Sorare – appraising the risks

In the wake of the collapse of Football Index and Footstock, I’ve seen various people questioning the risks of getting involved, and committing funds, to another platform. I wanted to outline my thinking with Sorare, which is attracting some big money at the moment but is quite different to the aforementioned platforms.

A couple of disclaimers to start off with:

I went down with the ship on Football Index and Footstock, and had a fair chunk of money in both as they closed. You may therefore think I’m a pretty bad judge of risk! Football Index closing was no great surprise to me and I knew the risk of not getting out earlier. Footstock did take me a little by surprise though, as I expected they had a bit longer left to turn things around.

I’m pretty heavily invested in Sorare. I joined in August last year and I’ve invested several thousand into player cards. My confidence in the product led to me becoming an affiliate and an ambassador for Sorare. You might interpret that as me having a vested interest, and I guess I do – in the sense I want Sorare to succeed. But I also don’t want to be stung by another platform going under, which is why I’ve spent so much time looking at the potential risks, as well as the upsides.

Last disclaimer – this is long! I wanted to go fairly in depth so this is a long read. Grab a cuppa before you start. What I’m going to cover is:

  • Does the business model make sense and does it look sustainable?
  • Does it look ‘too good to be true’?
  • How much of a risk is the crypto element?
  • How does future demand affect my current investment?
  • Are there any competitors to worry about?
  • Is there anything to worry about in the ts&cs?
  • Are there any regulatory issues to worry about?

Is the business model sustainable?

Looking at what happened elsewhere, it’s vital that we start with understanding how the business model works. It’s also good to have in the back of our minds the warning signs that the model might be failing, so we know how to recognise that and get out.

Sorare utilises NFT collectibles (player cards) in a global fantasy football game. The model from the user-side is that we are motivated to buy cards in order to build a collection to compete for rewards or to resell for higher value. We make money if we can build a good enough team to win or if we can pick players who will be worth more further down the line. It’s a blend of DFS (daily fantasy sports) and collectibles – both of which attract a lot of interest in their own right.

The founders of the business, Nicolas Julia and Adrien Montfort, have a background in software engineering and other blockchain initiatives, and the company has attracted early investment from the Accel and Benchmark venture capital firms. The link with the community is strong and they publish a roadmap of plans for the product so that users (called ‘managers’) can track their progress against stated aims. So far, so good.

Minting new cards is the key income stream for Sorare. All-time auction volume stands at around $27 million at the time of writing and they are currently averaging about 120 ETH a day (around $260,000). There’s no doubt the money is coming in.

In terms of costs and liabilities, there will be some fixed costs to consider – like business overheads and the cost of the licensing of the clubs/leagues. Some costs may change according to volume – the gas fees (for moving cards/ETH around) could be considerable and will vary depending on how much activity there is on the site. Presumably they also have to have a plan in place to cover the start up investment they’ve received.

Then there is the prize fund element – SO5. Card prizes are not really a cost as such but represent lost income potential which can’t be recouped due to the need to preserve scarcity. It’s a very clever part of the model though – a manager might win a card worth several hundred pounds, which has actually only cost Sorare a few quid to mint. This keeps the prizes high (and the game fun) without creating a huge liability for Sorare.

The ETH prizes will vary each gameweek but will be in roughly the same ballpark. Let’s take GW152 as an example:

  • Podium ETH rewards: 20.55 ETH
  • Threshold ETH rewards: 27.34 ETH
  • Total ETH rewards: 47.89 ETH (approx $103,000)

This seems fairly representative of a busy gameweek – one where most leagues are open. Of course there will be quieter periods too – international breaks and times when the main leagues have closed down for the summer. So, on the surface, running SO5 looks like it should be sustainable for Sorare providing they continue to see good auction volumes. The business model looks pretty sound to me and there’s still other revenue streams that they could explore if needed, such as the obvious one of adding commission onto secondary market sales.

