Immutable X - Enroute to becoming the first Web3 decacorn from Australia
Building the scaling infrastructure for the NFT revolution
What is Web3?
Previously I had written about the Ethereum landscape and delved into NFTs.
You might be thinking where are you headed with all this?
Well, the answer is Web3.
Here’s a definition of Web3 by A16Z
Web1 (roughly 1990-2005) was about open protocols that were decentralized and community-governed. Most of the value accrued to the edges of the network — users and builders.
Web2 (roughly 2005-2020) was about siloed, centralized services run by corporations. Most of the value accrued to a handful of companies like Google, Apple, Amazon, and Facebook.
We are now at the beginning of the web3 era, which combines the decentralized, community-governed ethos of web1 with the advanced, modern functionality of web2.
Web3 is the internet owned by the builders and users, orchestrated with tokens.
Closer to home, here’s Airtree’s John Henderson on what excites him (emphasis mine)
Web3 is built on open, decentralised blockchains like Ethereum and Solana. It runs on the currency of tokens - digitally native assets which confer property rights - the ability to “own” a piece of the new internet.
Tokens can be fungible or non-fungible.
If you buy a fungible token like ETH, you own a stake in the ethereum protocol, an open blockchain-based computing platform upon which many applications have been built in the last few years.
Non-fungible tokens (NFTs) unlock another new paradigm: digital scarcity. They sit on top of blockchains and enable digital property ownership of a specific virtual good, like collectible artworks or items within computer games.
So in other words, the era of Web3 - which runs on tokens and confers property rights for digital assets - is upon us!
And I strongly believe that NFTs are the easiest gateway drug into the world of web3 and crypto.
This post is a look into Immutable - a Sydney-based company that is at the forefront of creating the infrastructure on which this NFT revolution takes place.
I will attempt to follow my framework to review Immutable
What is Immutable?
Founded in 2018 by brothers James and Robbie Ferguson, Immutable — previously called Fuel Games — is a gaming and digital asset infrastructure business.
Okay, there is a lot to unpack in that. Let’s first focus on the NFT infra part - this is the most significant driver of potentially why Immutable might end up being a worldbeater.
What do I mean when I say NFT infrastructure?
Here’s an analogy.
Planes (the app) were invented before there were airports (the infrastructure). You don’t need airports to have planes. But to have the broad consumer adoption of planes, you do need airports, so the breakout app that is an airplane came first in 1903, and inspired a phase where people built airlines in 1919, airports in 1928 and air traffic control in 1930 only after there were planes
We have had our ‘plane moment’ with NFTs. Guess what comes next!
2021 - Year of NFTs
If you had any doubt about the popularity of NFTs - let me dispel it.
Collins Dictionary chose NFT as its "Word of the Year".
As per data from DappRadar
The NFT space experienced one of the most impressive expansions overall, amassing over $23 billion in trades in this year.…Collections like CryptoPunks, Bored Ape Yacht Club (BAYC), and Art Blocks became the face of the NFT explosion…..
$23Bn! From almost nothing in 2020.
Here is the sales chart for NFTs since 2017
And a large portion of the volume is on Ethereum
Okay so we are saying
NFTs have exploded
A large part of the action is happening on Ethereum giving rise to an incredibly rich ecosystem, with network effects when you combine wallets (users) and developers
…but there has been an adverse impact of the rising demand on the transaction fees (aka gas fees)
Source: Y Charts
The above chart may not look like a lot - but believe me, it’s a lot. Before May 2020, the average fee was 12-15 Gwei, now it is 149 Gwei. (1 gwei = 0.000000001 Eth)
Well, gas price (149 Gwei) is literally like the price per litre of petrol. So when you are planning a trip to Byron, you don’t just look at the price of petrol you also look at how many litres you will consume to get there.
