Introduction
In a span of just one week, one of the biggest exchanges in the world went bust. The fall of FTX sent shockwaves across the crypto market. We hosted a twitter Spaces session with our friends from Footprint Analytics, Earn Alliance, and KCC Guild Games to assess the damage FTX's bankruptcy had on web3 gaming. In this piece we jot down some of the key insights.
It all happened so quickly.
Truly, the speed at which FTX went from the second largest exchange in the world to bankruptcy and SBF turned from boy-genius to scammer of the decade is bewildering.
Here’s a timeline of events.
- Coindesk publishes an article alleging that the balance sheet of FTX’s sister company, Alameda Research, was primarily made up of FTT tokens. For context, FTT is a token that FTX mints itself, which raises some questions about how they’re backing it.
- The CEO of Binance CZ announces that Binance will be liquidating their FTT (FTX) token holdings due to these allegations.
- This causes a bank run on FTX.
- Sam claims that the customer funds are fine.
- News comes out that FTX is facing a liquidity crunch and has to pause withdrawals.
- CZ announces that they are buying FTX to help with the liquidity crunch.
- The deal fell out as more details about the mismanagement of customer funds came out.
- FTX and Alameda Research filed for chapter 11 bankruptcy.
Once again, all this happened in just two weeks.
Doom and Gloom
Doomsayers are always calling for the end of crypto. We’ve seen this previously in 2011, 2013, 2018, and 2022. However, despite the critics calling for the end, we’re still here. The recent bankruptcy of FTX is being touted as the pin that will finally break the camel’s back. But the evidence suggests otherwise. Instead of a widespread boycott of crypto, what we’re actually observing in the market is that people are waking up to the risks associated with centralized entities.
The narrative thrown around by the critics of crypto is that the FTX collapse has fundamentally shaken the faith people had in crypto. But, what we are actually seeing is that people and projects are now more vigilant than ever.
The Fallout
It’s not clear how many retail customers were affected by the FTX fiasco. But the fall definitely hit institutional investors and other players in the industry badly.
One of the worst effects of the FTX collapse is that many small projects in the space will have a hard time raising funds and might even go out of business. It has already been reported that a game as big as Star Atlas is experiencing financial issues due to storing a significant chunk of its funds on FTX. According to their CEO, the game had enough capital to survive for the next 2 years, which has now been reduced to a sum that will only give them a runway for a couple of months. The game is now trying to raise funds by conducting NFT sales.
What about Web3 Gaming
Things were definitely not going well in the crypto market, and FTX just placed a cherry on top of this crap pie. While FTX did not have a large impact on the web-3 gaming market, it did make market conditions more uncertain.
From a player’s perspective, there’s definitely an inherent fear of what happened with FTX, but the Web3 gaming market was sort of insulated from other niches in the industry.
In addition to the unsustainable economic models that led Web3 games to fail earlier, too much centralization is another risk they need to be aware of. Currently, games are moving away from the play-to-earn narrative and providing different incentives for engaging with the game.
What Next?
Most games from Web3 try to onboard players from Web2, and the best way to do that is to reduce the barriers to entry that we have in the space. Centralization is attractive as it allows companies to easily remove these barriers, but there’s a risk in that tradeoff, as we have seen with FTX.
We’re likely to see a resurgence of decentralized finance as people will be more apprehensive about using centralized services going forward. This is likely to translate into more decentralized games coming our way.
For Web3 gaming investors, this is the time to strategize and accumulate good Web3 gaming assets. Although you won’t get massive returns in the short run, your long term profits can be huge.
Here are some metrics you need to look at before engaging with a game:
- The transaction volume
- Market capitalization of the token
- Mint and ongoing price of in-game assets
- Retention rates of the game
In Closing
It will likely take the industry a while to restore the trust of the mainstream. In 2021, crypto adoption grew too quickly, and it appeared that we were never going backwards. However, due to the misconduct of bad actors like SBF, we’re back to square one with people who are on the edge with crypto. However, we know that the technology hasn't changed and the true believers are going nowhere.
