By Joel John, Principal, LedgerPrime

Translation: Kay Feng, Founding Partner of Aperture Digital, Managing Director of NGC Ventures, translation authorized

For a detailed explanation of the flywheel, please see the end of the article

Before the article starts, I would like to remind you that I completed this article under the inspiration of Sumanth Neppalli. If you are interested in the topic of GameFi, please pay attention to him.

In February 2021, I wrote an article about Axie Infinity, but unfortunately there was no unity of knowledge and action. I did not open a position at a price of $0.7 when I wrote him——AXS rose another 200 in the secondary market later times, once above $140.

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Understand Ronin

Ronin is an Ethereum sidechain originally designed specifically for the Axie ecology. Its transaction time and transaction fees are almost negligible, making millions of on-chain game transactions possible. Ronin is an important infrastructure support for the Axie Infinity game, including all transactions and all assets-Axie elf, land, SLP, AXS, WETH, etc. The PoA (Proof of Authority) consensus mechanism currently used by this network. In other words, he uses fewer verification nodes (currently 7) and obtains faster transfer speed. The current verification nodes of the Ronin network include: Binance, Ubisoft and Animoca.

Note: Before November last year, Binance had already supported the deposit and withdrawal of AXS, SLP, and WETH on the Ronin network

On the surface, Ronin is a sidechain specially designed for games. At the same time, its operation focuses on introducing game studios to help them design token economies and acquire users. In terms of functionality, style of play, and positioning, the difference from BSC and Solana does not seem to be that big. So the question is, the game project party can go to BSC or Solana to develop and deploy, why choose a separate network like Ronin when there is already such a solution? I gave the following answers:

*Historically, gamers are quite sensitive to price. In the past year, the transfer fee on the Ethereum network has continued to be $30-$50 per transaction, which is naturally prohibitive for new users

*The vast majority of application scenarios of chain games do not require the degree of decentralization of Ethereum L1

*After launching Ronin, Sky Mavis transformed from the parent company behind Axie Infinity to an infrastructure provider for all types of games. If you are familiar with USV’s classic fat protocol theory, of course you know the meaning of it. The value of Ronin—in theory, the value of the underlying network should be greater than the value of all apps that depend on it

The way Sky Mavis plays on Ronin seems to be the exact opposite of how most protocol layer projects are played. Historically, the general approach is to raise a large sum of money, spend a few years to develop an L1, and build an ecological fund at the same time, spending millions of dollars or more to attract developers to invest in companies that do not yet have real users. Chain construction ecology. Intentionally or not, Sky Mavis plays the exact opposite of most L1's right now - they did Axie Infinity first, and got millions of users, in other words, before Ronin even started, they solved the most important Challenge - get users. Once developers start seeing millions of users on the web, it's only a matter of time before they migrate to developing on Ronin.

This scenario is very similar to the mobile operating system battle in the mid-2000s-the reason for BlackBerry's final loss to Android and iOS is not just its crude product itself. At that point in time, BlackBerry users couldn't communicate with iPhone users and vice versa. When such alternatives emerged, BlackBerry's user base plummeted, and its appeal to developers quickly diminished.

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achievements so far

Before we get started, it may be more helpful to state what Axie has accomplished with the Ronin network over the last year.

Last year, a total of 1.5 million users on the entire Ronin network completed NFT transactions worth more than $4 billion. Over $1 billion in AXS is staked on Axie. There are twice as many NFT buyers as ETH on the Ronin network (Translator's Note: The data may be even greater, the number of NFT historical buyers on the ETH network does not exceed 500,000 in our Research statistics) and 20% of the transaction volume. This is quite large, since most NFT transactions on Ronin are worth only the gas fee of an NFT transaction on ETH. I think Ethereum will still be a storage network for high-value NFTs, and big players prefer to store high-value NFTs such as Bored Ape and Cryptopunk in Ethereum-because Ethereum is more secure. But there is still a market space that is needed by consumer-level NFT applications. Their transaction frequency is higher and each transaction is smaller, and this is exactly what Ronin is doing.

It is worth mentioning that so far, users on the Ronin chain are still more oriented towards the Axie Infinity game itself. Therefore, most of the transactions on the Ronin network so far are in this single game, while Ethereum, Solana, and Flow all have multiple game ecologies. So in the end, the real innovation of Sky Mavis is not to deliver L1 itself, but to deeply cultivate the methodology of game economic design, so that the asset velocity (Asset Velocity, token and NFT turnover rate) is consistent with other top L1—this This has been done, as can be verified by comparing the number of NFT buyers on Ronin and Solana.