For the formula and calcs check out this super helpful post
Now there are two-fold impact of high gas fees
High gas fees for deploying and minting a new collection
US dollar cost of deploying an NFT contract: $1,125
US dollar cost of minting a single NFT: $90
To put that in context - imagine that you wanted to deploy a CryptoPunks style contract and mint ten thousand punks. The total cost would be: $900,000
Yes, it will cost more than US$900K in just Eth gas fees to deploy a CryptoPunks style collection of 10,000 NFTs.
High gas fees for buying/ selling NFTs
Here’s some analysis of the average gas paid on OpenSea (the largest NFT platform) in December 2021.
So we are saying - on average - each transaction incurred a gas fee of around US$60.
Makes you wonder, why are people okay to pay such high fees?
Well, I can confirm no one is happy to pay the fees. It’s more a case of people grudgingly paying the fees for the security offered by Ethereum for their high-value assets.
Okay, so summarising
NFTs have exploded
A large part of the action is happening on Ethereum (Network effects)
Gas fees to transact have also gone through the roof
People grudgingly pay the fees for the security of the Eth network (credibly decentralised)
The reason the gas fees have increased is that Ethereum is severely constrained in terms of block space and TPS (transactions per second). Currently, the Ethereum network is only able to process 13-15 transactions per second.
As an analogy imagine TPS as seats on a plane between Sydney and LA. If there are only 15 seats and 100 people want to fly, the airline will increase ticket prices.
The primary challenge that Ethereum is facing — scaling the network in a cost-efficient way.
….and here is where Immutable comes in…
Immutable X is a scaling solution for Ethereum. More specifically - a scaling solution for NFTs on Ethereum.
With Immutable X - the TPS potentially goes upto 9,000!
Immutable’s primary value prop - zero gas fees for minting and trading NFTs.
How does Immutable X do this?
Using bleeding-edge technology called ZK-Rollups (Zero-Knowledge rollups). ZK-Rollups use the magic of Zero-Knowledge Proofs to verify and consolidate transactions in an extremely performant and scalable way, without sacrificing integrity and security.
Story so far
NFTs have exploded
A large part of the action is happening on Ethereum (its got Network effects)
Gas fees to transact have also gone through the roof (due to the poor TPS of Ethereum)
People grudgingly pay the fees for the security of the Eth network (because it’s credibly decentralised)
Immutable offers technology to scale NFTs on Ethereum (zero gas fees for the minting and trading NFTs)
Before we go on into the business model, a quick review of the Gaming business of Immutable.
Immutable has two blockchain games. The key difference in a blockchain game is that users actually own the in-game items by turning them into NFTs.
Gods Unchained
Guild of Guardians
A multiplayer, fantasy, action RPG (Role Playing Game - a game in which players assume the roles of characters in a fictional setting).
The game started development in mid-2020 and is expected to have a full release in 2023.
Overview of the business model
Immutable X:
Sure, you are thinking, how can the fees just drop to zero. How does all this work?
It’s simple - the gas fees only drop to zero for the customers as Immutable takes on the cost itself.
Here’s an explanation from their website on how it works
We take thousands of off-chain trades, generate a proof that these trades were all valid (i.e. the users who owned the assets signed the trades), and then publish that proof on-chain, where it is verified by a smart contract.
During this process, the on-chain user assets are held in the smart contract, and can only be released after a valid proof, including them, has been published in a batch
In other words, using ZK-Rollups, Immutable is able to combine / compress thousands of transactions together and then do one single transaction on Ethereum.
So how does Immutable make money?
Immutable X takes a 2% fee on all primary asset sales, and a 2% fee on every NFT trade.
Another important aspect to understand - the ZK rollup technology is owned by an Isreal based company called - StarkWare. A ZK-Rollup requires an “operator”. The operator is responsible for linearising transactions, which means putting them into a consistent, global incremental order with no gaps. In this instance, Immutable X is the operator.
Based on this Bankless podcast that Robbie Ferguson did I understand that the 80% of protocol fees is split between Immutable and Starkware (not sure in what ratio)
Gaming division:
Below are the primary revenue streams for the games
The costs for the gaming division are of course the costs to actually develop the game.
