FL Weekly | Fundamental Insights Weekly 2022.05.13

Investment Chapter Author: FL Research Team

Fundamental Insights

#1 Cross-chain Investment Opportunites

The mission of the cross-chain bridge is to fix the gap between different chains and lower the entry barrier for beginners. Staying on one chain, the user can reach other Dapps and liquidity on other chains. Compared to multi-chain wallets which offer better UX, the cross-chain bridge unit all chains to one and the user doesn't need to figure out which chain he/she stays on. Aligning with this mission, below are opportunities in the cross-chain ecosystem:

  • Inter-layer bridges: Inter-layer bridges are bridges between laye2 and layer1. There are not as many players in this market as players in the cross-chain bridge markets. This market is still early. In the future, we expect transactions in layer1 to move to layer2. This means more protocol revenues for protocols in this market.
  • Bridges with new tokenomics: Nobody knows how to use tokens appropriately in the cross-chain bridge. Most tokens are used as governance tokens and secure the whole network. We often see TVL increases, but the token price decreases. The token price does not reflect the progress of the project.
  • Bridge SDK: A toolkit or standard for building bridges. Developers can quickly construct their own bridges to extend their applications over more chains. Multichain is the future. With this toolkit, developers can expand to new chains fast and secure.
  • Bridge Aggregator: The aggregator connects with multiple bridges and offers better UX and lower fees. The DeFi market proves the necessity of aggregators. After DEXs, lots of aggregators join the market. This will happen again in the cross-chain bridges market.
  • ZK Bridge: ZK bridges can offer a better, cheaper, and safer cross-chain experience. Developers can easily build apps on top of the ZK bridge. Nil Foundation made significant progress in Solana and Mina, but it is hard to expand to other chains.

#2 The existance of LayerZero NFT

LayerZero, the Omni-chain Interoperability Protocol can be understood as a cross-chain protocol or tool. It is a convenient protocol that allows users to complete cross-chain processes with a low gas fee and fast transaction processing. The LayerZero protocol functions similarly to the “layer 0” IBC (Inter-Blockchain Communication) protocol of the Cosmos ecosystem. What stands out about LayerZero is its use of Ultra-Light Nodes (ULNs), which propose a new model for securely transferring information between chains on the premise of being cost-effective. They are implemented by performing the same authentication as light nodes on the chain. Omni-chain NFT does not require the holder to use the cross-chain bridge tool to achieve transfer. Omni-chain NFTs can be minted by calling the appropriate contract on the respective chain that the contract has been deployed on.

The concept behind cross-chain is to allow tokens or arbitrary data to be transferred from one network to another. They provide a compatible way for both parties to interoperate securely and provide key components for developing multi-blockchain networks. For NFT art collectibles, the opportunities may be limited. However, for practical NFTs, untapped usage scenarios and markets are likely to emerge.

Ethereum is facing challenges in continually scaling its NFT ecosystem as a result of its high gas fees. At present, the main solutions to this problem are to reduce network congestion through Layer 2 networks and to grow a multi-chain ecosystem model, pioneered by cross-chain protocols, such as Anyswap and Multichain amongst others, to redistribute the network load. With the development of multi-chain ecosystems, NFT assets on different public chains have also begun to grow across networks such as Polkadot, Solana, Heco, and Binance Smart Chain. While many projects have been deployed on cross-chain protocols such as Anyswap and Multichain, the emergence of the LayerZero ecosystem supported by the Omni-chain NFT appears to be ushering in a new turning point for cross-chain projects.

#3 How Axie infinity keeps value cycling around the ecosystem

The ways games monetise their user base has had three major phases over the last 20 years. First was the ‘Pay-to-Play’ genre dominated by the likes of Call of Duty, Minecraft, GTA, and many more. Second was the craze around ‘Free-to-Play’ (F2P) games like Fortnite, Farmville, Candy Crush and other mobile-casual games. We are currently seeing the emergence of the third phase known as ‘Play-to-Earn’ (P2E) which has been brought to popularity by Axie Infinity.

We tried to use 3 most important metrics that describe the transaction behavior of users in the GameFi ecosystem.

  • Reach - The growth of new players.
  • Retention - How many players does the game retain over time.
  • Revenue - How much money is captured by the different parts of the ecosystem.

The visual above gives a high-level breakdown of how Axie infinity keeps value cycling around the ecosystem.

First though, the value must flow into a Ronin Wallet (center in the diagram above) and happens in three ways:

  1. Bridge from Ethereum to Ronin.
  2. Binance integration with Ronin.
  3. Ramp Network allows users to deposit directly into their Ronin Wallet.

After a user has funded their wallet, they can buy and sell on the Axie marketplace. If a user is looking to battle in the arena they’ll need to buy at least 3 Axies. They can also trade or provide liquidity for SLP, AXS, and WETH on the Katana DEX.

Once a player starts battling, they begin earning SLP rewards which can only be redeemed every 2 weeks. Within this time, if a player shows exceptional skill they can be ranked on a global leaderboard to earn AXS as a prize.

As seen in the preceding diagram, these rewards (both SLP and AXS) are meant to flow into the breeding of more Axies. The SLP (which is generated when claimed) is burned upon the breeding of Axies. The AXS used in breeding is sent to the Axie Treasury and distributed as future rewards.

Retention comes from players wanting to play more to earn more, earn more to spend more, spend more to level up their team, and level up their team to earn more. Then the cycle starts over, theoretically capturing the value that enters the ecosystem. If SLP and AXS tokens leave the ecosystem and consequently aren’t used to breed more Axies, then they can’t be recycled back to pay the current players in the battle arena. For the Axie Infinity economy to remain sustainable in the long term, the SLP burnt from breeding needs to exceed, or equal, the amount of SLP minted through in-game rewards. If players redeem more SLP in the arena than what is burnt from breeding, then the supply of SLP increases putting downward pressure on the price of SLP. If token prices fall then the earning potential drastically decreases, and players lose the incentive to play the game.

To dig a bit deeper into the scholarship programs. We can look at the Yield Guild Games (YGG) - one of the largest Axie Infinity scholarship programs. According to the YGG 2021 Year End Retrospective, YGG reached 10,000 scholars by the end of 2021 and generated $13.6M in SLP revenue since the program began in April. According to the most recent YGG Asset & Treasury Update, they had 4,710 scholars in September, who earned a total of $1.24M through gameplay. This equates to $263 per user for the month of September. Based on a number of metrics that we will discuss below, it is not likely that YGG scholars are generating any more than this currently. Of that $263, 70% goes to the scholar, 20% to the manager, and 10% to the guild. This means the average scholar is making about $184 per month which annualizes to $2,209.

Week's Recap

Indicator Tracking


source: Coin Metrics

Crypto Fear & Greed Index

source: Alternative

Data of NFT Market

source: NFTGo

Protocol Total Revenue

source: Token Terminal