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DraftKings, the North American gambling giant, have abruptly shut down their NFT fantasy game Reignmakers.

Announced on the 1st of August 2024, in a community update DraftKings wrote:

DraftKings have also allowed users to withdraw their NFTs to self-custodial wallets, should they choose to do so.

Thus far, the reaction to the cash amounts offered to customers has been mixed.

To quickly summarise:

Let’s dig into the legal developments that DraftKings cite as the reason for shuttering Reignmakers.

In March 2023, Justin Dufoe, a buyer of Reignmakers NFTs, filed suit against DraftKings on behalf of other owners alleging that these NFTs are securities. The claimant’s losses were $14,000 as per their suit.

In July 2024, a U.S. judge in Massachusetts denied a motion to dismiss the class action lawsuit against DraftKings, setting the stage for a future trial. And seemingly, the judge denying a motion to dismiss has created a domino effect that has led to Reignmakers shutting down.

DraftKings Reignmakers allowed players to build a collection of NFT player cards through pack drops, auctions, and a secondary marketplace, that were used in fantasy lineups.

The player cards were on the Polygon blockchain, and players could collect athletes across their three verticals, RM Football, PGA Tour and UFC respectively.

Each player card NFT represents an athlete and scored points based on the player’s statistical performance in a given event or game. They were also accompanied by a card rarity ranging from five tiers: core, rare, elite, legendary and Reignmaker.

The rarity determined the scarcity of the card and which contests you could enter with that card. For example, 4 rare cards are required to enter a rare-tier contest. The contests themselves reward players with cash and player card prizes.

This time last year, between July and September 2023, Reignmakers was the third-largest digital collectible project across all blockchains. In that timeframe, it outperformed the total digital collectibles volume of every other blockchain, not inclusive of Ethereum and Polygon. This growth and dominance was seen in a period where the macro NFT market was at historic lows, some 95% down from April 2022 peaks. This makes these numbers either a) more impressive or b) shows that Reignmakers didn’t attract crypto native users.

Throughout 2024, the Reignmaker numbers were steady.

The Reignmakers product has seen 9000-13,000 monthly unique buyers in 2024, with monthly total transactions ranging from ~250,000 to 320,000. The total sales in USD terms ranged from ~$2.6m to $7.5m, with historic fluctuations usually due to sports seasons beginning and ending.

So why exactly has a seemingly successful digital collectible game been shut down so abruptly?

Reignmakers was a bit of a sleeper project in crypto terms.

Their mid-late 2023 dominance wasn’t noticed by the masses in crypto. This is likely because Reignmakers wasn’t a product that attracted the ‘crypto natives’, but was something being played by regular consumers, with many perhaps being onboarded through the original DraftKings platform.

And whilst DraftKings will cite legal concerns, and are right to do so, it does beg the question as to whether it was simply legal concerns — or whether Reignmakers was worth fighting a legal batter for.

The number of unique buyers (9,000-13,000 in 2024) was not huge, and in DraftKings, we are talking about a business who had ~2.3m unique monthly payers in total in Q3 2023, driving $780m in revenue that same quarter. To add to this, DraftKings is a business that has a user base primarily in the United States, a geography where the gambling market is maturing and growing at a rapid rate.

By the numbers, Reignmakers was a small experiment for DraftKings in the grand scheme of things.

With that said, however, I am surprised to see such a small suit push DraftKings in this direction. Especially if you consider that regulatory waters are clearing ever so slightly in the U.S. as both political parties have begun making inroads into what their respective crypto policies could look like. Compare that to the environment that Reignmakers was conceived into, which was much murkier and fraught with difficulties for crypto-related operators. On the other hand, perhaps the risk of losing the suit was too big for DraftKings. Should they have gone to court and lost, there would have no doubt been a precedent set for other customers to go after them for perceived losses.

Another key point to consider is; why this may not have been a fight worth having for DraftKings. As per reports, Reignmakers generated $50m in revenue for the company in its maiden year — but it’s unknown what the licensing costs to the NFL, PGA and UFC were respectively. It’s also unknown how legal costs would have compared per customer for the business, compared to Reignmakers. If we compare Dapper Labs, for example, who settled a similar suit to the tune of $4m — that was something that was necessitated by the entire business model being contingent on selling digital collectibles. For DraftKings, this is not the case.

This leads to my final point related to DraftKings, which is the broader state of gambling in the United States. Online sports betting is expected to more than double as per projections by Statista. In Gross Gaming Revenue (GGR) terms — DraftKings has a 36.2% market share in the U.S. as of May 2024. This is the golden goose that DraftKings care most about, and rightly so — it is what makes them so valuable. And this is something that they’re looking to protect, as they look to ramp toward $1bn in profitability per year by 2025. Almost simultaneous to their announcement that they are shuttering Reignmakers, DraftKings announced that it will surcharge on winnings on customers in high-tax (20% or higher) legal gambling states. This has seen a large amount of kickback from customers.

DraftKings are moving chess pieces to ensure their bottom line is protected — but it will be interesting to see whether or not these moves do indeed protect and grow their business long term.

To conclude, it’s worth quickly touching on the fact that DraftKings was built on Polygon. This is the second big brand that has closed its Web3 project down on Polygon (with Starbucks being the first), and this is amid rumours that Nike is also drawing back resources on all things digital, Web3 strategy included.

Polygon are still wildly successful, but it will be fascinating to see how many of their big bets from previous crypto cycles are deemed a success years from now. As of the present day, those deals do not look like good value — even if they drove short-term transaction volume and activity on their network.

Reignmakers is a loss to the space, but it feels like something that has been shut down in part due to legal reasons, but also perhaps opportunistically to ensure the gambling behemoth is based in place to scale to higher levels of profitability within a growing, and maturing U.S gambling market. It doesn’t feel like a Web3 failure, but more like a business recalibrating their priorities.

To Summarise this Analysis:

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