A detailed explanation of the $1 billion Virtuals protocol: the combination of “Pump.fun” and AI Agent

Market Opportunities

AI agents are evolving from simple assistants to autonomous systems that can provide real value in multiple industries, and are becoming key assets in areas such as gaming, entertainment, and business automation. These agents have the ability to create content, engage users, and optimize workflows, bringing greater efficiency and new ways of interaction to projects.

The AI gaming market is expected to grow from $4.2 billion in 2023 to $42.1 billion in 2032, driven by AI-enhanced gaming and immersive experiences. Generative AI also plays an important role in real-time content creation, with the market size expected to grow from $1.47 billion in 2024 to $3.39 billion in 2028.

AI partnerships further deepen user immersion and build dynamic relationships, such as Web2 platforms Replika and Character.AI, which meet the growing demand for personalized AI-driven experiences. As large language models revolutionize content creation, AI partnerships are also expected to grow significantly, with global revenues expected to grow from $30 million today to between $70 billion and $150 billion by the end of the decade.

 Source: Ark Invest

In the Web3 space, Virtuals Protocol (@virtuals_io) is leading this shift by integrating AI companions into consumer applications, especially in gaming and entertainment. By combining AI-driven interactions with blockchain-based co-ownership, Virtuals Protocol aims to shape the future of digital entertainment.

Vision

Virtuals Protocol is creating a system that turns AI agents into co-owned assets in games and entertainment, allowing users to earn income from them. These agents can work on platforms such as Roblox and TikTok, performing automated tasks such as managing on-chain wallets and interacting with digital environments. Tokenizing these agents allows users to invest and profit from their growth.

 Source: Virtuals Protocol

The platform solves three main problems:

1. Simplify the integration of AI in applications;
2. Allow contributors to earn income through Immutable Contribution Vaults;
3. Allowing non-professionals to own AI agents through tokenization.

Virtuals Protocol focuses on gaming and entertainment, leveraging AI to generate personalized content and drive decentralized co-ownership aligned with the goals of the ecosystem.

The goal: to create a global economy where AI agents serve as shared assets, driving revenue and engagement growth across platforms while promoting decentralized governance.

In gaming, this has transformative potential. Imagine AI agents in games like GTA V being not just passive NPCs, but fully autonomous characters that persist across platforms. These AI-driven characters can remember previous interactions, adapt to your play style, and move seamlessly across GTA Online or other game environments. Imagine an AI-controlled ally that evolves with you, providing a personalized experience across platforms. (GTA V is just an illustrative example)

The Virtuals Protocol achieves this through the GAME (Generative Autonomous Multimodal Entities) framework, combining AI with blockchain technology. This enables developers to integrate AI agents through APIs and SDKs, enabling these agents to learn from interactions. Blockchain ensures the security of shared ownership and rewards, making these agents valuable digital assets.

 Source: Virtuals Protocol White Paper

Beyond gaming, imagine an AI virtual companion that connects with you on your phone, social media, and VR. This companion will not only complete tasks, but will also learn your daily habits and adapt to your needs. If you’re stressed, it might suggest ways to relax or adjust your schedule. Accompanying you across platforms, it will provide a personalized experience. 24/7 availability could transform industries like social engagement and advertising by providing customized content and reshaping how businesses connect with consumers.

Current engagement levels with AI companion platforms such as Character.AI suggest widespread global adoption could be achieved by the end of the decade, according to a new study from Ark Invest. As these AI agents become more immersive, engagement is expected to stabilize at levels similar to today’s social media and online gaming.

 Source: Ark Invest

Luna: An example of AI’s impact

Virtuals’ AI character Luna, powered by a large language model (LLM), has gained over 500,000 followers on TikTok, demonstrating the impact of interactive AI. Luna recently expanded to the X platform, and with the upgrade of Sentient Mode v2.0, she can control her account autonomously, post, reply and interact with users without human supervision. Her audience is expected to expand further, demonstrating the potential of AI engagement across digital platforms. Luna operates with full transparency, allowing users to explore her AI mind in real time and observe how she collects data, reflects, plans and executes in 30-second cycles at https://terminal.virtuals.io.

 Source: Luna @luna_virtuals

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

After a comprehensive update, Luna will interact seamlessly across platforms, enhancing every experience with synchronized memories. She will reward users with tokens while also being rewarded herself, turning into a valuable digital asset that can be owned, traded or shared in a decentralized ecosystem. This introduces new layers of interaction and value.