Another example of measuring the migration of users to Ronin is to compare the weekly active user data of Ronin and other public chains in the past week. Theoretically speaking, as an emerging network with not so many DApps, Ronin's weekly activity should be much less than that of Fantom or Polygon. As I mentioned just now--Ronin's current performance is even only dependent on one game. When more games are deployed on Ronin, we will see these data become higher overall.

Then let's look at the current real data: As of January 27, 2022, Ronin has 1.4 million weekly active wallet addresses-almost twice that of Polygon. Of course, this may be related to Polygon's network upgrade last week. The gap opened by Ronin may also explain why Polygon wants to actively invest in game studios. Just yesterday, Polygon announced the news that the former Youtube game director joined.

The last indicator to measure the activity on the Ronin chain is to observe the average number of transactions per day. So far, more than 289 million transactions have been made by 9.6 million wallets on the Ronin network. BSC and Polygon average about 7 million and 5 million transactions per day, respectively.

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Valuing Ronin

There are many ways to value the Ronin network. I will adopt two methods below and give some other ideas. The total amount of $RON tokens is 1 billion, of which 100 million will be allocated to users of Katana (the native AMM DEX on Ronin). The only way to get $RON is to provide liquidity on Katana in the past quarter. The current trading price of $RON is around $3, which is about $300 million in circulation. But let's put these aside first, and use the idea of ​​fat agreement to make a valuation.

Above, I've hinted that the value of Ronin lies in capturing value as an infrastructure layer. One way of valuing is to measure the application layers on top of it, and value them based on their performance. Remember - I didn't calculate Axie Infinity's revenue and only focused on Katana DEX.

First, I collected DEX transaction data from DappRadar for the past 30 days. Katana ranks second with about 375,000 users. These data do not allow us to give a valuation conclusion, but give a rough ranking of Katana. You can also find that Katana’s transaction volume is much lower than that of Sushi or 1inch, partly because other exchanges serve more DeFi native customers, and usually their transaction volume is larger.

According to the above data - we can extrapolate a growth curve of Katana in the coming year. From my point of view, I took the figure of 2 billion transactions from the last 30 days of data and predicted the next year's data. We assume that Katana will grow at 60% month-on-month, and the growth rate will decrease by 10% every month. In this way, we can calculate that the annual trading volume will be about 280 billion US dollars. This is still a conservative estimate. On the ETH chain alone, the transaction volume in the past year was about 1.5 trillion US dollars. It is conservatively estimated that the transaction volume of DEX on all chains may be about three times that of ETH—about 4.5 trillion US dollars. We assume that Ronin can capture 280 billion US dollars in transaction volume, which is about 5% of the entire network transaction volume. Katana's service fee model is 0.25% returns to LP, and 0.05% enters Ronin's treasury. For the convenience of calculation, we take this 0.3% as the agreement income. In this way, we use this assumption to make an income statistics for Katana so that we can make a valuation:

The $840 million gross revenue figure might seem odd, but remember that most of that goes back to LPs.

According to TokenTerminal data, Uniswap's protocol revenue was about $1.6 billion last year. Based on this $840 million figure, if Katana is the only application, multiple scenarios for $RON's final valuation can be calculated. To get an estimated valuation for this number, we again considered the P/E ratio given on TokenTerminal, which is calculated by dividing the FDV by the protocol’s annual revenue, ranging from as high as 655 times for Kyber to as low as 1.74 times for LooksRare . There are no clear benchmarks here. According to their data, Axie Infinity has a multiple of 55x. I think the multiple will decrease over time, but if the asset is hot at the time of listing, it could skyrocket and reach 100x. One way to measure PE multiples is by comparing them to traditional stocks, as of now, Activision has a PE multiple of 23, Ubisoft has a PE multiple of 65, and Take Two Software has a PE multiple of 32. Given the differences in how governance tokens operate compared to traditional stocks, the multiple comparisons here are not entirely fair, but nonetheless give a comparative perspective.

Keep in mind that the valuation here only considers the Katana DEX. Earnings from Axie Infinity or any third-party apps are not counted. Also, given that we don't yet know what kind of external game studios or independent applications are deployed on Ronin, the above revenue figures can still be more optimistic. Fat protocol theory generally states that the base layer should be valued above all applications running on it. If this is the case, and the optimistic scenario for Katana's valuation is around $40 billion, $RON of $40 is not out of the question. But the problem is that the fat agreement is not always deduced according to the textbook. For example, during the bear market, the value of the stable currency on Ethereum is higher than the valuation of the Ethereum network. It should only be used as a guide to the potential pricing of the network.