If auctions volume were to significantly slow down or stop, there could be an issue. If Sorare didn’t have other income streams in place to cover the prize pools and other ongoing costs they’d need to pull back on SO5 prizes. A severe cut to the rewards would reduce the underlying intrinsic value of the cards but, given that the bulk of rewards are actually cards which cost Sorare very little to mint, I can’t really foresee a situation where this happens.

In fact, Sorare are currently looking at increasing the rewards on offer at the moment, to take into account the growing number of managers. It’s important that any changes are ‘generous yet sensible’ – not pushing it so far that it breaks the model and they have to cut them back again. The fact they are taking so long over this gives me faith that they’ll get it right.

Some people have raised concerns that it’s the auctioning of new players that funds the prize pool, and that one day auction demand might dry up completely. I don’t really agree with that. Football is fluid in it’s very nature – form goes up and down, players emerge out of nowhere, while other players will retire. These variables mean that there will always be demand for new players, even if there isn’t an ongoing influx of new managers.

Is it ‘too good to be true’?

Any new platform which has users shouting about making life-changing amounts of money is going to raise some eyebrows and attract comments about it being a ‘Ponzi scheme’. Sorare is no different.

The two different angles to Sorare – the NFT collectibles and the fantasy game – really need to be looked at almost as separate products in terms of the potential yield and whether it’s realistic or sustainable.

There’s no doubt that NFT collectibles have been in a bit of a bubble since the start of this year. NFTs have zeitgeist appeal at the moment and the values of some Sorare cards have benefitted from that. In my mind, there are clearly cards that have value beyond what they can win on the game, simply because of who they are. The obviously ones are the likes of Ronaldo, Neymar and Mbappe. This underlying collectible value, the hope that someone may pay more for a card in the future, is hard to measure.

In my collection, I hope that Gouiri and Malen become world beaters on a similar level, and therefore hold some collectible value one day. That’s a real leap of faith though as no one knows what will happen with the NFT scene yet, never mind Sorare.

We saw a big influx of collectors in February, spurred on by influencers like Gary Vaynerchuk, who bought a Unique Joao Felix card on 14th February and tweeted about it. Looking at the Rare prices of Joao Felix around that time and since, it looks like the bubble might have burst a bit and prices are getting back to more rational levels now.

Essentially, any DFS game should have far more losers than winners but, as we’ve seen, the growth in card demand is pushing up prices, along with ETH performing strongly. It certainly feels like there are a lot of winners right now.

The SO5 game gives cards a more tangible ‘intrinsic value’. There are card and ETH prizes to compete for in nearly every gameweek, and there are two gameweeks per week. It’s not difficult to do some quick maths and work out what a card might be worth, given what it could win you.

Looking at the ETH threshold rewards in Global All Stars Division 4, allowing for occasional breaks, we could assume that there are 100 threshold rewards to compete for each year. These rewards are very winnable, even with a fairly average set of cards. I might predict that I can win the 0.020 ETH reward in 75% of my gameweeks, managing the 0.010 ETH in 20% and finishing with nothing just 5% of the time. That would be 1.7 ETH over the year in threshold rewards alone.

I’d expect to add some card wins to that. That’s harder to do, and much harder to predict, but looking at my stats so far, I’d expect to make at least another 0.8 ETH from card rewards per team, per year. So that would be a total of 2.5 ETH across 5 players in a year, although perhaps you could say you’d need to include 7 or 8 players in a team, to allow for rests and injuries, and discount 3 months for the team’s summer break. That still works out as a yield of around 0.250 per year for a pretty average card – a card that you can use for the rest of the player’s career. Remember that Global All Stars runs all year too, so you can always move between European and MLS/Asian league players to maximise your earnings.

But hang on, where are the losers?

My quick back-of-a-fag-packet maths is for the Global All Stars Division 4 – the fastest growing division. Step outside of that and things get noticeably harder. The other leagues don’t have the threshold reward so the figure above isn’t scalable – it’s only the card rewards to go for. Move up the divisions and you also have to factor in a much bigger outlay for cards, making it a more risky proposition to get involved (but with big rewards if you do get it right). It’s easier for most new managers to buy the cheaper players who will grind out the ETH rewards but will struggle to compete for cards, at least in the short term.

