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Monthly Market Review - August 2021

Updated: Mar 8

In this note, we will discuss the 'metaverse', what is it, what developers are trying to build via it and how it is driving a rally in Ethereum competitors.


August was a month of recovery in the digital asset space, with the broader market and smaller caps outperforming Bitcoin.


The digital asset space is a broad split between financial and technical innovation. The bitcoin whitepaper described the blockchain for the first time, which was a technological breakthrough in its own right and used to create a new financial product – Bitcoin.

Ethereum was the first digital asset to tap into the technological innovation, providing the ability for a decentralized group of developers and users to interact with products through smart contracts, without requiring the approval of an authority. After years of rampant speculation – the breakthrough product was Decentralized Finance (DeFi). In hindsight, this was a perfect use case for smart contracts. Developers can mirror traditional financial products, and end users can buy and sell these in a trust-less manner. This realisation led to the boom of DeFi products last summer. Ethereum in its current form is well suited to this; it is highly decentralized, has been around a long time, and the underlying ETH is valuable enough to use as collateral.

However, digital scarcity enables other features which don’t require the same level of security such as gaming, digital collectibles and digital sovereignty, which have been combined into what is called the ‘metaverse’. This is the beginning of combining all our individual digital presence into one interconnected and interoperable world.

This idea can sound very abstract – and one of the first successful implementations of this was Axie Infinity. It is a Pokémon-style game, which allows users to battle their creatures against opposition. The difference to other games is all results are saved to a blockchain, so the creatures have an ‘auditable’ history. Additionally, each creature and card are an NFT, which allows users to trade them. Users are training these creatures and earning rare in-game assets before selling them onto other users, while Axie Infinity takes a 4.25% fee for facilitating the transactions. They have facilitated over $1.7 billion of transaction volume through their marketplace1, of which nearly $800 million of that was in August. There are reports of people in the Philippines and other countries ‘playing to earn’ as a full-time job.

Axie Infinity is exciting, but the game is still built by a single company who has the exclusive vision over the game. The current craze of NFTs is primarily comprised of digital art and digital avatars, but the craze also included a picture of a rock selling for $2 million. Another project that has caused a commotion is Loot. It is deceptively simple – 8000 loot packs were launched, which were just words, with each word being an NFT. It is up to owners and community members to decide what these become. I believe that owners are hoping that a world of games is built around these words. This may happen and investors will try and help it happen. For this to occur, the community needs to get two things right:


Developers need to be incentivised to build on top of loot as opposed to making another base layer. If it’s more profitable to launch another 8000 cards, then that is the rational thing to do – and there are several people who have done that.

The games need to be fun – without fun games the concept won’t work as the loot world needs to attract users beyond just owners of the loot pack.


Loot Bag #693. Currently on sale on OpenSea. The current ‘floor price’ (cheapest purchase price) for any pack is c. 13 eth (± $50,000).

A second-order effect of all this innovation is that a substantial amount of money has been poured into Solana (up 197% for August) and Avalanche (up 188%), which are the main competitors to Ethereum. Ethereum’s transaction costs can exceed $100, depending on the complexity of the transaction. Solana and Avalanche use different blockchain consensus methods and they aim to facilitate smart contract transactions in a cheaper manner, making them more suitable for low-value transaction applications.