What does Roblox's IPO say about Cryptogaming?

Day 6: 30 Days of Crypto-modeling

This is part of 30 consecutive series of posts related to understanding and modeling cryptocurrency-related economic activity. We are sifting through hype and speculation to find quantitative insight.

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Modern massively online role-playing games create economics of scarcity around in-game artifacts. The scarcity makes players have to work, or otherwise rely on luck, to experience success by acquiring things that other players can’t acquire easily. That sense of accomplishment makes the game fun, but it also lucrative for the company that operates the game. These companies create an in-game currency so that players can buy and sell scarce in-game artifacts. The companies then sell in-game currency for real-world currency.

Sales of virtual money is a significant source of revenue for game companies. Consider Roblox, the MMORPG that IPO’ed with the highest valuation of a video game company ever. There are two notable things to note about its business model:

  • Its revenue comes from the sale of in-game currency called Robux.

  • Its in-game worlds are created by players, which gives it distinct advantage games that rely solely on developers.

Initially, Roblox was trading about 25 times its projected revenue (this has since increased). That’s a bit less than Unity, which licenses its development platform via an enviable subscription model. It’s far more than 3rd place Activision Blizzard Inc, which owns several billion-dollar properties such as Call of DutyCandy CrushOverwatch, and World of Warcraft.

I was once offered a job by a household name gaming company to run experiments on how to encourage players who spend a lot on in-game currency (they literally call them “whales”) to spend even more. I declined because it all felt a bit evil.

Understanding cryptogaming

Case studies like Roblox present an interesting backdrop for our analysis of cryptonomics. NFTs, the Ethereum blockchain technology for creating digital technology, are used to create scarce economics in online games. If you go to an NFT market like Opensea or Rareable, you can pay large sums of money to purchase digital land and other in-game assets.

It is also interesting that the generic use case for cryptocurrencies is avoiding financial market manipulation and regulation by governments and central banks. There was a time when it was popular in China to use virtual money to buy real-world goods and services until Beijing prohibited this behavior

In the next few posts, we’ll apply learnings from centrally controlled virtual economies in games like Roblox, to decentralized crypto-economies in games like The Sandbox.

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