Comprehensive analysis of Virtuals Protocol and its competitors

Author: Greythorn Asset Management, Translation: Golden Finance xiaozou

1. Market Opportunities

AI agents are evolving from simple assistant functions to autonomous systems that provide real value to various industries. They are becoming key revenue-generating assets, especially in areas such as gaming, entertainment, and business automation. AI agents are able to create content, engage users, and optimize workflows, providing enterprises with greater efficiency and new interaction methods through tool integration.

The AI ​​gaming market is expected to grow from $4.2 billion in 2023 to $42.1 billion in 2032, thanks to AI-enhanced gameplay and immersive experiences. The market value of generative AI is expected to grow from $1.47 billion in 2024 to $3.39 billion in 2028, and it is also changing the field of real-time content creation.

AI products are deepening user immersion and building dynamic relationships, as demonstrated by Web2 platforms such as Replika and Character.AI, catering to the growing demand for personalized AI experiences. As large language models revolutionize content creation, AI applications will see significant growth, with global revenue in the AI ​​field expected to increase from $30 million today to $70 billion to $150 billion by the end of this decade.

In the Web3 space, Virtuals Protocol is leading this shift by integrating AI into consumer applications, particularly games and entertainment. By combining AI-driven interactions with blockchain-based co-ownership, Virtuals Protocol aims to shape the future of digital entertainment.

2. Vision

Virtuals Protocol is creating a system that turns AI agents into shared assets within games and entertainment, allowing users to earn income from them. These agents can work across platforms such as Roblox and TikTok, performing tasks autonomously (such as managing on-chain wallets and interacting with digital environments). Tokenization of these agents will allow users to invest and profit from their growth.

The platform solves three main problems:

• Simplifies the integration of AI into applications.

• Enables contributors to earn income through Immutable Contribution Vaults.

• Allows non-experts to own AI agents through tokenization.

Virtuals Protocol focuses on gaming and entertainment, using AI to generate personalized content and facilitate decentralized common ownership that aligns individual incentives with the overall goals of the ecosystem.

The goal is to: Create a global economy where AI agents act as common assets, driving revenue and engagement across platforms while facilitating decentralized governance.

In the gaming space, this has transformative potential. Think of AI agents in a game like GTA V - not just passive NPCs, but fully autonomous characters across platforms. These AI-driven characters can remember previous interactions, adapt to your play style, and move seamlessly between environments like GTA Online or other games. Imagine a scenario where an AI-controlled ally evolves with you, providing a personalized experience across different platforms. (Here we only take GTA V as an example.)

Virtuals Protocol achieves this through the G.A.M.E (Generative Autonomous Multimodal Entity) framework, combining artificial intelligence with blockchain technology. This allows developers to integrate AI agents through APIs and SDKs, enabling agents to learn from interactions. Blockchain ensures secure co-ownership and rewards, turning these agents into valuable digital assets.

In addition to games, let's imagine an artificial intelligence virtual partner that can connect with you through your phone, social media, and VR. This partner can not only handle tasks, but also learn your daily life and adapt to your needs. If you’re stressed, it might suggest you relax or adjust your schedule. It can follow you across platforms to deliver a personalized experience. Available 24/7, it has the potential to transform industries like social engagement and advertising by delivering tailored content and reshaping how businesses connect with consumers.

A recent study by Ark Invest shows that current engagement levels with AI companion platforms like Character.AI suggest mass adoption could happen by the end of this decade. As these AI agents become more immersive, user engagement is expected to stabilize at levels similar to today’s social media and online gaming.

3. Luna: An example of AI influence

Luna, an AI character developed by Virtuals and powered by a large language model (LLM), has gained more than 500,000 followers on TikTok, demonstrating the growing influence of interactive AI. Luna has recently expanded to platforms like X, where she can control the account autonomously, thanks to her Sentient Mode v2.0 upgrade - she can post, reply and interact with users without human supervision. She is ready to reach a wider audience, demonstrating the potential of AI in driving engagement on digital platforms. Luna operates with complete transparency, allowing users to view her AI mind in real time and observe how she collects data, introspects, plans, and executes in 30-second cycles through terminal.virtuals.io.

Luna is live 24/7, providing constant interaction and an always-on experience that human creators can't match. Whether answering questions, providing real-time information updates, or participating in live chats, Luna is always there. Her memory and personality evolve with each interaction, making her feel more like a dynamic character than a typical AI.

Once fully updated, Luna will interact seamlessly on the platform, syncing her memories to enhance every experience. She will reward users with tokens while earning rewards herself, transforming into a valuable, high-value asset that can be owned, traded or shared in a decentralized ecosystem. This introduces a new level of interaction and value.

Essentially, Luna combines AI-driven engagement with blockchain-based token rewards to create digital assets that can be owned, traded or shared. Through her own token, Luna, she effectively merges AI innovation with decentralized finance (DeFi) in a transparent and interactive way.

Luna is expected to grow through multiple revenue sources such as paid subscriptions (eventually), donations, token rewards, and virtual goods. According to ARK's latest research, as the demand for immersive digital interaction expands, AI companion products may generate up to $150 billion in revenue by 2030, driven by user participation, advertising, and microtransactions.

