A strategic view on Immutable's $500M Ecosystem Fund (WHAT, HOW, WHY?)

Immutable, the Sydney-based L2 blockchain scaling solution unicorn, announced a $500M web3 gaming fund! In this article, I will explain WHAT a web3 Ecosystem Fund is, HOW they work and WHY it is a great strategic growth initiative for Immutable.

Summary:

• Immutable has launched a hybrid "Developer and Investment Fund."
• $500M split into "Ventures" and "Grants" to be awarded to gaming companies who build on the Immutable X protocol
• "Ventures" were established as co-funds with venture firms BITKRAFT, Animoca, Airtree, and King River Capital, who are investors in Immutable
• Cash investments for equity or token purchases can range from $100k - $500k.
• Token investments (IMX) for development on Immutable X can scale into the millions, but they are time and milestone-based.
• Funds are allocated based on project milestones over the next four years with 24-month vesting schedules.

Successful applicants will receive access to monetary support, milestone-based rewards, and access to deep blockchain gaming support and expertise. This includes direct access to an advisory service for tokenomics and game design, plus community and marketing support.

What does this all mean? Let's dive in!

What is an Ecosystem Fund in the Web3 world?

First things first, let's start with the basics. An ecosystem fund (or Developer Fund/ Investment Fund) is essential to the ecosystem growth strategy and necessary for attracting developers and game studios to their platform.

Web3 Protocols (aka Platforms, Chains, Solutions or Projects) like Ethereum or Sandbox depend on developer adoption. They all have the same issue: without developers building products and services on their protocol, users won't have any incentive to adopt it.

An Ecosystem Fund gives money to promising projects to increase the number of projects in their ecosystem. Their value proposition:

We give you money and technical support if you build your product or service on our protocol instead of our competitor's

How does the Immutable X Developer and Investment Fund compare to other industry players?

Ecosystem Funds are common in the Web3 space, and they all operate similar and target projects that are aligned to their respective strategic focus area (e.g. "Gaming"). By now, they are an expected part of the growth strategy, which often leaves these platforms no choice but to deploy large allocations of their tokens into these funds.

Binance: $1 billion fund for their Binance Smart Chain

Sandbox: $1 billion fund for game makers

Near: $800M Ecosystem Fund

Algorand: $300M Veridis DeFi Program

Polygon: $100M Ecosystem Fund

It is important to note that since the fund sizes are calculated based on token prices when the funds launched, Immutable's $500M fund at today's prices ranks higher than any other of the funds. For example,

Why does Immutable need an Ecosystem Fund?

If you haven't read my previous article about Immutable's strategy, here is what I closed my analysis with:

"The ultimate key to success will be determined by how well the team can onboard developers and studios onto their platform. The technical advantage generated by betting early on ZK-rollups will remain for another 6-9 months, at which point the developer and game ecosystem becomes the most valuable differentiator. I expect a "winner takes all" race, and the competition is not sleeping (Polygon, Ethereum etc. will all offer similar features)."

More projects in your ecosystem attract more users who spend more money, attracting even more projects bringing in more users. And the ecosystem takes a fee for all transactions, which is how the company, Immutable, can become successful over the long term.

Especially in a nascent industry like Web3, a very limited number of developers with the skills needed to create valuable products exist. Thus there is fierce competition between the different protocols to attract the best existing companies, developers and studios to build on their platform instead of any of their competitors.

Remember: The two golden growth metrics for any Web3 ecosystem

1. Number of projects building on top of their technology (which is a lead indicator for)
2. Total transaction value (which Immutable takes transaction fees from)

The new ecosystem fund will help Immutable to drive both of these metrics!

I've done some calculations in the article linked above on how much more transaction volume Immutable X requires to grow sustainably (~10x). Check it out if you want to dive deeper into the fee structures and business model.

Whom are they targeting?

When starting the application process, it becomes obvious which types of projects Immutable targets. The below screenshot is part of the application form.

Immutable targets three different types of projects. The types differ based on their maturity and current tech stack. Each project type is aligned with the two golden ecosystem growth metrics.

Type 1: Pre Launch

These are project teams with a great idea, maybe a prototype, but who haven't launched their game yet. This type is suitable for investing a small amount in many projects, with the hope that some of them are successful and generate high transaction volume in the future.

These projects will most likely require some fiat to finance their game development in return for some of the equity and their tokens.

Type 2: Post Launch not on Immutable

These project teams developed and released a game and now want to integrate NFTs. Similar to the Type 1 projects, they increase the "projects metric". However, they will have a faster path to transaction volume because their game is already released.

Given that these teams managed to launch their game, they are more likely to be funded already. Getting an IMX grant will attract them to Immutable instead of a different platform to introduce game asset NFTs.

