Updated: Jan 17
Welcome to a new project snapshot!
This is the start of a new series of articles digging in to Australian Web3 projects, why they exist, and what their future looks like.
First up is Immutable, one of the most promising Web3 companies – certainly in Australia, but also the wider Web3 ecosystem – because their product shows significant market fit and addresses 2 of the overarching narratives of 2021.
NFT adoption & the Ethereum Gas Fees!
NFT dominance in headlines and a huge surge on Twitter have driven millions of new users, creators, and projects into Web3 last year.
It's been an amazing narrative and use case that continues to hold strong, but the sudden influx of activity really accentuated Ethereum's scaling issues. High gas fees drove huge growth to alternative Layer 1 protocols like Solana, Avalanche, Algorand, Tezos & Terra – reducing Ethereum's Layer 1 dominance from ~98% in January 2021 down to ~60% now.
The sheer speed of this migration has caught many by surprise. Ethereum still retains the most active developer community by a country mile, but the arrival and adoption of Layer 2 scaling solutions cannot come soon enough for the ETH ecosystem.
Enter Immutable X – a Sydney-based startup who've partnered with StarkWare to provide a Zero-Knowledge Scaling solution for Ethereum NFTs.
It's beyond the scope of this article to explain what a ZK-Rollup is, but StarkWare do a great job of it here. (TL;DR: StarkWare use a cryptographic proof to validate and batch thousands of transactions, which are then settled on the Ethereum main chain in a single proof – allowing the gas fee of 1 transaction to be split amongst all transactions in the rollup, rather than incurred individually.)
Here's a simple example of the scale we're talking about:
Assume 9000 NFT transactions are being processed by a marketplace and the gas cost of each transaction is $100 if executed directly on Ethereum's main chain. This equals a total gas fee of 9000 * $100 = $900,000.
Immutable X & StarkWare are able to prove all those transactions are valid (almost) immediately, and roll them up into 1 ZK Proof.
This ZK Proof is then committed to the Ethereum main chain, with a gas fee of $100.
The $100 transaction fee is then paid by Immutable X directly, because they want to advertise their service as "Gas Free NFTs on Ethereum".
That's an overall Gas Fee saving of ~99.99%; and a 100% saving for the end user.
To top it off, Immutable X can process all 9000 transactions in 1 second, compared to Ethereum main chain throughput of ~25 transactions per second.
Decent proposition so far – so let's see who's building it. 😁
Team / Partners / Backing
Immutable, originally began as Fuel Games, where they secured seed funding of A$2.4m to create Gods Unchained, a Trading Card Game (think Hearthstone) back in 2018. This was successful as a pioneering NFT game during the crypto bear market, and continues to thrive since the transition to Immutable's Layer 2. According to DappRadar – Gods Unchained has about ~20k monthly active users with a monthly transaction volume just under US$10M.
As Gods Unchained started to gain traction in 2019, the team closed a Series A investment round of US$15M from notable crypto investors such as Coinbase, Galaxy Digital, Naspers, Nirvana Capital, and more. By this time, I'm sure the team had learnt valuable development lessons and were beginning to build Immutable X with StarkWare as their scaling partner.
Now back in 2020, StarkWare's products were still in development and weren't available for just any project. In June 2020, StarkEx launched for 4 select partners:
Sorare - an IP-licensed NFT fantasy football (soccer) game.
DeversiFi - a gasless decentralised exchange.
StarkWare power 4 of the top 11 Layer 2 projects when ranked by TVL. Expect this list to grow significantly in the coming months, because in December 2021, StarkNet Alpha launched to Mainnet – allowing anybody to develop StarkWare's ZK-STARK tech on top of Ethereum.
That said, Immutable's StarkEx solution is tailored to process higher volumes of NFT transactions more efficiently.
In September 2021, Immutable was able to raise a Series B of A$82M, with notable investors BITKRAFT Ventures, FTX & VaynerFund – with further investment from Apex Capital and Galaxy Interactive, amongst others. Beyond just capital, these investors bring a network from gaming, crypto exchanges (who are all launching NFT marketplaces), and NFT agencies with a track record of bringing large brands to Web3.
