Key Insights
- Revenue and daily average users (DAU) continued to decline QoQ, with the former down 56% and the latter down 45% in Q4’22.
- The launch of Tournament Mode and the ICE Merge helped reduce token inflation from 58% in Q3’22 to 16% in Q4’22.
- With the ICE Merge, token emissions are down 3.7 million at its peak to 1.2 million ICE per day.
- Tournament Mode burned 16 million ICE in Q4 and has averaged a burn rate of 174,000 tokens a day since its launch in September.
- Decentral Games targeted Web3 natives in its newly released game adoption strategy; it established partnerships with CoinGecko, Ar8, and other Web3 applications and communities.
- Decentral Games is continuing to adjust its play-to-earn rewards structure to limit ICE inflation.
Primer on Decentral Games
Decentral Games (DG) operates ICE Poker, a card lounge played on mobile phones (ICE Poker Flex) and in the Decentraland metaverse (ICE Poker Metaverse). Participants must own ICE Poker NFT Wearables to play and can opt for either Challenge Mode or Tournament Mode. Challenge Mode is a sit-n-go, free-to-play option with daily challenges for active players. Tournament Mode is a six-person, elimination-based tournament with prizes for winners.
The game is designed to reward users with its native ICE tokens through a play-to-earn mechanism. No ICE is wagered in the actual playing of the game, but the token is used by the protocol and players to incentivize gameplay, purchase NFTs, pay for tickets (called Shine) to enter Tournament Mode, and trade on markets.
NFT player-owners can play ICE Poker and earn ICE themselves. Alternatively, they can delegate their assets to delegated players who play the game and take some portion of the proceeds on the NFT player-owner’s behalf.
Key Metrics
Performance Analysis
Q4 was a mixed bag in terms of performance. The quarter continued a decline in key performance metrics such as revenue and daily average users (DAU). But it also highlighted an area of progress with token inflation, an important sustainability metric.
Revenue derived from NFT activations, mints, secondary sales, and upgrades continued to fall on a QoQ basis. Revenue declined 56% in Q4 from $766,000 to almost $338,000. Annualized compared to its $16M market capitalization, the $1.35M run rate places the protocol at an 11.85x multiple, a much lower ratio compared to other NFT-based games like Axie Infinity (920.6x).
In the past, the primary source of revenue came from activations and mints. But as new players joined in smaller numbers, demand for those two sources either dropped significantly or became a nonfactor altogether. Compound that with declines in upgrades and secondary revenues, and numbers have been trending down across the board since the beginning of Q2. Overall, cumulative protocol revenue only increased 0.7% to slightly over $51 million.
DAU metrics also continued their downward trajectory in Q4 from 4,150 to 2,249. While DAU fell 46% QoQ, the decline does seem to be slowing. The metric is impacted by the daily counts at the beginning of last quarter. As such, the intra-quarter differences between users reveal that user counts only fell 24% within the three-month period. This allows some room for optimism, considering that Q2 and Q3 had intra-quarter declines of 41% and 52%, respectively.
The slowing of DAU’s decline might reflect the staying power of the game’s core users. ICE Poker’s “true fans” can help the game find some level of sustainability while the team continues to experiment with tokenomics during the bear market. In addition, the game’s play-to-earn model encourages a base of players to earn ICE rewards to supplement day-to-day income. The model is particularly attractive in developing countries, where play-to-earn games remain popular. This base level of activity should continue as long as the price of ICE holds value.
As with other play-to-earn games, the tokenomics ultimately determine whether the game is sustainable. Retaining players for the long term starts by reining in inflation. Since cardplayers receive ICE for gameplay, the market supply and price of ICE have a direct correlation with player earnings. DG is striving for a 1:1 burn-to-mint ratio, i.e., a 0% inflation rate. By maintaining this ratio implies the game has the appropriate levers in place to increase or decrease token supply when necessary.
Recent changes to the game structure and new gameplay modes led to newfound progress in tackling inflation after token supply increases of 47% in Q2 and 58% in Q3 2022. These changes drove inflation down to 16% in Q4 2022, bringing outstanding ICE to 425 million at quarter-end.
Tournament Mode as a Token Sink
Last September, DG introduced a new feature called Tournament Mode. Tournament Mode requires users to spend ICE to purchase Shine, the entry ticket for eligibility. Since all participants must have Shine but only the top two winners receive prizes, Tournament Mode has a deflationary economic profile. Compared to Challenge Mode, which maintains an inflationary model to reward players for repeat gameplay, the new game mode is clearly a bigger benefit to the tokenomics of the game.
So far, Tournament Mode has burned over 21 million ICE to date, at an average of nearly 174,000 a day. Almost 5 million ICE was burned in September, meaning the remaining 16 million was burned entirely in Q4. The burn rate even held steady in the later months of the quarter, with November (burning an average of 200,883 daily tokens) and December (~130,000 tokens).
ICE Merge Reduced New Token Minting
Besides token sinks, another long-standing goal for DG has been to convert users by making the game more affordable for new entrants. Delegation was intended as a path for delegated players to become player-owners themselves. However, ICE earned by delegated players was often sold in the market for fiat currency, triggering a downward pressure on the price of ICE.