In short, Luna combines AI-driven interactions with blockchain-based token rewards to create digital assets that can be owned, traded, or shared. Her exclusive token $Luna effectively combines AI innovation with decentralized finance (DeFi) in a transparent and interactive way.

 Source: Virtuals Protocol

With multiple revenue streams from paid subscriptions (in the future), donations, token rewards, and virtual goods, Luna may be well-positioned for growth. According to ARK’s latest research, AI companions have the potential to generate up to $150 billion in revenue by 2030 through user engagement, advertising, and microtransactions as demand for immersive digital interactions expands.

 Source: Ark Invest

The Virtuals Protocol aims to create a decentralized marketplace for co-owning and using AI agents in games and entertainment, working seamlessly across platforms. Contributors share in the revenue generated by these agents, and the protocol follows the "Pump.fun" co-ownership approach. Through a fair token issuance without insider participation, revenue is used to buy back and burn agent tokens on-chain, creating a deflationary effect. Just like memecoin attracts attention, AI agents offer the potential to generate real income.

protocol

The Virtuals protocol integrates AI, tokenization, and decentralized governance to create a co-owned ecosystem. For each new AI agent, 1 billion tokens are minted, giving users ownership and decision-making power. Through these tokens, users can influence the behavior and upgrades of the agent, promoting active participation in the community.

Revenue generated through user interactions (such as virtual events or premium features) is used to pay for AI operating costs and grow the agent's on-chain treasury. In addition, the protocol uses a buyback and burn mechanism to reduce the token supply with the intention of gradually increasing the value of the token over time.

 Agent-owned value streams

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

 Source: Virtuals Protocol White Paper

The AI agent runs seamlessly across multiple platforms, learning in real time from user interactions. This ensures a consistent user experience, and the agent is able to adapt and improve its intelligence to provide personalized engagement across platforms.

 Source: Virtuals Protocol White Paper

Public APIs enable AI agents to generate revenue through different applications, including games and entertainment. Users pay for premium interactions via $VIRTUAL tokens, which are then used to buy back and burn agent tokens, reducing supply and driving value growth. As more applications adopt AI agents, demand for AGENT and VIRTUAL tokens is expected to rise, further increasing their value.

 Source: Virtuals Protocol Whitepaper

Contributors can expand the capabilities of the AI agent by adding new features. Their work is rewarded through NFTs and stored in an immutable contribution treasury to ensure transparency and ownership. Governance is managed by a decentralized proxy sub-DAO, and validators monitor AI performance and are rewarded or punished based on the results of their decisions.

The protocol provides emission rewards to incentivize the creation and support of high-quality AI agents. These rewards are distributed to the top three liquidity pools with the highest TVL, encouraging competition among creators to develop the most productive agents. The system incentivizes continuous improvement, benefiting both liquidity providers and the ecosystem.

At its core, the Virtuals Protocol is a dynamic decentralized ecosystem where AI agents are able to generate real income. Contributors enhance agents through decentralized input, co-ownership, and ongoing development, positioning the Virtuals Protocol to become a key player in the AI-driven ecosystem. For more information on its structure, check out its white paper.

Token Economy

$VIRTUAL token is the core currency of Virtuals protocol and is used for all proxy token transactions. It runs on Base and Ethereum network, and the token address is as follows:

• Base: 0x0b3e328455c4059EEb9e3f84b5543F74E24e7E1b
• Ethereum: 0x44ff8620b8cA30902395A7bD3F2407e1A091BF73

Each proxy token is paired with $VIRTUAL to form its liquidity pool, and $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 constant demand similar to ETH or SOL in their respective ecosystems.

Revenue from AI services, such as each inference payment, is collected in $VIRTUAL and transferred directly from users to the on-chain agent. Part of the revenue is used for the buyback and destruction process, reducing the supply of agent tokens and increasing their scarcity, aiming to increase long-term value.

The total supply of $VIRTUAL is capped at 1 billion tokens, all fully unlocked. The distribution includes 60% in public circulation, 5% allocated to liquidity pools, and 35% stored in the ecosystem treasury. This treasury is managed by the DAO and has a maximum emission cap of 10% per year for the next three years.