What’s the opportunity
NFT sales in 2020 were $95m. In 2021 the number was $23bn. That’s a 25000% increase on the year.
Below image gives an overview of the key existing NFT categories
Each of these segments has huge potential.
But the clear focus for Immutable X would be to target high volume but low-value combinations
You can see from the below chart - the median NFT sale price has been over US$500 for large parts of 2021
Currently, the prohibitive gas fees make it impossible for low-value NFTs to gain traction.
Gaming
This represents the biggest and most attractive target market for Immutable X. The nature of the industry is such that it offers users (gamers) who are tech-savvy early adopters of technology.
Below is an excerpt from Immutable’s whitepaper
Gaming is currently a USD 300 billion industry and is expected to grow roughly 10% a year between 2021 and 2025, making it larger than the sports, movie and music industries combined.
Since 2018, players have spent more than USD 100 billion on in-game assets, such as unique character skins, items and exclusive unlockable content
Immutable X’s focus would be to partner with traditional gaming companies and launch NFTs of their in-game content on the Immutable platform.
These give rise to large volume but low-value transactions - which become non-economical on the Ethereum (remember $60 gas fees) - but made possible on Immutable X.
Also, consider Axie Infinity - a blockchain game with in-game assets tradeable as NFTs. The company generated revenues of $1.3bn in 2021.
In fact, it is Ethereum’s top revenue generating app
Axie’s got a similar business model to Immutable. The Axie protocol generates revenue by taking a 4.25% fee when players buy and sell Axie NFTs in its marketplace, and by charging fees for breeding Axies to create new ones in the form of its tokens.
Not surprisingly it now ranks among the top 5 video game companies in the world with a market cap of c.$30bn (based on token values as of Oct 21)
Adoption from traditional corporates and trendsetters
A whole raft of traditional corporates has dipped their feet into the NFT market.
Hollywood, sports celebrities, and big brands like Coca-Cola, Gucci, Nike, and Adidas, made their dent in the space, providing NFTs with a different level of exclusivity. The power of attraction of these famous names has profoundly impacted NFTs and the blockchain industry overall.
Moreover, NFTs arrived at famous traditional art auction houses like Christie’s and Sotheby’s, opening a doorway to a mainstream audience that would otherwise not be that familiar with the term
What this proves is that there is a huge opportunity to provide NFT deployment/management services to these factions who are keen tap into the NFT mania.
Coinbase NFT platform
OpenSea dominates the NFT markets currently - it has a market share of over 95%!
But Coinbase announced its intention to launch its own NFT trading platform in October 2021.
Within two days of launch news, the waitlist for the platform had swelled to over 1.5m people.
Given that Coinbase Ventures is an existing investor in Immutable - there might be a possibility of Coinbase partnering up with Immutable
Creator economy
Before YouTube came around - how many people were going around making their own video content?
Compare that to the current scenario - where YouTube content creator is a viable and legitimate career option.
Of course, YouTube sits in-between and captures the majority of the revenues generated.
If only the creators had a platform to directly reach their fans.
How long before those creators start using the power of NFTs to collect micro-donations or tips (<$5) from their fans. Technically, this would be possible even today - but practically who is going to pay a $60 fee to tip someone $5?
Immutable X's gas-free platform will enable a potential explosion in the monetisation of the creator economy
Key business strengths and risks
Immutable’s advantage is defensible
Network effect and strong partnerships
Immutable will be the first ZK-Rollup based scaling solution for NFTs on Ethereum.
It will benefit from the large network effect of Ethereum which has a rich ecosystem of users, developers, and other participants.
Large gaming companies with established markets are more likely to partner and deploy their assets on a blockchain with a long-standing security record - like Ethereum.