And, as I mentioned earlier, with injuries, rests and loss of form to consider, most people will need to build a sizeable squad of players to really enjoy the game – with some of those players probably never returning their value. Managers with a lower budget will need to look for the diamonds in the rough or pick out the young talent and accept a short term ‘loss’ for a potential longer term gain.

Ultimately this tells me that this isn’t a Ponzi scheme. It’s a game of skill – but one where having a bigger wallet will likely bring you faster rewards.

Is crypto a risk in itself?

I’ve written a little in the past about the crypto side of Sorare and I think it’s important to acknowledge this as something that adds a different element of risk to the game.

The part that people tend to focus on is the Ethereum bull run and whether this means we’re all buying cards at inflated prices that will eventually come crashing down to Earth. I think this is a bit of a red herring to be honest. ETH rising has impacted prices to some degree but I think the bigger factor in rising prices was the sudden influx of new managers onto the platform. As I’ve said before, adding a few thousand new managers onto a platform where player cards are already relatively scarce was always going to push prices up. I’ll come back to the scarcity point later.

However, if we consider that the SO5 prize structure is what gives most cards their intrinsic value, then any fluctuations in ETH should have some impact on player prices in fiat terms. My earlier example of an expected yield of 1.7 ETH per year in threshold rewards is currently equivalent to about £2,675. If ETH was to fall back to the level it was at in January, then my fiat yield would be closer to £1,500 – so really I’d want to be paying less for players.

Of course, what we’ve seen is the reverse of that. The 0.010 ETH and 0.020 ETH rewards were worth about £3 and £6 when they were first introduced. They’re now worth £15 and £30. The podium rewards have similarly increased significantly in fiat terms. This is obviously going to impact on how much people are prepared to pay for a player card. While ETH is rising, we’re all winning… or are we?

The problem with this is that it could be contributing to making the game less accessible to new users. Managers need a sizeable bank roll now just to put out a team of players, and several thousand to build a squad with household names. That can’t be good in the long run.

Would it be better to fix the ETH rewards to a fiat value (as they’ve recently done with the starting price of auctions)? If we assume that Ethereum is going to keep on rising, that would help to soften the impact of that and keep the prices more obviously linked to player form and scarcity. On the other hand, if we want to mitigate against the risk of Ethereum dropping back, a fixed fiat payout could help to prevent managers being left holding suddenly overvalued cards.

The other risk with crypto is more around it being a bit of a ‘Wild West’ space where the normal rules of engagement don’t necessarily apply. This isn’t a concern specific to Sorare but I think it’s something that anyone new to the game should bear in mind. Aside from needing to familiarise yourself with crypto tax issues, you’ll want to beef up security on your account (two-factor authentication is a must) and be prepared that in a world where KYC (Know Your Customer) checks don’t really exist, there will be people operating at the edge of the rules and beyond – multi-accounting, using bots and such like – so be extra careful in your transactions. There’s no refunds on Sorare if you make a mistake – caveat emptor!

How does future demand affect my current investment?

Judging risk is as much about looking at the future as it is about looking at the here and now, so it’s worth considering what might happen over the next few months or years.

Scarcity is a key driver of prices on Sorare and we’ve already seen this year what happens when demand outstrips supply.

So, in simple terms, if demand from managers is greater than the number of player cards available on the market then the value of the cards will go up as they become more scarce and therefore more valuable. This could be due to a big influx of new managers (as we saw in February) or due to auctions drying up, or Sorare changing the SO5 format in some way which would motivate managers to buy more cards (for example by introducing more SO5 leagues).

On the flipside, if demand reduces, then card values should reduce too. This could happen if the platform can’t achieve the required level of traction with new managers, or if changes are made to the SO5 structure or the card scarcities. This is the reason some managers are concerned about the proposal to introduce a new scarcity tier, below the Rares (possibly called Uncommon?).