The ICE Merge further incentivized becoming player-owners by distributing Banked ICE instead of ICE to delegated players playing Challenge Mode. Banked ICE is an illiquid token that gives users access to discounted NFT wearables. It can also be used to purchase Shine or convert to ICE at a rate of 1 Banked ICE for 0.3 ICE. The partial redemption rate helps to encourage asset accumulation and discourages cashing out into fiat currency.
Over the past quarter, over 55 million Banked ICE was distributed and utilized by delegated players. About 57% of Banked ICE was converted into ICE. Another 23% was redeemed for the ICE Plague NFT wearable with the delegated player transitioning into a player-owner. The remaining options, redeeming for Shine or a Tournament Mode wearable, made up the other 20%.
Delegated players did not begin redeeming their Banked ICE for the ICE Plague NFT until late October, but redemptions picked up in the weeks after. In December, 45% of Banked ICE activity was cashed out for ICE, while 38% was to redeem for the ICE Plague NFT wearable. The change in activity over the quarter reflects a growing willingness among delegated players to own their asset, potentially to build their own guild, or to return back to the ICE-denominated income they previously had.
As for the effect on ICE Poker tokenomics, ICE distribution across all categories (including Banked ICE converted to ICE) dropped by 55% from an average of 2.7 million to 1.2 million per day after the ICE Merge. The average ICE amount distributed to delegated players dropped 90% from over 1 million ICE to 106,000 each day. The distribution held consistent across player-owner earnings with the entirety of the drop being attributed to lower earnings by delegated players.
The ICE Merge questions the sustainability of converting delegated players to player-owners. At some point, enough delegated players will become player-owners to neutralize the effect of Banked ICE being a discount to ICE. And with a higher number of player-owners grinding Challenge Mode to earn daily rewards, ICE earned from player-owner gameplay will only go up. Moving forward, DG will need to encourage daily players to spend more time in Tournament Mode; however, taking away incentives in the current play-to-earn structure won’t be easy.
Qualitative Analysis
Customer acquisition remains another priority to ensure the longevity of the game. DG has outlined four demographics of gamers it wants to capture:
- Web3 game enjoyer
- Metaverse maximalist
- Poker enthusiast
- Casual gamer
The resources devoted to each demographic tend to ebb and flow with the state of the broader market. For example, the casual gamer represents DG’s push into mobile and its access to a larger base of players. But the decline in token prices and media attention might mean that Web3 games now hold less appeal to individuals who place a lower emphasis on asset ownership or play-to-earn tokenomics.
As a result of these market conditions, DG’s focus in Q4 was to promote the game to Web3 natives. A partnership in Q4 was announced with CoinGecko to promote pay-per-click ads on the website, leading to 900 first-time players trying out the game. Additionally, 10,000 CoinGecko-branded NFT wearables were also airdropped to loyalty members of the CoinGecko Candy Reward store. DG also formed partnerships in Q4 with other Web3 applications and communities, such as PoolTogether, Arc8, Lonely Alien Space Club, Metakey, and others.
DG celebrated its second anniversary (and ICE Poker’s first anniversary) this past quarter by remaining busy shipping product updates. Some of its big features included ways for users to pay for ICE wearables by credit card, in-game emoji reactions, and Web3 authentication for simple sign-in methods. DG plans to add in-game chat among players, private gaming rooms, and multi-table tournaments. The end goal is to boost the social factor of the game so it’s not just a room for poker players but also a place where friends can hang out virtually.
Governance Updates
Incentivize Reinvestment for Owners via Banked ICE
This accepted proposal aimed to change the reward structure of Challenge Mode to incorporate Banked ICE to player-owners, not just delegated players. Banked ICE’s ability to buy discounted NFTs makes it an attractive asset for those serious about investing in the ICE Poker ecosystem. The updated distribution for gameplay would be 20% Banked ICE and 80% ICE.
Fund Player Acquisition Campaigns to Optimize the Customer Acquisition Funnel
This accepted proposal aimed to allocate 125,000 DAI for strategic user acquisition experiments from November 2022 to February 2023. Approximately 80% of the 125,000 DAI will be used to fund ad campaigns on platforms such as Permission, BitMedia, and AdRoll. The other 20% is budgeted for sponsorships and newsletters. Any unused funds will be rolled over to the next marketing period.
Sell up to 246 Parcels of LAND
This accepted proposal aimed to sell 246 out of 1,000 parcels of land owned by DG in the Decentraland metaverse. The 751 parcels of land is enough to develop the game within Decentraland. From the sale, 90% of the proceeds will be converted to DAI and used to fund the DG treasury, which currently contains $15.1 million in assets. The other 10% will be used to bolster the ICE/USDC LP trading pool.
Closing Summary
While protocol financials such as revenue and DAU continued their downward trend in Q4, Decentral Games made strides in Q4 towards its goal of setting a neutral burn-to-earn ICE ratio. Both Tournament Mode and the ICE Merge were important steps towards limiting the game’s token inflation: Tournament Mode introduced another token sink, while the ICE Merge disincentivized the minting of new ICE. The combined effect was a QoQ inflation rate of 16%, which is 42% lower than the previous quarter. Further changes such as tweaks to ICE distribution to player-owners may also have an effect soon.
Though the road ahead is challenging, DG has an opportunity to become the first to reach a steady state within the play-to-earn model if circulating ICE continues to plateau in future quarters.