Type 3: Post Launch on Immutable

These project teams have already launched on Immutable and are actively using the protocol. Therefore, they won't increase the "projects metric". However, they are a valuable target for grants to accelerate their growth.

As we have seen in my previous article, about 85% of the transaction volume came from only three projects. It is in Immutable's best interest to support the dozens, if not hundreds, of other small projects to build up transaction volume and incentivise them with IMX not to give up.

How does the Immutable Developer and Investment Fund work?

Immutable intends to deploy the funds over the next four years. On average, they will deploy $125M per year to successful applicants.

Projects can apply anytime, and an Immutable panel reviews each application. Successful applicants will be contacted and advance either into the Ventures track or the Grants track (or maybe a combination of both).

Investors/Immutable will work with the projects to define milestones that will be used to trigger performance-based payments.

Cash investments for equity or token purchases can range from $100k - $500k. Token investments for development on our platform can scale into the millions, but they are time and milestone-based.

At this moment, it is unclear what the evaluation criteria are, who forms the panel and what the turnaround times are.

Where does the $500M come from?!

Good question! If you have followed the funding rounds so far, you will know that the total VC money raised by Immutable is ~$280M.

So, where does all the 'money' come from?

I added 'money' because web3 ecosystem funds typically do not hand out fiat money (i.e. traditional money). Instead, milestone payments are made in their respective native token.

In the case of Immutable, around 500 million of their IMX tokens are committed to the fund. These tokens represent 25% of all 2 billion IMX tokens in existence.

Their whitepaper (page 9) described that 51.74% of all tokens were earmarked for 'Ecosystem development': user rewards, developer grants, liquidity provision and marketing. Thus, about half of that allocation is now committed to the new ecosystem fund (= developer grants).

At the time of the announcement, these 500 million tokens are valued at USD 400M and are being held by "Digital Worlds NFT Ltd.", Immutable's not-for-profit foundation that was registered with the SEC on June 22, 2021, as the official issuer of the IMX token.

The remaining $100M will likely be contributed by the VC consortium of large previous Immutable investors as part of the venture part of the fund.

What could go wrong?

There are many risk factors involved with an initiative of this magnitude. I won't go into detail and instead mention the two that I think are top of mind for Immutable.

Too many tokens on the market

Currently, there are only 230 million tokens in circulation. Deploying 125million additional tokens per year adds pressure on the token price.

Projects are likely to sell the granted tokens to pay for their expenses (salaries, marketing etc.), and the more tokens are being sold, the faster the demand for tokens needs to grow to keep the price stable. (This is a gross simplifaction of the tokenomics. If you want to learn more or go deeper into token design and economies, consider signing up for my tokenomics masterclass :) )

To counter this risk, Immutable introduced a vesting schedule to all token grants. Once a milestone is reached, tokens are granted but come with 24-month unlocks. Projects cannot sell tokens before they unlock, avoiding sudden supply shocks.

While a 24-month vesting schedule is an excellent way to protect the IMX token price, it will be interesting to see if a 24-month vesting schedule post milestone achievement is desirable from a project point of view.

There are likely other ways how Immutable will manage the tokenomics, e.g. with smart milestone definitions. These will be negotiated on a project-by-project basis.

Investments do not have the desired impact

Finding projects and giving them money/tokens guarantees an increase in the number of projects building on Immutable X. But it isn't a guarantee for increased transaction volume, which is the more important metric to boost.

As of now, there is no mention of how they will support the growth of all successful applicants beyond the statement that they will provide "access to deep blockchain gaming support and expertise".

While this is great and will ensure that the tech works, we all know that "build it and they will come" is not a winning strategy. I expect that an accelerator experience is being worked on to launch with the first investment announcements.

Despite much work that requires a specific skill set and experience, a well-managed accelerator program is the best tool to protect the investments by increasing the probability of project success.

If you see any other risks that stand out, let us know in the comments!

Conclusion

Based on my previous analysis, I assume that Immutable X will require 10-30x ecosystem growth to avoid a down round in their subsequent funding round. Immutable needs to achieve that growth in a market that is much less frothy than when it raised money a few months ago - and increasingly competitive.

This Developer and Venture fund will have a fundamental impact on Immutable's future. It is likely their biggest bet to grow the number of projects on their platform and total transaction value over the next years.

The need to move fast and find, evaluate and invest in many projects will require a well-structured acceleration program to increase the chances of successful applicants becoming the next Illuvium.

It will be fascinating to see which projects will take advantage of the fund!

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If this article was valuable to you, I would appreciate a like. And if you have any questions or suggestions, let me know in the comments below! I did not receive any rewards or compensation for writing this article, and all opinions expressed are my own ones.

P.S. If you are a company or game developer who wants to build on Immutable, you can apply here. And if you do, please consider reaching out to me to share your experience so that I can make updates to the article if necessary.