The Gaming Cycle
How we view the crypto gaming sector, and our investment in PRIME & PROMPT.
We remain focused on finding the crypto categories most likely to produce killer apps in the current cycle. We believe gaming is one of these promising categories. However, despite reviewing tons of gaming projects over the past few years, we have only made two significant long-term investments in this space.
Given our enthusiasm for this category, why haven't we made more investments in crypto gaming? Let's examine our perspective on the sector and outline the specific qualities we seek in these projects.
The broader thesis for web3 gaming is compelling for several reasons:
Gaming is a massive and growing market.
Web3 technology can complement many game types by introducing genuine digital ownership.
Capturing even a small portion of the global gaming market represents a significant opportunity.
Despite the seemingly obvious bull thesis, sentiment around crypto gaming remains poor. Recent surveys indicate that managers across the industry are relatively under-allocated to this category. The most common objections we encounter are:
If crypto gaming is so promising, where are all the successful crypto games?
Web2 gamers dislike crypto games. Who will play them?
Addressing these concerns, we’d highlight the following.
First, keep in mind game development timelines:
Game development typically takes 1-3 years for indie titles and 3-5 years for AAA titles.
Significant crypto gaming development only began around 2020-2021, coinciding with the rise of high-throughput blockchains.
We are now at a crucial inflection point: many pioneering development teams are releasing their first generation of crypto games.
Second, note that web2 gamer perception is a temporary problem:
Most "crypto games" from the last few years weren't focused on creating quality gaming experiences. The emphasis was on tokenomics rather than gameplay.
Web2 gamers' current aversion to crypto games is understandable, given the lack of quality offerings.
This stigma is likely temporary and may dissipate quickly once gamers actually experience well-developed crypto games.
With that in mind, here’s what we look for when investing in this category:
A seasoned team with a proven track record of shipping great games
A game with mass market appeal (the "hero title")
A viable onchain business model with sensible P&L and sustainable tokenomics
Vision and ambition to leverage the hero title to build a larger platform
While points 1-3 are self-explanatory (though rare in crypto gaming projects), point 4 deserves elaboration. In web2 gaming, some of the most exciting and outsized outcomes have come from companies that used a wildly successful hero title to build a larger platform.
A prime example of this is the origin story of Steam, as illustrated below.
The Origin Story of Steam:
Valve Corporation's Breakthrough:
Valve releases Half-Life, their first game.
It becomes a breakout success, selling millions of copies.
Fostering a Modding Community:
Valve encourages modding by creating the Half-Life SDK (Software Development Kit).
This toolkit empowers the community to modify and expand the game.
Counter-Strike: From Mod to Phenomenon:
Counter-Strike (“CS”) emerges as a popular Half-Life mod.
Valve hires the two young CS developers.
CS is re-released as a standalone game, selling over 25 million copies and spawning a powerful franchise.
Addressing Growth Challenges:
CS's success reveals infrastructure weaknesses: a) Difficulty in distributing frequent game updates, and b) widespread cheating issues.
Valve begins developing Steam, a proprietary game distribution platform, to solve these problems.
Steam's Success and Industry Impact:
Steam becomes an incredibly popular and useful platform.
Third-party developers choose to sell their games on the platform.
Network effects compound Steam's growth.
Steam evolves into an industry giant:
Over 120 million players.
Billions in revenue.
Another such example is Epic Games, which leveraged the massive success of Fortnite to launch the Epic Games Store. Fortnite was transformational for Epic and for the gaming industry broadly. It has pushed the company into a bunch of new directions — including an ongoing metaverse collaboration with Disney.
The key takeaway for our investment strategy is that we're not merely seeking to invest in good games. Our focus is on identifying potential "hero titles" that can be leveraged into something greater, possibly expanding into a much larger TAM.
Importantly, the evolution of these hero titles doesn't necessarily need to mirror the path of Steam or the Epic Games Store by becoming distribution platforms. The next gaming giant could emerge in an entirely new way. By investing in projects with this growth potential, we position ourselves for potentially outsized returns if the hero title successfully expands beyond its initial scope.
Our Thesis on PRIME & PROMPT
Our first long-term investment into a gaming project was Parallel and the PRIME token. Let's examine why this project caught our interest, using the framework discussed earlier:
1. A seasoned team with a proven track record of shipping great games:
Parallel boasts a robust team of 80+ members, including experienced game developers, designers, and artists from leading gaming companies such as Blizzard, Riot, Epic, Xbox, and Wizards of the Coast. The executive team has fantastic vision and ships relentlessly.
2. A game with mass market appeal (the "hero title"):
Parallel's first game, the Parallel Trading Card Game (“TCG”), is currently in beta but already showing promising traction. It has hero title potential.
Established games in this category like Hearthstone, Magic: The Gathering, and Pokémon are estimated to have 50+ million active players globally. And importantly, the TCG format is particularly well-suited for web3 technology. Many players in this genre are already accustomed to owning physical cards. While this ownership aspect was lost in digital games like Hearthstone, Parallel's approach reintroduces it through web3 technology. They’ve successfully built a web2-quality game on a web3 tech stack.