Already, it has signed up some huge partnerships
TikTok Top Moments features a selection of six culturally significant TikTok videos from some of our most beloved creators. Each one-of-one NFT celebrates the impact these creators – including Lil Nas X, Rudy Willingham, Bella Poarch, Curtis Roach, Brittany Broski, FNMeka, Jess Marciante and Gary Vaynerchuk – have made across entertainment, culture, and the TikTok community
VeVe, the leading mobile-first digital collectible platform, announced a partnership with Immutable X. The collaboration paves the way for VeVe to scale its App from its current user base of 300,000 collectors to provide millions of everyday consumers seamless, secure and carbon-neutral experiences in the world of digital collectibles across all fandoms.
Integrating Immutable X will allow the marketplace to offer OpenSea users a gas-free trading experience without sacrificing the security of the Ethereum network.
“We’re rolling this out not only to better support existing Immutable X projects, but for future game developers and players on OpenSea who will benefit from this scaling solution”
OpenSea’s head of product.
A gaming company that chose Immutable over the competition
The upcoming and much-anticipated MMORPG Ember Sword has announced a partnership with Immutable X, the layer-2 solution for cheap and secure NFT minting and trading. As a result Ember Sword will no longer work with Polygon.
The team felt that the land sales didn’t go as smooth as they expected, and they feel that Immutable X better fits their needs.
The Ember Sword developers also believe that NFT sales will be much easier on Immutable X, because nobody needs to stock ETH or MATIC to pay for gas fees. Transacting on Immutable X is free. In addition the Immutable X does tap into the security offered by the Ethereum blockchain.
Others partnerships include
Comprehensive product stack
The Immutable X has an end-to-end product stack that lower the barriers of entry in the NFT space for developers and users, enabling instant trade confirmation, massive scalability, and gas-free minting and trading — all without compromising user custody
Immutable X platform is the core infrastructure that allows for the minting, depositing, withdrawing and trading of assets on Layer 2 blockchain
Immutable X marketplace is the first exchange venue for gas-free minting and trading of NFTs, developed by Immutable and powered by Immutable X
The protocol also has a shared assetbook / order book
Unlike other NFT scaling solutions, Immutable X provides a shared global orderbook to facilitate protocol liquidity. This means that orders created on one marketplace can be filled on another, promoting more effective marketplace bootstrapping and price discovery. This also means that NFT marketplaces can be built on Immutable X without a backend.
Developer friendly / API abstraction
Being that Immutable X is offering an NFT infra product, which is more B2B in nature than B2C. It is very important to make it developer-friendly and easy to implement.
Here’s a summary from the Immutable whitepaper
Currently, NFT application or marketplace developers spend the majority of their development time building and configuring the blockchain components of their projects. This distracts them from what really matters: creating a fantastic and unique experience for their users built around true asset ownership
Immutable has taken pains to ensure developers will be able to deploy NFT collections without having to learn a new programming language and associated rules.
The analogy is companies integrating Stripe as a payment gateway. All they need to do is implement the Stripe API and you are ready to go.
On Immutable X, every interaction, from minting to trading to transferring, is as simple as an API call. Converting complex asynchronous blockchain interactions, which can take minutes or hours, into synchronous REST API calls, is a powerful upgrade to existing blockchain development paradigms.
Without the need to interact directly with smart contracts, new entrants in the space, such as established gaming and content companies can launch better projects, faster
The goal is to cut down project implementation times
Platform and programming language specific software development kits (SDKs) allow partners to integrate with Immutable X more easily….
Combined with the APIs, the Immutable X SDKs will allow partners to build NFT projects in hours rather than weeks
Superior user experience
Immutable offers a clean, easy to use and trustworthy interface.
Here’s a summary from the Immutable whitepaper
Currently, the user experience of NFT trading on Ethereum isn’t ready for mainstream adoption. Transactions take minutes or hours to confirm, and often fail to succeed or are frontrun, massively impacting user satisfaction, price discovery and overall liquidity.
Existing solutions, or alternate blockchains, improve this user experience only by compromising user asset security or network decentralization.
Immutable offers instant transaction confirmations, zero gas costs and the same security as mainnet Ethereum.
Further unlike other blockchains or sidechains, Immutable X currently supports all desktop Ethereum wallets without forcing the user to switch networks.