Note: One reason for not adding Axie Infinity revenue to the revenue calculation here is that the value there is captured in AXS tokens.

Another way to value $RON is to calculate the opportunity cost of farming $RON tokens in the last quarter. As mentioned earlier, the only way to get $RON tokens is to provide Katana with AXS or SLP and ETH liquidity. All three tokens saw their prices drop in the last quarter. And, from the perspective of opportunity cost, although individual traders can consider countless opportunities, the consideration here is that Power Users who are willing to invest a lot of liquidity in Katana have a high probability of knowing other mines. So we use (i) the average TVL of the last quarter, (ii) the expected return of individuals using these assets in the last quarter, and (iii) the number of tokens entering the market to value $RON.

The assumption here is that the potential return rate of these users’ idle assets is 10%, and they will not sell unless they get a high return multiple (because otherwise, why do such a high-risk operation like LP mining). We assume that potential sell-offs are unlikely to occur until the token reaches a price that recoups opportunity costs and fundamental returns, including when the token goes live, which is not to say that retail investors who have farmed $RON over the past few months will not sell. Because the price of SLP and AXS has fallen sharply in the past few months, retail investors may sell, but the $RON book profits of large investors cannot make up for the losses. Part of the reason I'm assuming this is the data from the Ronin bridge.

According to Nansen data, about $320 million entered Ronin in the last week alone, but about 390 addresses accounted for the vast majority of the amount, so that the average cross-chain amount per wallet for these whales is $820,000, which makes I don't think they will sell $RON for low farming income.

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What's next?

When I wrote about Sky Mavis last year, I didn't expect their valuation to grow 100x in a year. I missed two things when researching them -

(i) Consumer-oriented apps will see greater exponential growth in 2021 than the typical DeFi-native apps I was more familiar with at the time

(ii) Axie Infinity's mobile-first strategy partially facilitates mass adoption

We need to clearly realize that the Crypto world is still a blue ocean market, and the Crypto world can still grow 5 to 10 times from the consumer-oriented App in the traditional world. This is nothing new either. In 2008, Zynga's Farmville was the leading reason teens logged on to Facebook. Games can make more people resonate with new technological paradigms, while those discussions about complete decentralization or sovereign currencies in the native encryption community cannot. One of the interesting things I've seen from several consumer-oriented apps is that about 70% of their traffic comes from mobile apps. Through Axie Infinity and Sky Mavis, Ronin has the unique advantage of channel distribution through mobile App. It will be very interesting to see the results of the next year - soon everyone will know that what Sky Mavis is building is a flywheel! (Let's take another look at the title picture now)

*Game developers may migrate to Ronin to provide better experience for gamers:

*This will also facilitate more liquidity and transactions on the network

* Economies of scale make it cheaper to serve every new user on the network

*This in turn lowers customer acquisition costs for Sky Mavis for its own games like Axie Infinity

*Revenue from these users is then reinvested in game developers looking to build on Ronin

In the end, Ronin represents a shift in thinking about game history. Developers who contributed to the growth of AWS in the early 2000s didn't think it was bringing any value to them, and neither did users at the time. But AWS finally got Jeff Bezos to work on his rocket, but I think we can do better. Ronin's distribution model philosophically puts users with AXS or SLP first. Anyone can earn SLP tokens in the last year (albeit subject to price changes), which means gamers will hold a lot of Ronin tokens. That's not to say VCs, hedge funds, and Sky Mavis aren't optimized for network ownership. But on a percentage basis, gamers own more Ronin than they own shares of Activision, Blizzard, or Electronic Arts. So it will be interesting to see how ownership economics change gaming behavior in the coming quarters, the price drop of SLP is currently causing concern for a large portion of Axie Infinity users. There is certainly room for deeper discussions about how guilds and the gaming revenue ecosystem will impact the labor market of the future. I'll write something about it next week, but we're back to Ronin for now.

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I and the financial entities I am affiliated with may have positions in assets mentioned in the article.

Not financial advice. Digital assets are currently highly volatile. Don't invest what you can't afford to lose.

I did not discuss this article with anyone at Sky Mavis prior to publication.