This does need careful handling. If they do this smartly – perhaps by creating a new division that only the Uncommon cards can compete in – then there shouldn’t be a problem and it may go a long way towards removing the cost barrier to new managers. I do think it’s important they keep any new scarcity quite separate from the existing Rares and the Division 4 threshold rewards.

Perhaps a new scarcity will only be needed if user growth remains high, given that every new season they can inject (up to) another 111 cards of each player into the market, just with the existing scarcity tiers that exist. Some of this will also depend on how quickly Sorare are able to add new clubs and leagues to the platform, as this alone will have a large impact on the number of cards in circulation, and the level of demand for certain players.

Future demand isn’t just about the auctions of course, it’s also about the liquidity on the secondary market – the manager-to-manager transfers. A key risk to consider with Sorare is that you’re buying an item (an NFT) and there’s no guaranteed buy-back on that. If demand falls (across the platform as a whole or in relation to the player/s you own) then you may struggle to extract any future value from them. For this reason, it’s really important not to spend more than you can afford on Sorare.

The other dynamic to consider in relation to demand is that the SO5 prize pool isn’t a proportional one based on the number of entrants – it’s a fixed number of payouts. So as the number of managers on the platform increases it becomes it’s harder to win but the cards are likely to be worth more, whereas if the number of managers decreases then SO5 should become easier to win but the cards are likely to be worth less. That seems quite nicely balanced to me.

With all of these things, there are plenty of levers that Sorare can pull to reduce/increase demand accordingly – through the frequency of auctions, the number of cards minted and the way that they promote the platform. All of these things should also give us clues to how well they are managing demand as the platform evolves.

Are there competitors to worry about?

With the near collapse of the alt-gambling sector, the only real competitors for Sorare are other NFT platforms and the risk of a new product moving into their space, like Topps or Panini.

Everyone is talking about NFTs at the moment and there’s definitely a risk that Sorare will lose users to other platforms, particularly those that offer a similar sort of utility for their NFTs – like F1 games and horse racing platforms.

To some extent, I’ve seen this first-hand already – this isn’t like Football Index or Footstock where people pick a platform and stick with it. Once people have found their feet in the crypto space they often want to jump onto the next big thing in the hope of getting the benefits of being an early adopter. Ultimately though, not all of these platforms will have longevity and the vast majority of them certainly don’t have the backing and expertise that the Sorare team have, so I imagine a lot of users will want to keep at least a toe in Sorare, even if they dabble elsewhere.

Perhaps more of a risk is that an existing soccer card brand, or an established NFT platform, comes in and buys up the licences to create a direct competitor for Sorare. I’ve not seen much evidence of this yet but it’s worth noting that Animoca signed up Manchester City last year, presumably ruling out the chances of Sorare getting the licence for the City cards. Animoca are a big player in this space – responsible for the highly successful F1 Delta Time – but one team alone isn’t really enough to build a football game and I think they’d struggle to overcome Sorare’s first mover advantage.

Topps already launched NFTs as part of their offer but don’t appear to have any utility behind them. Any new movers into this space would need time to build a game and obtain the necessary licences, meaning that Sorare would have time to respond – and that managers would almost certainly have time to consider their options.

What are the ts&cs like?

People are often keen to digest the terms and conditions of platforms like this to identify the problems or suspicious bits of wording, especially since some of us have been burnt by these elsewhere. I’m never sure how helpful this is – essentially the ts&cs will always be an exercise in arse-covering more than anything else, and any sensible company will write in a loophole for most situations.

Nevertheless, I’ve had a look through the Sorare ts&cs for anything that looks particularly shady. There’s nothing that troubled me too much but there are a couple of bits that probably need some further explanation.