Immutable knew they would have a limited head start when they partnered with StarkEx, and have certainly been capitalising on that advantage through 2021.
Here are a few notable projects currently on Immutable:
Veve - 3 million official NFT collectibles from Disney, Marvel, DC, Cartoon Network, etc.
TikTok Top Moments - TikTok's first foray into the NFT space.
RTFKT - recently acquired by Nike.
GreenPark - gamifying sports fandom around NBA & La Liga.
Illuvium - hyped Open World RPG with current Market Cap of US$650M at time of writing (peak over US$1BN at end of Nov 2021) – check out the write up on our blog here.
IMVU - 1 million daily active users and 200K active creators in an open metaverse.
Gods Unchained - 7 million in-game items, in-house Trading Card Game.
Guild of Guardians - in-house Mobile Role Playing Game, not yet launched – all NFTs to date have sold out and there are 121k users in an active Discord.
Great! So they have some interesting projects bringing their userbase to the Immutable X protocol – but NFTs are notoriously illiquid, and supply is only useful if you can also drive demand from the marketplace side.
Of course, the Immutable team have thought this one through – there are a few live marketplace integrations and announced marketplace integrations that are all interoperable with the Immutable X Protocol.
Basically, if you list an NFT on any of these marketplaces supporting Immutable X, the protocol gathers bids from every marketplace and runs the auction across all marketplaces at the same time.
In theory, this should provide more access and demand for NFTs listed on the Immutable X protocol, regardless of what marketplace it was originally listed in.
Here's what they've announced so far:
Tokentrove - Live
Mintable. - Live
Veve - Live
OpenSea announcement in March 2020 (unsure when this implementation will land).
This is the big one – controlling the absolute lion's share of the NFT market to date, facilitating US$14.68bn to date. The closest marketplace is Solanart with ~US$600m volume at time of writing.
Coinbase NFT marketplace integration? We'll see, as an investor in the platform already, it wouldn't surprise me if Coinbase utilise Immutable X as the primary protocol behind their marketplace. There are currently over 2.6 million people on the waitlist... 👀
FTX NFT Marketplace integration? Similar to Coinbase, FTX are a recent investor and while their current NFT marketplace doesn't have Layer 2 capability, it would make sense for them to integrate Immutable X.
Beyond liquidity and reach, Immutable have also secured some important onboarding partnerships:
Moonpay - direct fiat on ramp into Immutable X, rather than bridging from L1.
ESL Gaming - The largest esports company with a 20-year track record of delivering esports events.
It's a growing list and the last 2-3 months especially has seen solid growth in the amount of projects launching on the platform – Immutable's business development team deserves a pat on the back for this! Beyond the BD department, their developer tooling is probably the most impressive part of the sales pitch.
I'm not a developer by any means – but there's a consistent narrative of reducing barriers for game developers and extensive developer documentation clearly written for someone completely new to Web3 and crypto in large. The easier that on-ramp is, the more likely we are to see high-profile projects choose Immutable.
There also appears to be a collaborative Customer Success team at Immutable as well, Veve completed a complex migration from Layer 1 to Immutable X, involving multiple exchanges and thousands of users.
Finally, the financial & technical incentive behind the product makes complex gaming economies possible, while retaining the security of Ethereum and significantly lowering the barrier of entry for players. In this interview, CEO James Ferguson details the aligned incentives with mid-tier game developers looking for a competitive advantage in an incredibly saturated market.
The desire to innovate and attract players with the Play-to-Earn model is significant, and I'd expect to see a big influx of Web3 games come online in 2022 as the longer game development cycle starts bearing fruit. We're starting to see more complex game mechanics in the NFT space starting to unfold, like the expanding universe of TreasureDAO games, collections and tokenomics.
I know I've been painting a pretty picture so far, but it's not all butterflies and roses – here are a couple drawbacks of the current product, and risks to growth in the short and medium-term.