The next game in the pipeline is Parallel Colony, an ambitious project aiming to create an entirely new genre. It combines elements of AI and blockchain technology into a unique experience.
They’re calling it a “1.5 player game” – because it’s not quite single player and not quite multiplayer. The game consists of LLM-powered avatars that live in a simulated world that is influenced (but not controlled) by the human player. Each avatar in this simulated colony has a unique personality and is equipped with its own smart contract wallet to interact autonomously with a bustling onchain economy. The human player participates in the game by having conversations with their avatar and guiding them through challenges.
The game is in late stages of development and has had multiple week-long closed alpha playtests with community members. Early feedback was very positive and players developed a deep connection with their avatars.
The development of this game required the Parallel team to build innovative infrastructure and tooling enabling AI agents to autonomously transact onchain. This advancement creates intriguing new opportunities, which we'll explore further below in section 4.
Beyond the TCG and Colony, there’s much more in the pipeline for Parallel. Project Tau Ceti (a 3rd person shooter) is coming in 2025. They are selling physical trading cards and comic books in Japan based on the rich sci-fi universe they’ve created. And much more…
3. A real onchain business with a sensible P&L and sustainable tokenomics (no ponzinomics!):
Parallel has implemented sustainable tokenomics designed to deliver meaningful value to token holders as the ecosystem grows. Each product in the franchise, including the TCG, generates multiple revenue streams that benefit both token holders (PRIME) and equity holders (Parallel Studios).
Revenue streams to the equity are reinvested into further development for the ecosystem. The equity entity holds a meaningful portion of the token supply in order to maintain alignment.
Revenue streams to the token are used to:
Fund operating expenses for the DAO
Fund further development by the DAO (through token grants for specific initiatives)
Fund token rewards to players (think of it as a marketing expense / player retention mechanism)
And lastly, to reduce the supply of the PRIME token – the key value accrual mechanism
Understanding the above, we can create a proxy P&L for the token. We have done this internally to model out the potential profitability (i.e. token supply reduction) as the ecosystem scales.
4. Vision & ambition to leverage the hero title to build a bigger platform:
How is Parallel leveraging its hero titles to build a larger platform? While they are pursuing multiple strategies, the Wayfinder Protocol stands out as perhaps the most exciting initiative.
The development of Parallel Colony necessitated the creation of sophisticated AI tools to enable autonomous onchain agent operations. The Parallel team soon recognized that these tools had broad applicability beyond Colony. Consequently, they decided to spin off this technology into a separate project called Wayfinder, governed by a new token named PROMPT. Notably, a significant portion of the PROMPT token supply is being allocated to PRIME token holders.
Wayfinder is particularly promising because it addresses some of the most significant challenges facing AI agents operating onchain. These challenges include:
Operational Complexity: Even simple operations, such as swapping a token, often require multiple steps and various function calls to complete.
Dynamic Blockchain Environments: The constant emergence of new tokens, smart contracts, and protocols necessitates continuous adaptation by agents.
Resource Intensity: Due to the complexity of blockchain environments, agents require extensive data scraping and significant computing power to accurately determine how to complete operations autonomously.
Error Proneness: LLMs are susceptible to making mistakes, which can be particularly costly in an onchain environment.
By addressing these challenges, Wayfinder positions itself as a crucial tool for the development and operation of AI agents in blockchain ecosystems.
We would summarize Wayfinder’s efforts as falling under 3 different product categories, as detailed below.
The Wayfinder Graph forms the crucial foundation of the stack, providing essential guardrails for AI agents to operate efficiently and cost-effectively onchain. It establishes a standardized knowledge base encompassing protocols, assets, routes, functions, and other external data for AI agents. As an open-source protocol, it validates a set of "wayfinding paths" deemed safe and correctly specified. Anyone can contribute to and benefit from maintaining and updating this open knowledge base.
The PROMPT token functions as the utility token for network coordination and incentives, including:
a) Staking: Creators of new wayfinding paths stake PROMPT, which can be slashed to discourage misconduct.
b) Usage Fees: AI agents using these paths pay a small fee in PROMPT.
c) Revenue Sharing: A portion of the fees is shared with path creators, incentivizing the ongoing development of useful routes.
While Parallel is utilizing the Wayfinder Graph for its first AI-powered application, Parallel Colony, this primitive has broader potential. Any project seeking to deploy onchain agents could potentially leverage it. In a scenario with millions of onchain AI agents, the TAM could be substantial.
Beyond the Wayfinder Graph, they are also working on their own implementation of AI agents and their own front-end for users to interact with the protocol. It effectively looks like a “ChatGPT for doing stuff onchain”.
And the good news is that development is progressing very quickly, given all the work already completed as part of Colony development. Wayfinder is heading into closed alpha in the next few weeks. Although the UI is still unpolished at this point, you can view some sneak peeks of Wayfinder on their Twitter page.
We’re excited to follow the Parallel team along on this journey as they re-shape gaming and web3.
DISCLOSURES
Risk Considerations
Please note that VanEck has a position in Parallel and the PRIME / PROMPT tokens.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
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