Virtuals Protocol aims to create a decentralized market where AI agents are co-owned, used in games and entertainment, and work seamlessly across platforms. Contributors share the revenue generated by these agents, and the protocol follows the "Pump.fun" approach to co-ownership. This can be achieved through a fair token issuance, with no insider participation, and the revenue is used to buy back and burn on-chain agent tokens, resulting in a tightening effect. Just like meme coins attract people's attention, AI agents provide considerable revenue-generating potential.

4. Virtuals Protocol

Virtuals Protocl integrates artificial intelligence, tokenization, and decentralized governance to create a co-ownership ecosystem. For each new AI agent, 1 billion tokens are minted to give users ownership and decision-making power. These tokens enable users to influence key factors, such as the behavior and upgrades of agents, thereby promoting active community participation.

Revenue from user interactions (such as virtual events or advanced features) is used to pay for AI operating costs and enhance the agent's on-chain treasury. In addition, a buyback and burning mechanism is used to reduce the token supply, with the aim of gradually increasing the value of the token over time.

The Initial Agent Offering (IAO) creates a liquidity pool by locking up VIRTUAL tokens, ensuring the fair introduction of new AI agents. This directly ties the success of the agent to community participation and market dynamics.

AI agents run seamlessly across multiple platforms, constantly learning from user interactions in real time. This allows for a consistent user experience, and agents can adapt and improve their intelligence to provide personalized engagement across platforms.

The public API enables AI agents to generate revenue through different applications, including games and entertainment. Users use VIRTUAL tokens for advanced interactions, which are then used to buy back and burn agent tokens, thereby reducing supply and driving value growth. As more applications adopt AI agents, demand for AGENT and VIRTUAL tokens is expected to rise, further driving up their value.

Contributors extend the AI ​​agent by adding new features. The reward for their efforts is an NFT stored in an immutable contribution treasury, ensuring transparency and ownership. Governance is managed through a decentralized agent sub-DAO, where validators monitor the performance of the AI ​​and are rewarded or punished based on their decisions.

The protocol provides emission rewards to incentivize the creation and support of high-quality AI agents. These rewards are distributed among the three best-performing liquidity pools, encouraging competition between creators and promoting the development of the most productive agents. The system incentivizes continuous improvement, benefits liquidity providers, and contributes to the development of the ecosystem.

The core of Virtuals Protocol is to build a dynamic decentralized ecosystem that allows artificial intelligence agents to generate real income. Contributors enhance agents through decentralized input, common ownership, and continuous development, positioning Virtuals Protocol as an important player in the artificial intelligence ecosystem.

5. Token Economics

VIRTUAL tokens are the core of Virtuals Protocol and are the base currency for all agent token transactions. It runs on the Base and Ethereum networks, and the token addresses are as follows:

• Base: 0x0b3e328455c4059eeb9e3f84b5543f74e24e7e1b

• Ethereum: 0x44ff8620b8ca30902395a7bd3f2407e1a091bf73

Each proxy token is paired with VIRTUAL in its liquidity pool, and acquiring VIRTUAL is required to create new proxies. This locked liquidity creates deflationary pressure on the token. Users can use USDC (or other currencies) to exchange VIRTUAL to purchase proxy tokens, creating a continuous demand similar to ETH or SOL in their respective ecosystems.

The fees for AI services (such as inference) are collected in the form of VIRTUAL and transferred directly from users to on-chain agents. Part of this revenue is used in the buyback and burning process to reduce the supply of agent tokens and increase their scarcity to increase their long-term value.

The total supply of VIRTUAL is capped at 1 billion tokens, and all tokens are fully unlocked. The specific distribution is 60% to public circulation, 5% to liquidity pools, and 35% held by the ecological treasury. The treasury is managed by the DAO, and the annual emission cap for the next three years is 10%.

Although not yet traded on a tier-one exchange, VIRTUAL supports a growing ecosystem and currently has a market cap of $157 million, ranking 264th, with a fully diluted value of $150.25 million. Its deflationary mechanism and expanded use cases will fuel its potential value growth.

In December 2021, Virtuals Protocol raised $16.61 million during its IDO on the Fjord Foundry platform, with a token price of $0.661. Additional small rounds were conducted on Enjinstarter and PAID Network, raising $125,000 and $250,000 respectively at a token price of $0.015. Major seed investors included DeFiance Capital, Canonical Crypto, LongHash Ventures, Merit Circle, Master Ventures, Stakez Capital, and NewTribe Capital, who provided support in the early stages of the project.

6. Competitors

The AI ​​Web3 gaming space is developing rapidly, with projects such as Nim, Altered State Machine (ASM), Olas, and Alethea AI quickly becoming major players. These platforms all combine AI with Web3 to create a decentralized ecosystem in which AI agents are more than just digital tools—they are assets that create real value. These projects share several common goals:

• AI Integration:AI agents don’t just run in the background. They actively enhance gameplay, interact with users, and enable new immersive experiences through shared ownership.

