is the possibility of someone taking out a massive loan of the token being used for governance ahead of the snapshot and leveraging it for voting. The use of subdomain names can be an alternative system for DAOs, as their acquisition can be better controlled with a whitelist (and presumably a vetting process for getting on it). It could also be argued that this is more democratic, as it’s no longer the opinion of the people with the most tokens with the most weight - rather, all with a subdomain would become equal when it comes to voting rights.  

GameFi Guilds

In web2, guilds in MMOs are originally a source of affiliation within the game, leading to real personal relationships and vibrant communities. Web3 guilds have adopted the name of “guild” but they also have potential to provide that “affiliation utility” native to MMORPG guilds like say in, ahem, Guild Wars 2. 

Metaverse / Gamer Name

GameFi games are also able to take advantage of the subdomains to have them represent the username of the players within the game. They are also able to implement additional features for the names within the game itself, such as enabling users to point them at different locations in the game. For example, say you want to teleport to a specific home in a metaverse platform, if the owner of the home has a second level domain name pointing to it, you could use that as the teleport address as well, and even send tokens to that address when making purchases!  

Subscription Services

Because ENS domain and  subdomain names are fundamentally subscriptions, they can be used to power other subscription products. As subdomains naturally expire if not renewed,   ownership of the subdomain can potentially be used as an access token to a product or service.

Companies

Companies may wish to issue subdomain names to their employees. This is not only to foster a sense of affiliation that has been stressed to death in this report so far, it can also be a proof of legitimacy. How do you know if someone reaching out to you is actually Ryan, a business developer from OpenSea and not an impostor trying to scam you and your team? You could have him produce a signature with a wallet with ryan.opensea.eth. 

Conclusion

As we’ve explored in this article, subdomains have so much potential value and use cases spanning almost the entirety of web3. Personally, sure, I’m happy with my janky olesnakey.eth as my main name in the Ethereum ecosystem but also I’m looking forward to picking up a few olesnakey.future-web3-game-im-obssessed-with.eth’s and olesnakey.this-shows-i-am-a-member-of-this-community.eth  subdomain names as well.

Affiliation has been the glue that has built and holds together all of human society. Before there were discord channels built around NFT hodlers using their JPEG profile pictures, there were sports teams. Before there were sports teams, there were nation states. Before there were nation states, there were tribes. Before there were tribes, there were families. In web3 we are just seeing this force take a new form and subdomains are yet another way to express it. 

If you are interested, please feel free to check out our Subdomain Subscriptions service we have launched for projects, communities and holders to allow others to register subdomains on their main domain. Oh, and here is the documentation.

But WAGMI has also caused me to reflect on what the specter of failure looks like in crypto and how we should handle it. When someone says WAGMI about a project, chain, brand, community, company, trading strategy, game or whatever entity, does a realistic possibility of it’s failure exist in their minds? If it doesn’t, does this induce them repeatedly take risks they can’t afford, which lead to real life-changing consequences like losing their entire life savings? That’s a rhetorical question, I’m sure there is >0 people who interacted with crypto who went through bankruptcies, divorces and now think it ruined their lives (just take a glance at the Coinfessions Twitter). Lets stop reading for a bit and take a moment of silence for these anguished souls.

Then comes the real, non-rhetorical questions. Does the crypto community have an obligation to warn, educate or even protect it’s members from ruinous risk taking? You could say there is, but then what you do about the incentive problem? After all, life-savings fueled floor sweeps is exactly what NFT projects want because it keeps the price up. A leverage addict’s trading habit is exactly what DEXs and deFi wants: more transaction fees. There is also a “no” answer, which can be seen as a personal responsibility argument or victim blaming, depending on who you ask. People have had an obligation to look out for themselves over the tribe since they had to outrun each other against lions on the savannah but where you do you draw the line? If you get scammed or rugged, is it your fault or theirs? If the US government and all the centralized institutions built on top of it (Coinbase, Github, Discord) comes after and decapitates the project you’ve maxi’ed into (Tornado Cash), is it your fault?

Everyone will have a different answer to these questions, as they should. My take on it is this: The current sentiments behind WAGMI are lies. It’s just simply never true that We Are All Going To Make It. No one is special or completely safe: projects will get rugged, positions will be liquidated, startups will go bust, core devs will be arrested, hype will die, entire tokens, chains and ecosystems will collapse and we have no idea (with certainty) which, when or how in the future. This is why, at very least, everyone in the space has a moral obligation to do their best to protect themselves from and prepare against ruin. Projects have an ethical obligation to not grift people with seductive promises and fun tribal mantras like WAGMI, or at least do their best to back it up with real efforts to provide value.

That said, WAGMI has a new meaning for me. While projects and the tech implementations behind them are fallible, the values and ideals behind them are less so.  Decentralization, innovation, disruption, honesty, permissionless interoperability, metaverses, transparency, freedom, immutability, a better future for ourselves and our society – these ideas are the only thing’s worth having diamond hands for because they are the most decentralized entities you can find – they live in the heart of every degen, trader, community member, developer, investor and crypto ally.

That said, there are several timelines in the near future where playing this game is going to get a lot harder. The sanctioning of Tornado Cash and the arrest of it’s developer signals that the antibodies have kicked in and the incumbent institutions and systems are ready to play their opening moves to defend their interests against this round of disruption. It’s nothing like the quaint spat between Netflix and Blockbuster or Uber and Taxi Cabs in web2 - our opponents include actors in the government, the very bedrock of our society whose main source of power is being challenged: money and financial systems. Even if you believe in the ideals of web3, it’s not impossible that they will be up against the escalating forces of regulation, sanctions, police, surveillance, tanks and nukes.

So, if you are in the game for the quick flip of tokens, have at it. No judgement from me, only respect and admiration. But for your sake, I hope you don’t drink the WAGMI kool aid and properly manage and prepare yourself against your risks before you start buying or trading. But if you are here for something that is deeper and more meaningful but potentially even riskier, keep on doing whatever your doing (again, on a personal risk adjusted basis, of course). Manage that fund, buidl that start-up, design that protocol, hodl that token, make that trade, vote in that DAO, lobby that bill. Because while individual people, implementations, tokens and even ecosystems could be NGMI, in the spirt of crypto, WAGMI, my frens. WAGMI all the way.