There’s a line in capital letters that says ‘BY PURCHASING A COLLECTIBLE ON THE WEBSITE, THE USER EXPRESSLY WAIVES HIS/HER RIGHT OF WITHDRAWAL’. The caps make this sound more worrying than it actually is! Basically this line refers to the right of withdrawal that we all have when we make an online purchase – sometimes knows as a ‘cooling off period’. All this means is that you can’t ask Sorare to take your card back after you’ve purchased it if you suddenly change your mind. This right can be waived for digital purchases like this, as long as the customer is made aware.

The ts&cs distance Sorare from too much liability due to hacking or service failure, especially in relation to the wallet, which is described as relying on ‘an experimental technology independent of the Service’. I suspect this is a hangover from the early days of the platform but my earlier point about being careful in the crypto world also applies.

Aside from the wallet, they limit their liability for service failure to ‘direct and reasonably foreseeable damage’ to an amount not more than ‘the amounts invoiced to the User by the Service during the last twelve months‘.

I didn’t see anything that nails down the number of ‘mints’ of each player card, so that gives Sorare the room to mint more players than we’re expecting them to do. It would be a strange move if they suddenly started to mint 200 Rare cards per year instead of 100 – so I don’t think they’ll do this – but there’s nothing to say that they can’t.

Likewise, SO5 is clearly described as a ‘promotional game’ which is offered for ‘an unlimited period of time but may be stopped by the Organizer at any time and without notice once all announced Tournaments have ended’. This feels like standard arse-covering and doesn’t worry me – stopping SO5 suddenly would be devastating to Sorare so would be a final outcome after a long period of decline (we’d see plenty of red flags before that, I’ve no doubt).

On the other hand, we’ve already seen a number of side platforms start to offer games using the Sorare NFTs (One Shot League, SorareData, SorareMega), so perhaps there is a vision that the game element will be floated off as an entirely independent part of the offer at some stage, who knows? Either way, I’m very comfortable with this as it stands.

Is the platform regulated? Are there any issues with this?

I touched on some of these issues in a previous blog of mine but it’s important to underscore that Sorare isn’t gambling and therefore doesn’t come under any regulation from the Gambling Commission. The ts&cs of the platform are governed by French law.

There is definitely concern being raised in some quarters that aspects of Sorare ‘feel’ a bit like gambling and that the Gambling Commission may include this in some future crackdown on unregulated activities. There are also concerns that perhaps the crypto stuff might become more keenly taxed by HMRC in the future.

At the moment, these are simply concerns (sometimes bordering on scaremongering by people with vested interests) but it’s something to be alive to in case legislation changes in the future. Bear in mind that any regulatory changes won’t come in without warning and generally these things progress slowly, with clear warning signs before action being taken. The UK Government’s Gambling Review is due to report back soon so that might give us a better idea of the direction of travel and whether we should be concerned at this point.

Personally, I’m quite comfortable that this isn’t gambling and the rationale for why it isn’t makes sense to me. And, at the end of the day, it doesn’t really matter what I or other people think – only what the legislation says (and I’m yet to see anything that contradicts the position of Sorare on this).

One of the most positive aspects of Sorare is that they have the necessary licences in place with the clubs/leagues to offer the NFT cards, unlike some other platforms. With footballers increasingly concerned about the monetisation of their images without their consent, this puts Sorare in a much safer place than some of their potential competitors.

And remember you’re not placing bets here – you’re buying NFTs which remain yours for life. If Sorare was to fold, the NFTs would still be yours, and perhaps someone else would create a platform to utilise them.

Taking all of that into account, I’m comfortable with my level of investment in Sorare as it stands. I’ve got a bit less of my own money in than I had when I was at the peak of using Football Index and it isn’t money that’s come out of my savings, so if it somehow did all disappear tomorrow, I’d survive.

It’s important that you do your own research before committing any cash and make sure you don’t overstretch yourself. This should be a fun game to play, something that adds to your enjoyment of football – not something that keeps you awake at night worrying about how you’re going to get your money back out.

Anyway, if this has piqued your interest and you want to dip your toe into Sorare, please make sure you check out my getting started guide before you take your first steps on the platform. Good luck!

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