Your first transaction on Immutable X kinda sucks. Bridging ETH from L1 to Immutable X took at least 10-15 clicks, multiple popup contract authorisations, and ETH gas fees for bridging from L1 to L2. That's assuming you already have a Metamask wallet with funds in it
I understand the need for these transactions, but I'm sure many users drop off during this process. They've been enticed with "no gas fees" then have to pay $60 to get ETH on the marketplace before buying anything. 🤷♂️
I haven't tried the Moonpay on ramp from fiat directly to L2, which should be a lot smoother – presumably this is targeted towards new entrants to Web3 rather than crypto-native crowd.
Your NFTs don't show up in major marketplaces yet. Until major marketplaces integrate Immutable X's protocol, you're basically limited to Immutable X's Marketplace, TokenTrove & Mintable. Nothing to scoff at, but you're still missing out on visibility from ~90%+ of the current NFT market, so liquidity becomes even more scarce.
Chain Explorers lack depth. Immutascan still has a long way to go before providing the same level of detail as something like etherscan. I'm no expert here, but I'd assume a new suite of tooling needs to be made to scan Layer 2 data in any depth.
Integration with third party explorer tools comes with adoption – I'm keeping a keen eye on when Immutable X is listed on Nansen.
StarkWare centralisation. Right now, all StarkWare ZK Rollup products are validated through a StarkWare-controlled server. In a sense, this undermines the "Security of Ethereum" selling point. This should only be a temporary concern, as I believe StarkWare plans to decentralise processing of ZK Proofs – but in January 2022, we're still some distance away from that reality.
StarkNet now available on Mainnet. As mentioned earlier, the underlying ZK-Rollup tech stack is now openly available in Alpha form, and can be utilised by competitors and directly integrated by potential partners.
Market Demand Risk
Risk of NFT market downturn – NFTs have had a huge breakout year and the overall market looks a bit frothy at the moment – we've basically seen big consolidation since September/October 2021. Despite that, Immutable seem to be in a healthy position to withstand an extended bear market (more on that below).
Classic WAGMI shout! We're all still super, super early in the life of NFTs and we've barely penetrated the market potential that NFTs can reach. Below is a timeline of anticipated platform releases for mainstream NFT adoption:
(Source: Giancarlo Buys Tokens)
Games also bring their own communities and Immutable facilitates super low-cost, high-volume NFTs. Fortnite & Roblox don't care about the share market – why should Play-to-Earn games care about the wider crypto market?
Further DeFi / liquidity solutions for Immutable NFTs – these would include rental, ERC 20 fractionalisation, indexes, etc. James mentions these possibilities in this interview, so it's on the radar.
Solid effort if you've made it this far. 😂 So we've covered who they are, what they do, why they do it, and now we're at the final question – is Immutable currently a good investment?
The IMX Token had its ICO in November 2021 and sold out quickly – the token utility includes voting on governance, ability to stake, and to pay marketplace fees on Layer 2 exchanges.
Staking rewards - not yet live; the IMX Huobi listing stated Q4 2021 – whilst that hasn't happened yet, I'd expect to see staking unlocked imminently. When it does, anybody holding IMX on Layer 2 is automatically staking and eligible for staking rewards which is a nice little perk!
Funding - Immutable X specifically:
25% of all IMX tokens in Development Fund, currently valued at US$3.47 = ~US$1.7bn at current market value.
July 2018 - Seed: A$2.4m
Sept 2019 - Series A: US$15m
Sept 2021 - Series B: A$84m
Nov 2021 - ICO: US$12.5m
Current token market cap US$652m (as of January 9th, 2022)
Revenue (Napkin Maths)
20% of fees paid on every transaction has to be paid in IMX, with the protocol automatically swapping payment currency in the market for IMX.
If IMX can manage to integrate with enough partners & get to Opensea levels of volume, it’s not out of the question for monthly fees around ~US$200m = US$40m
Of course, IMX don’t get the full cut of these fees as it goes to all IMX stakers. But it’s safe to assume a high level of the staking pool will be controlled by the protocol.
