Free mints, a breath of fresh air?

This week, we look at the hype around "free-to-own", web3 gaming's latest narrative, and how it emphasizes the use of whitelists and the potential for speculative behavior.

Gabe Leydon and his free-to-own campaign caused a major stir in the NFT community when the DigiDaigaku NFT collection was released last year.
Typically, the minting of NFTs and acquisition of genesis NFTs has been associated with tremendous upfront costs and, consequently, asset speculation. The underlying idea is simple: invest in a game upfront to help finance its development and receive rewards when the game is released. Fundamentally, it is difficult to justify spending large amounts of money on an asset for a game you have never seen much less played. While successful platforms like Kickstarter and the temporary popularity of Axie Infinity helped support this model, it became clear that it was not sustainable unless the game was both a major success and built for long-term sustainability - a rare combination to date, as demonstrated by the eventual downfall of many web3 games with play-to-earn mechanics.

Limit Break's mysterious play

The emergence of web3 gaming is often compared to the rise of free-to-play (F2P), where the industry initially resisted its economics, but, eventually, it came around. Many web3 enthusiasts, us included, see a similar pattern emerging, and believe it is only a matter of time before web3 elements become an integral part of gaming.
Gabe Leydon, known for his work at Machine Zone with Game of War: Fire Age, was part of the shift from premium to F2P games on mobile. He is now bringing the same “free is better” mentality over to web3 and advocates for giving game NFTs to players to bootstrap economies and create excitement. Part financial and part marketing tactics, but at the moment, all hype. Gabe's new company, Limit Break, initially launched with a somewhat stealth mint that exploded in popularity despite having no actual game attached. This was followed by a staggering $200M fundraise and numerous types of mints and airdrops. Even with the project generating a lot of excitement and a highly anticipated $6.5 million Super Bowl 2023 commercial very little information about the game itself is currently available.

From free to pricey

The hype around NFTs has spread to other games, leading them to offer free mints as well. Champions Ascension, for example, initially sold expensive Prime Eternals NFT mints with the promise of early benefits, but later held a free mint for their Elementals NFTs. This mint varied in terms of whitelisting schemes, whereby there were multiple tiers of access and only few NFTs left for public minting, which did not require any whitelisting. The limited supply of less than 20 NFTs left for the public to mint caused gas prices to surge to almost $350 - a hefty price tag for a “free mint”. This illustrates the competitive nature of limited free mints, which often negate the meaning of "free" due to supply and demand. Free mints might be interesting from a financial standpoint as they often include a royalty system, enabling projects to earn profits from resales in the secondary market, where the NFTs can command high prices due to speculation. DigiDaigaku for example promised NFT holders future airdrops, thus treating them as “Factory NFTs” (arguably a fairly inappropriate name for how they work). Choosing to keep or resell something that was obtained for free often triggers a sense of greed, especially when it can be sold at exorbitant prices to people who feel like they have missed out.

Incentivizing community involvement

The speculative nature of NFT minting emphasizes the significance of whitelists. While traditional games have limited "insider" groups, such as those who pre-order games or participate in closed beta groups, web3 has taken community involvement to another level by using whitelists as a significant incentive for participating in community events and Discord groups. This creates a strong desire to be part of the exclusive group of inside minters who benefit from the excitement, which is a key driver that free mints can tap into. However, some of these whitelists involve questionable marketing tactics, such as requiring follows, retweets, and referrals. When these types of whitelists are associated with free mints, they may create a new version of play-to-earn that is based on community participation or social media activity rather than gameplay. In theory, whitelists for free mints reward early community participants better than providing them the chance buy into a mint, often at significant costs. Nonetheless, many of these participants are still looking for opportunities to flip for profit, resulting in unwelcome behavior from both speculators and bots.

Whitelist wars and speculation

Source: OpenSea

An almost limitless number of whitelist spots that are easily accessible can result in a large number of bots purchasing NFTs with the aim of making a profit, as the example of Gossamer shows. This is reflected in a relatively high trading volume after release. This type of speculation can be detrimental to the game in the short term as actual players will have to pay a higher price for the NFTs. However, in the medium to long run, the impact is not significant as post-hype prices tend to reach an equilibrium determined by the market's willingness to pay, reflecting the current and future utility of the project.

Nevertheless, a very simple or non-existent whitelisting mechanism can still be problematic, especially for projects with established communities, as it may disappoint community members who are unable to secure a whitelist spot. This is why Limit Break chose to keep their first mint announcement low-key, to provide everyone an equal opportunity to acquire an NFT.

Despite this, the DigiDaigaku Genesis minting concept was not perfect as their very limited supply, combined with potentially high bot activity, resulted in surging prices after its launch and thus created a barrier of entry for players. Consequently, DigiDaigaku decided to use the Genesis NFT as "Factory NFTs" to avoid frustrating early investors while allowing new players to enter the game by introducing new NFTs. In summary, Limit Break’s approach might have been great guerilla marketing but may lead to further problems down the road. Paid mints can also suffer from similar problems as the examples of Axie Infinity and Pegaxy show.

A third example of a free-to-own project, Champions Ascension, seems to have created an optimal model. There was comparatively little speculation after the mint as a reasonably complicated whitelisting mechanism was introduced, which reduced the participation of bots and speculators by some degree. The supply of around 7’500 pieces was also sufficiently large to not create too much excess demand. The NFTs did decrease in price in the short and medium term after the mint, which does not matter much in principle, as the mint was free in the first place.
Moreover, long-term community members who have participated in the mint will be relatively uninterested in the price and bots and speculators could also be deterred from participating in such mints in the future.

Boon for business

The use of whitelists in NFT minting has become a significant incentive for community participation, but examples from the past have shown how difficult it is to manage community expectations and economics. Although providing free mints can benefit early participants, some members of the community may still seek to optimize their earnings.

Overall, giving away free NFTs can be an effective marketing strategy and can alleviate concerns regarding behavior geared towards maximizing ROI. One potential solution could be to allow claiming of a limited number of free copies of an NFT, but delaying the actual mint until they are available for primary sale to the public.
This approach encourages fair competition and prevents speculative pricing, while still giving participants a free NFT. Rather than artificially limiting the supply of NFTs, the value should be derived from the game activity the NFTs are associated with.

That being said, free mints are not always the perfect solution for NFT launches, and game developers need to consider other design points carefully. Nonetheless, free mints mean that developers have no financial obligations to their community members, allowing them to focus entirely on creating a fun game that offers maximum value.

Thanks for reading this week’s piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.