Michael Tong, founder of Xterio, was interviewed by Wu Shuo to share his entrepreneurial journey from the traditional gaming field (NetEase, FunPlus, etc.) to Web3 and the direction he explores in the Web3 ecosystem. Michael detailed his company's footprint in the Layer 2 ecosystem, including game development, NFT marketplaces, and convergence with AI. Key projects such as "Palio" and "Befriend" showcased the potential of AI technology in gaming, while exploring the key differences between Web3 and Web2 games, the phenomenal boom and decline of TON Mini Games, and the diversification of TGE (Token Generation Event) models. Michael also shared his vision for the future of AI, combining AI and gaming to create a more immersive, personalized user experience.

Opening remarks

Colin: Hello listeners, today we're going to talk to Michael about Web3 gaming. First of all, Michael, would you like to give us a brief introduction to your own resume and what you're working on right now?

Michael: Okay, everybody, I'm Michael. I've had about 20 years of experience in the gaming industry. At the beginning, I was at NetEase, and I participated in the release of "Fantasy Journey to the West", which was about 20 years ago. I was at NetEase for a long time until I officially left in 2014 as COO. In fact, I have been on the board of directors of NetEase for 2021, so I am the longest-serving director of any time besides Ben.

After leaving NetEase, I did some investment and entrepreneurship on my own, and also became an investor in FunPlus. During this period, I also tried some small companies of my own, such as some female-oriented game projects and so on. Now I'm running a company called Xterio. Xterio is a company dedicated to Layer 2, and there's a lot of stuff in our Layer 2 ecosystem. At our core, we are all about games, both our own games and those of our partners. At the same time, we also have our own launchpad, NFTs, and marketplace.

One of our most popular games at the moment is an AI-native game called Palio. Palio went into beta in April of this year, eight months ago. At that time, there were already 8 million Wallet Addresses, while also generating more than 1,000 BNB in revenue. Recently we launched an AI game called Befriend, which has even more UAWs (Unique Active Wallets) than Palio, and currently has about 2 million DAUs (Daily Active Users). The game doesn't have any charges yet, so the revenue isn't counted yet, but it's a lot of players. That's a quick overview of Xterio.

Differences in user attributes and business models between Web2 and Web3 games

Colin: So you've been making games for a long time at NetEase, including being the person in charge of a classic IP like "Fantasy Journey to the West", and then moving from Web2 games to Web3 games, will there be a big contrast? What do you think is the difference between them?

Michael: Well, I think there's a big difference. At the beginning, the understanding of users in the Web3 game market may not be so deep, and the awe of this next industry may not be enough, so at the beginning, it is not completely clear whether what needs to be done is accurately matched with users, especially the understanding of some needs of Web3 users is not deep enough. But by learning from our mistakes and tweaking step by step, we were slowly able to make games for different Web3 users.

There are actually a lot of categories of Web2 users, and I like to describe them in different scenarios. For example, in the old days of Internet cafes, a group of people might get together to play the same battle game, and the atmosphere was very high, and everyone would shout at each other, such as "World of Warcraft" back then, everyone would play copies together, and the interactive atmosphere on the scene was very strong. However, in the era of PC and mobile games, this scenario-based atmosphere has weakened, and mobile gamers are more casual, especially the older generation, who play mobile games mainly to pass the time.

I have a well-known friend who is the game producer of Black and White, and he once said that many people play match-3 games for no particular reason, just because it's a habit of theirs, like drinking a glass of red wine before going to bed. Through this habit, they are able to relax and fall asleep.

There are many types of games in Web2, while Web3 games have their own unique characteristics. Many Web3 games now start with some "Play to Earn" model to attract users, and get players to participate through certain ways to make money. I think this is normal, and in fact Web2 has a similar model, such as novel platforms attracting users through ad revenue. However, how to attract these users and achieve effective conversions is a very important question.

The shift from "making money" to "spending" is also a key point of exploration. I may have been a little inexperienced in Web2 games, but I've learned a lot in the process of Web3. In our AOD (Age of Dino) game, for example, many people think that making Web3 games is simply using certain mechanics to guide users to "farming". But what we found is that there are a lot of players who actually know how to play the game, and they may be big players, not only buying our NFTs, but actually entering the game and becoming key players in the league.