Risks
Competition
Immutable has no doubt got the first-mover advantage in terms of being a ZK-Rollup based scaling solution on Ethereum.
But it will face competition for NFT volumes from
a. other scaling solutions on ethereum
b. other blockchains
Here is a look at the landscape
NFTs demand cooling
NFT demand has exploded in 2021. However, there is no guarantee that it will continue to grow as aggressively or grow at all.
A volume-driven product like Immutable X counts on the exponential demand for NFTs
StarkWare tech dependence
As we had discussed the Immutable X platform is powered in partnership with StarkWare - an Israeli company.
While the revenue share structure ensures that incentives are aligned there is a risk of StarkWare providing similar tech to other operators. The terms of their agreement are not fully clear.
The execution team, existing investors and diligence
Immutable is Sydney based company led by the Fergusson brothers, James and Robbie.
Both of them were avid gamers who got drawn into the world of crypto as they were fascinated by the programmability of Ethereum.
Given their interest in gaming - they decided to build a blockchain-based trading cards game that allows users to retain ownership of the in-game assets. But they soon encountered the problem of scalability and high gas fees on the Ethereum network.
Here’s a post from the Immutable team describing what they wanted and how they chose
At Immutable we've worked in depth on blockchain games for years with titles like Gods Unchained. When comparing scaling solutions, we knew what we wanted
Unlimited scalability
Instant transaction confirmation and mainstream-quality UX
No compromise on user security
Retaining access to Ethereum’s ecosystem and network effects
This made our choice easy: we built Immutable X as a ZK-rollup in partnership with StarkWare. ZK-rollups are the only solution above capable of scale without compromise
Immutable has over 120 employees.
Over the years they have been backed by a roster of high quality and credible investors - which will give confidence to anyone analysing Immutable.
Funding history
Seed round of $2.4m in 2018 led by Nirvana Capital, Continue Capital and Coinbase Ventures
Series A of $15m in 2019 led by Galaxy Digital
Series B of $60m in 2021 led by BitKraft Ventures, Alameda Research, Airtree and Reinventure
Diligence:
As a user, I attempted and successfully managed to buy an NFT on Immutable. I found the whole process very seamless. It required me to transfer Eth from my MetaMask wallet to the Immutable platform - this process took about 20 minutes. Once I had transferred Eth, all transactions were instantaneous.
Was not able to check how easy it is to actually mint NFTs on the platform as that requires getting in touch with Immutable’s technical team and more importantly requires some developer skills
You can get a seat on this ride
Generally, only venture capital funds and other sophisticated investors have access to the growth provided by start-ups.
However, Immutable is a Web3 start-up with a token launched in September 2021
IMX is an ERC-20 utility token built for the purposes of accelerating the growth of Immutable X by rewarding pro-network activities on Immutable X, such as trading, liquidity provision and building applications. The token aligns incentives between traders, creators and marketplaces so that everyone benefits from protocol activity.
It’s safe to say the token sale was well received
To be clear - the token unlike a share does not confer any ownership in the company but merely provides a vehicle to get exposure to the company’s performance.
IMX’s current market cap is just under US$700m. The two blockchain games (Gods Unchained and Guild of Guardians) also have tokens that have a combined market cap of an additional US$100mn.
An interesting chart is the Price to sales of top decentralised apps. Axie Infinity is at >50x
Final word
Well, I was fascinated that a Sydney-based company is at the forefront of NFT scaling technology and Australia might produce another world-beater company.
Let me reiterate my thesis
NFTs have exploded
A large part of the action is happening on Ethereum (its got Network effects)
Gas fees to transact have also gone through the roof (due to the poor TPS of Ethereum)
People grudgingly pay the fees for the security of the Eth network (because it’s credibly decentralised)
Immutable offers technology to scale NFTs on Ethereum (zero gas fees for the minting and trading NFTs)
I for one will be super excited to follow Immutable’s journey over the next 6-12 months and see if the thesis plays out.
Happy new year everyone!