DISCLAIMER: THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY. IT IS NOT A RECOMMENDATION TO PURCHASE TOKENS OR ANY OTHER ASSETS. ANY INVESTMENTS MADE IN THE PROJECTS OR ASSETS MENTIONED BELOW ARE DONE SO AT YOUR OWN RISK. THIS IS NOT FINANCIAL ADVICE.
Limit Break & Free-to-Own
Gabe Leydon’s Limit Break game studio made quite a splash in the web3 gaming world at the end of August by emerging from stealth to announce they have raised a whopping $200M in funding to build a new blockchain game. Investors include Buckley Ventures, Paradigm, FTX, CoinBase Ventures, Shervin Pishevar, Anthos Capital, SV Angel, and Standard Crypto. But it wasn’t just the money that made crypto twitter headlines.
Gabe Leydon, Founder/CEO, Limit Break - Photo by Asa Mahat
In an interview with GamesBeast, Leydon made some ambitious claims: “Our focus is on what I believe is going to replace ‘free to play’ with something I call ‘free to own’ games.”
And so, a new buzz-term in gaming is born. “Free-to-own” (F2O) refers to Limit Break’s strategy whereby the studio mints an initial collection of NFTs and gives them away for free. On the surface, this approach may seem counter-intuitive, since “pre-selling” NFTs before games are made has been a primary source of early funding and revenue for new blockchain games. However, there are a number of potential benefits we will explore below.
It’s also worth noting that Limit Break is not the first nor only game to attempt the F2O strategy, though they stand a good chance of mastering it.
Loot Project branding
???? Loot Project was one of the first projects to do a free mint, but has since lost momentum; game development was left up to a loose affiliation of NFT holders and they failed to include trading royalties in their NFT, so the project had no treasury to support development.
Gossamer World concept art
???? Gossamer World did a successful free mint earlier in the summer. It is another mysterious project early in development being produced by Bron, a prestigious independent film studio in Hollywood.
Aurahma PFP from Project Eluüne
???? If you missed out on those, keep an eye on Ancient8 Dojo Launchpad for a potential free mint with Project Eluüne, a team-based auto-chess battler with RPG mechanics.
The Bull Case for Free to Own
Leydon sees F2O as inherently superior to “play-to-earn” (P2E) models that have reliably led to player-investors dumping the NFTs and cryptocurrencies that underpin the game’s ecosystem. But Leydon’s ambition does not stop at web3. He sees this as the future of gaming, period.
“If you match free to play up against free to own, there’s no way for free to play survive… I don’t see how anybody goes back to free to play after that. Free to play is download the game for free, buy a bunch of virtual items that you can’t own, essentially. We’re completely reinventing the game industry.”
DigiDaigaku Genesis floor-price listings on Opensea as of Sep 30, 2022
Principles of Free to Own (F2O)
There are two defining principles of F2O:
- The community mints and owns the first NFTs for free.
- Those NFTs should be “factories” that generate other NFTs.
Let’s break down the benefits of this model below.
Alignment with the Community
For the studio, “Free to Own” is a long-play. While they collect no upfront profit from the initial mint, revenue does trickle in from royalties or “creator fees” on subsequent transactions when fans sell their NFTs on secondary marketplaces like OpenSea. Limit Break collects 10% of every Digi sale in this way. The game also reserves some NFTs for itself, and its team, which they can sell at market price later on. This aligns the interests of the studio and fans by incentivizing the team to create a great game and grow the community. This, in turn, attracts more buyers on secondary markets, which increases the trading volume and prices and generates more royalties.
For fans, free NFT drops could potentially reduce the likelihood of rug-pulls (intentional or no), in which a project pre-sells NFTs and then fails to deliver a quality game, amounting to an emotional and costly loss of time and capital for the community. The idea is that welcoming early fans by making them NFT owners for free will foster a community of loyal advocates who are incentivized to evangelize the game without the expectation of ROI.
???? In the currently ambiguous regulatory environment around crypto assets in the US, the F2O model of giving away NFTs for free should theoretically protect Limit Break from allegations of illegal securities offerings.