These players not only drive other players to play the game together, but also make the game more competitive by beating other alliances. They will invest a lot of money to upgrade their equipment, bases, etc. I think that's kind of a reflection of the conversion opportunities in Web3 gaming. This deep engagement is an important phenomenon that we observe in this process.

The rise of TON Mini Games and the challenge of sustainable development

Colin: Actually, the hottest game this year is still the previous TON mini-games, I don't know if you paid attention to it at that time, and what do you think of TON's overall game phenomenon? It went from a sudden hit to a bit of a flash in the pan now.

Michael: Well, that's how I see it. The key point of TON is that it successfully converts users within Telegram into Web3 users. I think that's a very interesting phenomenon. Because if you ask which community or platform currently has the most people working in this industry, the answer is mostly Telegram. Of course, Discord can also be mentioned, but Telegram is definitely more used.

There are a lot of people in Telegram's own user base who already know about Web3, or at least have some exposure to cryptocurrencies. This makes it easy for their user base to be converted into real users of Web3, such as starting to participate in the trading of virtual currencies, etc. From this perspective, TON's conversion path has been very successful. But the question is, are these converted users really interested in games, especially casual games? This involves what kind of game to use to retain these users, which is obviously a very challenging problem.

At the moment, it seems that the popularity of TON has cooled down, but I'm not sure of the exact answer. After all, we don't do much in this area. However, I believe that this challenge is inevitable. In the case of STEPN, its success is not just because it is a running shoe, but because it achieves a phenomenon that breaks the circle. It's a transformation in a particular area, and that's the key. But its success is not due to the use of a certain theme or a certain model, but because it has found a specific conversion point. From the current point of view, we have not seen another explosive project that can break the circle like STEPN.

This also shows that such challenges are very difficult. TON's mini-game faces a similar dilemma. Of course, I also hope that they will be able to launch another circle-breaking project as quickly as STEPN, haha.

Colin: yes, STEPN is a special case. It combines running, walking, and some external elements like betting shoes nicely to form a fortuitous phenomenon. Unfortunately, instead of following the direction of IP or long-term development, they followed a path that favored the Ponzi model, which led to the gradual fading of later development. This is indeed a pity phenomenon in the industry.

Michael: yes, but they also launched a project called Gas Hero later on, but it didn't seem to get a lot of attention.

Colin: yes, it doesn't feel like people are paying much attention to the project.

Michael: Well, it's hard. I think it's a big challenge, haha.

Xterio's exploration in the field of AI

Colin: Like some of your recent developments, I think your project may move towards AI agents, can you elaborate on that?

Michael: Well, I can actually say a lot about AI. So I'll talk about the longest version. In fact, it can be traced back to DeepMind's launch of AlphaGo in 2016 and 2017. At that time, AlphaGo defeated Go players, and I was a Go enthusiast myself, and although my chess skills were average, I liked to study very much, such as watching Lee Chang-ho's Tesuji and Wu Qingyuan's life equality.

But after AlphaGo defeated all the top Go players, my admiration for Go masters completely fell, and I felt that the AI was so much better than humans that I had no power to fight back. Only Lee Sedol was the only human to win an AI game, but never again. Since then, I've been focusing on AI-related things.

Later, I would also play some AI-based games, such as some games on ChatGPT 3, but the quality of the games was not high at the time. Until MidJourney came along, I liked it so much that I shared a lot of my own generated work on Twitter. From November to December 2022, with the release of ChatGPT, I started to think seriously about how to combine Web3 and AI.

Our original idea for Palio was entirely my personal idea, but in order to make it happen, I needed to find someone who was interested in both Web3 and AI, and had the ability to make games. It took me a long time to eventually form a team and move this project forward together.

In April of this year, we went live in beta with Palio. We have trained an exclusive image model for players, which players can use to generate their own style of pets and mint them into NFTs. We've also partnered with our partner, Reka, whose core team members are from Google's AlphaGo project. The first time I met him, I thought he was amazing, and I was very excited about the collaboration.

Palio's first generation of the Emotional Engine was created through this collaboration. The engine is a system of emotional companions that attracted more than 8 million addresses when it went live, with 400,000 paying users. We've designed charging points, but we don't let players spend a lot of money to dominate the game, such as farming points on a large scale.