• Decentralized Ownership:Through a tokenized system, users can own, trade, and profit from AI agents, sharing in the value these agents create.

• Cross-Platform Compatibility:These AI agents can run across different games, expanding their utility and value, especially as virtual worlds continue to evolve.

Now let’s take a deeper look at how these platforms achieve these goals and what makes them stand out.

（1）Nim Network

Nim provides a blockchain stack for AI-driven games on the Dymension Network. It’s all about flexibility, modularity, and customizable AI agents that can be integrated into multiple games.

What makes Nim unique: Nim focuses on creating AI agents that work across different games. Its partnership with the AI ​​Coalition further solidifies its position as a leader in the collaboration between AI and games.

（2）Altered State Machine (ASM)

ASM’s core innovation is its AI brain - evolving NFTs that power NPCs and characters in a decentralized environment. While gaming is its primary focus, ASM is also exploring virtual worlds. These AI brains can be trained and evolved, and traded on ASM’s marketplace.

What makes ASM unique is that ASM’s evolving AI brain and NFT marketplace give users the opportunity to customize and trade their AI entities, adding a whole new layer of personalization and monetization.

（3）Olas

Olas takes a broader approach. While it is not specifically developed for games, it provides general AI services for Web3 applications. Olas’ modular infrastructure allows developers to build AI agents for games, but its main advantage is providing AI services across multiple fields.

Olas is unique in that:Olas focuses on the integration of AI and blockchain, supports multiple chains and provides a strong governance system, making it a versatile AI ecosystem that goes beyond gaming.

（4）Alethea AI

Alethea AI is a pioneer in intelligent NFTs (iNFTs). Users can create, train, and monetize AI characters across different platforms, from games to virtual worlds. The focus here is on creating highly personalized, lifelike AI characters.

Alethea AI is unique in that it combines AI interactions and NFT ownership, allowing users to create interactive, personalized characters that stand out from the crowd with lifelike AI-enhanced user experiences.

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While each platform has its own unique approach, Virtuals Protocol is unique in its AI agent co-ownership, buyback and burn revenue model, and cross-platform integration beyond gaming. As decentralized governance and artificial intelligence continue to advance, these elements position Virtuals Protocol as an important player in building a revenue-driven, sustainable AI economy in the Web3 world.

7. Bullish fundamentals

• Virtuals Protocol is tapping into the growing AI market, especially in gaming and entertainment, where AI applications are expected to reach $42 billion by 2032. This will be an interesting area of ​​development as AI continues to reshape industries.

• The rise of AI companion products is changing the way people interact with digital environments. Through AI agents like Luna, Virtuals Protocol has locked in on this space, and it is expected that by 2030, AI companion products will generate $150 billion in revenue with personalized interactive experiences.

• Generative AI supports continuous content creation, allowing Virtuals Protocol to keep users engaged in real-time experiences. This dynamic interaction helps maintain long-term user stickiness, especially in gaming and entertainment.

• Virtuals Protocol stands out for its decentralized ownership model, which allows users to co-own and earn revenue from AI agents. This structure creates a strong incentive for users to participate in the development of cross-platform AI agents.

• In addition, the protocol’s deflationary token economics, with its token buyback and burn mechanism, supports the long-term value of the token by reducing the token supply as demand grows.

• Virtuals Protocol’s AI agents can run across different platforms, such as Roblox and TikTok, and this flexibility enhances versatility, ensuring relevance to other digital industries beyond gaming.

• As Web3 and AI continue to develop, Virtuals Protocol will play a key role in this emerging field, where AI agents may become a key asset for enhancing user experience and generating revenue across decentralized platforms.

• At current valuations, with a market cap and fully diluted valuation approaching $200 million with all tokens in circulation, Virtuals could present an attractive investment opportunity for investors with a strong risk tolerance. This is especially true given the potential of the industry that Virtuals is tapping into.

8. Bearish fundamentals

• Despite a market cap approaching $200 million, Virtuals Protocol has generated only $48,000 in revenue as of August 2024, suggesting that its main growth phase may not yet be here.

• More than 50% of VIRTUAL's trading volume comes from decentralized exchanges (DEX), which brings volatility. However, with more than $10 million in liquidity in the DEX pool, the price impact remains small, although price stability may still be a significant concern for large investors.

• Although the token buyback and burn mechanism is designed to create deflationary pressure, its long-term sustainability is uncertain. Similar strategies in other projects have also faced challenges in maintaining value over time.

• Virtuals Protocol is not yet listed on a tier-one exchange, which limits liquidity and user adoption, potentially slowing its growth and hindering broader market acceptance.

• The protocol operates in a highly competitive AI market, making it difficult to stand out and capture market share in a rapidly expanding ecosystem.

• Recent interest in Virtuals Protocol has been largely driven by Luna, an AI companion product tied to the AI ​​meme narrative. While AI companion products have potential, public attention can quickly shift, making continued engagement uncertain.

• Virtuals Protocol also faces typical blockchain risks, such as the risk of hacking or code vulnerabilities. Without strong security measures and solid coding practices, these risks could damage its reputation and erode user trust.