Staffing: Currently 146 on LinkedIn with 221 ads posted. They do tend to list the same ads in major Australian cities as remote, so open roles are probably closer to ~40.
Gas prices of submitting rollups to Ethereum main chain “8 figures” according to Bankless interview w/ Robbie. This cost for Immutable could potentially go up should they wish to settle rollups to Mainnet more often. Presumably this would only happen if transaction volume increases significantly
FYI - Gods Unchained and Guild of Guardians all raise capital separately via NFT presales, ERC 20 ICOs, and treasuries. This was not included in the Revenue section, but still contribute healthy amounts to Immutable's reserves.
(Source: Immutable X Whitepaper)
Above is the token allocation table from Immutable's Whitepaper. In general, I think these weightings are very reasonable, with only a small percentage allocated to the private sale and foundation reserve – it's also nice that the ICO Public Sale only makes up 5% of the total supply (more on this below).
My main concern here is how quickly they plan to release funds from the Ecosystem Development allocation of 51.74%. Ideally, these are rewarded over a long time horizon to reduce inflationary supply shocks – below you can see this is planned for a release over 48 months.
(Source: Immutable X Whitepaper)
This supply schedule also points to supply shock about 12 months after token sale – which would be October-November 2022.
In addition to this, there are 6-month unlock times for User Rewards and 2-year unlock times for developer grants, which should help keep people vested in a healthy ecosystem while they fully unlock tokens.
Below is an excerpt from the whitepaper describing token states, lock times, and staking/voting ability of different token types:
(Source: Immutable X Whitepaper)
This is smart, but also depends on the volume of grants being assigned as it could just drive consistent sell pressure on the IMX token. 🤷♂️
I’ll be keeping a keen eye on the behaviour of wallet addresses moving forward.
And, a final cautionary note on IMX for the short term, the IMX token launch was a bit cheeky to originally list at $10-$15 per token – then shortly after the ICO, Immutable decided to split the IMX tokens by 100 before coins were able to trade publicly. This effectively gives us an ICO price of $0.10 - $0.15 per token.
I’m sure it's contributed to the perceived value of each coin which is great for ICO holders, but it’s a bit shifty for people who only partially did their due diligence before buying on a secondary exchange. This is crypto, not everybody does their research...
There's a 6-month gradual unlock period for ICO participants, which might explain the downward price pressure despite some pretty impressive partnership announcements.
ICO Token Unlocks occur every 28 days between 19th October 2021 & 19th April, 2022. At the time of writing, we’re at 32x-48x of ICO sale price. It wouldn’t surprise me to see people taking immediate gains as their coins unlock & become available for trading.
All that said, the public ICO only sold 5% of total supply, so this pressure should only be "transitory" as J-dog would say.
Overall – I think Immutable is a fantastic project from a tech and developer standpoint, and should achieve a great market fit. They have been early to the party, and as far as I can tell, there’s no clear competitor on Ethereum without building directly on StarkNet or going to Polygon, both of which are lower Transactions Per Second and more general purpose solutions than what Immutable X offers for NFTs.
Of course, this is reliant on NFT demand on Ethereum – which may not necessarily be the case – the market could always switch preference to a different Layer 1 protocol entirely, and a growing portion of NFT projects have done so already.
It's really up to IMX and similar projects to push the NFT pendulum back in Ethereum's direction.
As for the IMX token in the short-term – I’m expecting to see sideways price action until the ICO sell pressure eases after April – at which point, *hopefully*, some major marketplace integrations are live, and we see some significant network effects increase demand for IMX's fee utility.
I’m personally DCA-ing a small position in my portfolio and monitoring IMX wallet action + the broader Crypto / NFT market over the next few months.
It's been a bumpy start to 2022 and there's a lot of fear in the market, but on a slightly longer time horizon – there are many paths to Immutable's success in onboarding significant numbers of new participants to Web3, and very little competition standing in their way.
Not financial advice, go chat to a pro and do your own due diligence before investing in anything. I’m just a guy who Googles a lot and used to build theme parks. 😅