DigiDaigaku Spirits Banner
Factory NFTs
The second major selling point and driver of value for Limit Break’s strategy is not mutually exclusive to Free-mint collections. Factory NFTs offer the promise of economic utility inside the game by generating valuable in-game items or completely new NFTs for holders to use or sell.
It provides further alignment because the studio and team holds on to a cache of genesis NFTs and is therefore incentivized to drive the most value and economic relevance to the original NFTs. The subsequent NFTs generated from these Factories might also be perishable and have more specific utility so as not to compete or conflict with the Factory’s importance and value. All of this allows the game economy designers greater flexibility in balancing the value flows from season to season by driving the proceeds of overall economic growth of the game to factory NFT holders.
A good example for comparison is Bored Ape Yacht Club. BAYC NFTs have generated incredible value for their holders through airdrops and whitelist sales (MAYC, Otherside Land Deeds, etc.)
While precious few details have been revealed about Limit Breaks game or the specific in-game utility of their NFTs, they have introduced the first “products” of DigiDaigakus: DigiDaigaku Spirits. Per the DigiDaigaku website:
“Digis will periodically receive a spirit NFT that matches the respective Digi. You won’t be able to do anything with it AT FIRST, but each Spirit is a core ingredient in creating Digidaigaku HEROES”
They have also revealed a ranked system for “combining” Digis and Spirits to make Heroes of varying quality:
This diagram outlines the first step of “combining” Digi NFTs to generating Heroes. This is textbook GameFi (Gaming + DeFi), which opens a number of strategies for investors & players to try leading up to the game.
A New Trend
Lastly, the bull case is supported by the fact that Limit Break is not the only project employing this model. Other titles like Civitas, Gossamer Seed, and Project Eluune from Arrivant Studio already have or are planning their own free NFT mints, all of which offer some in-game utility, if not perpetual Factory benefits.
Challenges & Contradictions of Free to Own
The term Free to Own might sound inclusive / egalitarian, but this could not be farther from the truth, and its revenue strategy has built-in challenges that may make it untenable for most projects to rely on the way Limit Break has.
Capital Requirements
The most obvious challenge of F2O is that game devs must have the resources to build the game without the upfront revenue from initial NFT sales. This typically means game devs must raise more funding from venture capital and dilute their own ownership or future profit. While it is quite normal for blockchain game studios to raise funding, few could ever hope to pull off Limit Break’s $200M raise, a vote of confidence due largely to Gabe Leydon’s previous success in the gaming industry.
Exclusivity
Free NFT sales must be done in stealth or in a tightly controlled manner via whitelists; otherwise, they are plagued by bots that buy up most of the supply in a matter of seconds, which defeats the point of the whole model. This exclusivity allows the project to select for members who will be the best early advocates of the project who will stay faithful and active during the multi-year development process.
However, this leads us to the main contradiction: Free to own is only free for the first group of free-minters, who obviously are not so generous on the secondary market. With a current floor price around 12 ETH, there nothing free about Digidaigaku anymore. These issues around the exclusivity of Digidaigaku were pointed out by Loopify (Founder/CEO, Treeverse) on twitter:
“The issue with this free 2 own model is that it only supports the initial buyers, now the entry automatically on the secondary is $20K+. If they do any future free mints, they will have to think of another model other than stealth because of crazy demand” - Loopify
Speculators
Though the initial mint is free (and exclusive), inevitably, speculators will flock to participate, especially for a high-profile project like Limit Break. Speculators may be useful for driving up asset prices and boosting trade volume (and revenue from royalties), but their mindset and approach is inherently different from the early fans who minted for free. Their patience and tolerance for price volatility may be much lower, unless the rewards for holding factory NFTs generate sufficient downstream revenue. Speculators are loyal only to their bottom line. Which leads to the next challenge:
Optional Creator Royalties
While creator royalties on secondary sales has been touted as one of the most virtuous features of NFTs, many don’t realize these fees are not hard-coded into smart contracts, which means NFT marketplaces like Opensea must agree to honor, collect, and distribute them to the artists & projects. Until recently, the major exchanges on Ethereum and Solana have embraced this duty, but now this institution is under attack. Last year saw the launch of Sudoswap, an NFTFi platform & marketplace with automated market making (AMM) algorithms and liquidity pools that allows NFT buyers and sellers to bypass creator fees, charging instead a flat .5% exchange fee on all transactions.