We hope that Palio will be able to become an IP and then further spread this IP through different games. By January of this year, we plan to release a beta version that will give early NFT buyers a priority experience. At the same time, we continue to work with Reka to drive the engine iteration.

Another item Befriend is a simpler but no less fun way to play. Its backstory is about how the AI is gradually dominating humanity, and players need to learn to communicate with the AI and improve their friendship to continue to survive. Every robot and setting in this game is very interesting, and the player's interaction with the AI can sometimes lead to unexpected surprises.

We hope that Befriend will become a platform-level product that not only provides AI agents, but also creates backstories, events, and scenarios for users, and this combination will lead to more stories and gameplay.

In the future, our goal is to build a true platform-level product, which can take one to two years. And in the long run, I think the potential of AI is not just in text, picture or music generation, but like Doraemon, it can be your mentor, friend, and even a super robot that helps you with various tasks.

I feel like Xterio has an opportunity to work in that direction. When we train our models, we are also exploring the visual and auditory capabilities of AI, including recognizing the user's expressions and voices, and even having their own emotions and behaviors. It's a distant but worth working on, and I believe the combination of Web3 and AI could bring this goal closer to reality.

The development potential of the combination of AI agent and gaming

Colin: But now we don't seem to see a lot of AI agents and games combined, and most of the applications are mainly focused on coining, right? For example, memecoin, which is currently relatively simple in function, may be able to automate some of the coin issuance process, such as a chatbot on Twitter. How did you come up with combining AI agents with gaming?

Michael: Well, I think so. Let's briefly comment on this phenomenon first, in fact, I also tried these features with my own wallet, hahaha. I think there are probably two paths here. First, some projects build communities by issuing coins, so that some people do make money, and then they use those resources to improve their functionality.

The second is to apply the functions of the AI agent directly to the game. Actually, I've seen projects that have tried this direction to some extent. Specifically, AI agents can be designed to be in-game NPCs. I think it's a good way. In this way, the AI agent can take on the role of an NPC by entering different games.

In the future, I think there is a possibility that AI agent will be further included as part of the game's content. For example, if there is a lack of content in some games and a limited number of real players, the AI agent can fill in these gaps first. Even if human players enter late, they can play directly with the AI, which improves the playability and interactivity of the game to a certain extent.

It's one of those ways to combine and an effective way to quickly reduce the cost of producing game content. Of course, sometimes quantitative change leads to qualitative change. When this combination is applied to enough scenarios, it can change the gameplay and experience of the entire game, bringing a whole new feel. I think this possibility is very much worth looking forward to.

Diversification of TGE models

Colin: Then you might start working on TGE for this project right away. How is this being done? Is it still going well? Can you tell us a little bit about the community or readers?

Michael: Yes, I think it's going well so far. Today is the 24th, and I can still sit in a nice café and pick out gifts for colleagues and partners. Haha, if it doesn't go well, I guess I'll be busy at home right now.

So overall it went pretty well. We plan to release information to the community as soon as it is officially announced.

Colin: Understood. Speaking of TGE, the overall model has really changed a lot this year. For example, Binance is no longer the only listing option, but you may have to pay a lot of coins to get on their Launch Pool. Relatively speaking, more people are starting to fight for combinations like BYBIT, Coinbase, and Upbit, and it seems to be working well. In addition, recent projects like Hyper, which does not rely on centralized exchanges at all and issues coins on their own, have directly rushed to a very high market capitalization. What do you or your team think about the diversity of the current TGE model?

Michael: I think, first of all, a different approach is definitely more beneficial to the project side, because it means more options. Secondly, we also need to understand the specific performance and effect through data, not just feelings or superficial judgments.

For example, sometimes people may think that some exchanges are performing poorly, but when you look at the specific data, you will see that this may not be the case. For example, if some projects go live well through BYBIT and Upbit, people will think that this path is particularly good. However, if other projects on the same path fail, they may be scolded for two days and forgotten.

So, my point is that you have to rely on objective data to make a judgment. Different approaches have their pros and cons, but they don't necessarily work for all projects. Even with the same method, sometimes the results are uneven. Some projects perform well, while others may fail, and this needs to be analyzed on a case-by-case basis.

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