Trade volume on Sudoswap (Dune Analytics), an NFT marketplace that does not enforce NFT creator royalties
Similarly, Yawww, an NFT marketplace on Solana, launched earlier this summer without enforcing creator royalties. This trend has sparked a contentious debate within the NFT community, pitting creators (and those who want to support them) vs. profit-motivated traders and collectors. Magic Eden, the largest NFT exchange on Solana was initially proven themselves a powerful ally to creators by providing software to projects that lets them track whether or not royalties have been honored and limiting individual NFTs’ functionality or visibility until royalty debts are payed. However, in October 2022, Magic Eden announced they, too, would make paying creator royalties optional.
While many accuse them of siding with traders over creators, Magic Eden believes they see the writing on the wall for the centralized enforcement of royalties. However, they assert that this decision reflects the current reality but not the future, and are putting up $1M for any developers who can innovate a code-level solution to the issue.
- While this nuanced issue has become quite polarized on crypto twitter, it was well-articulated in a recent episode of The Chopping Block in which host Haseeb Qureshi partnered with Zhuoxun Yin, cofounder of Magic Eden, to debate Unchained host Laura Shin and Li Jin, cofounder at Variant Fund.
Digidaiku Genesis NFTs listed on Sudoswap. These sales will provide no royalties for Limit Break.
Clearly, the situation is fluid and evolving. Software tools like those provided by Magic Eden will likely be adapted for other chains like Ethereum, but how long before someone develops a workaround? Hopefully, the majority of NFT buyers will go the path of least resistance and continue to use the major platforms that honor creator royalties. Otherwise, the revenue of many NFT projects will be severely cut and cause them to fold. However, profit-motivated NFT traders will reliably go where fees are the lowest in order to improve their margins. This means there will always be demand for a sudoswap or Yawww, and always a threat to NFT projects— one that is especially acute to F2O. This is also why an influx of speculators could become a costly and even existential threat to F2O games.
The Verdict
So, is Free-to-Own the future of gaming, or another marketing buzz-term?
The answer, as you might have guessed, is likely both.
It’s really a trick question and not only because we can’t know the future. It’s also because the the term 'free-to-own' is deeply problematic: It’s most certainly a marketing gimmick, but it’s also a total head-fake: “Free to own” only describes the initial distribution method enjoyed by minters, and actually hides the mechanism with the most potential: Using Factory NFTs to turn whales into loyal producers.
Despite his aforementioned criticism, Loopify imparted a piece of wisdom in our recent interview about Treeverse that is worth recalling here:
“the secondary market is way more important than the primary. You need to curate your community (mainly through distribution, how you market, and balancing expectations) so you avoid people who buy but do not care/believe in your product.” - Loopify
It seems like Leydon and Loop are fully aligned on this point. In the end, aside from some potential legal advantages and good will towards minters, the free mint does not matter as much as the secondary market, which inevitably selects for whoever has the deepest pockets and conviction about the project itself. Limit Break is curating this community primarily through the expectation of future value being generated by these NFTs.
Conclusion
Whether or not you think F2O is fair (it’s not, but nothing is), this model is one of the most promising we’ve seen in web3 gaming. But as we’ve explored, it all hinges on funding and the ability to collect creator royalties. And ultimately, if the game itself is no fun, the whole thing will come toppling down like a pyramid scheme.
But if it is fun, then the game will draw new participants with non-financial motivation into an economy designed to drive value to the genesis NFT holders, these loyal whale producers. Leydon hasn’t revealed the full scope of his plans for Limit Break, but they must be pretty damn convincing to wrangle $200M. But maybe this is what we should all come to expect; Gabe Leydon won’t be the last studio head coming off a hot-streak in traditional gaming who realizes the potential of web3 and brings their experience, vision, and stacks of venture capital to the table. It might benefit whales the most, financially, but it will also lead to better and better games for the rest of us.
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