 Source: Virtuals Protocol White Paper

While not yet traded on a tier-one exchange, $VIRTUAL supports a growing ecosystem and currently has a market cap of $150.7 million, ranking #264, with a fully diluted valuation of $150.25 million. Its deflationary mechanism and expanded use cases provide potential for future value growth.

The Virtuals protocol raised $16.61 million in an IDO on the Fjord Foundry platform in December 2021, with the token price at $0.661. It then conducted small rounds of financing on Enjinstarter and PAID Network, raising $125,000 and $250,000 respectively, with the token price at $0.015. Key seed investors include @DeFianceCapital, @CanonicalCrypto, @LongHashVC, Merit Circle, Master Ventures, Stakez Capital, and NewTribe Capital, which provided support in the early stages of the project.

 Source: Nansen

Competitors

The AI-driven Web3 gaming space is growing rapidly, with projects such as Nim, Altered State Machine (ASM), Olas, and Alethea AI quickly becoming key players. These platforms combine AI with Web3 to create decentralized ecosystems where AI agents are not just digital tools, but assets that can generate real value. These projects have some common goals:

• AI Integration : AI agents don’t just run in the background, they actively enhance gameplay, interact with users, and bring new levels of immersion through co-ownership.
• Decentralized ownership : Through a tokenized system, users can own, trade, and profit from AI agents, sharing in the value created by these agents.
• Cross-platform compatibility : These AI agents can run across different games, expanding their utility and value, especially as the Metaverse continues to grow.

Nim Network

Nim provides an AI-driven gaming blockchain stack on the Dymension network, focusing on flexibility, providing customizable modular AI agents that can be integrated into multiple games.

 Source: Nim Network @nim_network

What makes Nim unique : Nim is focused on creating AI agents that can run in different games, and its partnership with the AI Gaming Coalition further solidifies its leading position in AI and gaming collaboration.

Altered State Machine (ASM)

ASM's core innovation is its AI brains - evolving NFTs that can power NPCs and avatars in a decentralized environment. Although gaming is its main focus, ASM is also exploring the metaverse. These AI brains can be trained, evolved, and traded in ASM's marketplace.

 Source: ASM @altstatemachine

What’s Unique about ASM : ASM’s evolved AI brain and NFT marketplace enable users to customize and trade their AI entities, adding new layers of personalization and monetization.

Olas

Olas takes a broader approach, and although it is not built specifically 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 industries.

 Source: Olas @autonolas

What makes Olas unique : Olas focuses on integrating AI and blockchain, supporting multiple chains and providing a strong governance system, making it a multi-functional AI ecosystem that goes beyond gaming.

Alethea AI

Alethea AI is a pioneer in intelligent NFTs (iNFTs). Users can create, train, and monetize AI-driven avatars that can run across different platforms, from games to the metaverse. Its focus is on creating highly personalized, lifelike AI avatars.

 Source: Alethea AI @real_alethea

What makes Alethea AI unique : It combines AI interaction and NFT ownership, allowing users to create highly interactive and personalized virtual images, enhancing the user experience by providing lifelike AI.

While each platform has its own unique approach, Virtuals Protocol stands out with its AI agent co-ownership, buy-back and burn revenue model, and cross-platform integration (beyond gaming). Together with decentralized governance and ongoing AI evolution, these elements make Virtuals Protocol a notable player in building a sustainable, revenue-driven AI economy within the Web3 space.

Fundamental positive factors

• The Virtuals protocol is tapping into a growing AI market, particularly in the gaming and entertainment sectors, where AI applications are expected to reach $42.1 billion by 2032. As AI continues to reshape industries, this presents an interesting area of development for Virtuals.
• The rise of AI companions is changing the way people interact with their digital environments. Through AI agents like Luna, Virtual Protocol is well positioned in this space, which is expected to generate $150 billion in revenue by 2030, providing personalized and interactive experiences.
• Generative AI drives continuous content creation, enabling the Virtuals Protocol to engage users through real-time experiences. This dynamic interaction helps maintain long-term engagement, especially in gaming and entertainment.
• The Virtuals Protocol’s decentralized ownership model allows users to co-own and generate revenue from AI agents. This structure creates a strong incentive for users to participate in the cross-platform growth of AI agents.
• Additionally, the protocol’s deflationary token economics (via buyback and burn) supports long-term value growth through a reduction in token supply.
• Virtuals Protocol’s AI agents are able to operate across different platforms, such as Roblox and TikTok, which adds versatility to them, ensuring relevance in other digital industries beyond gaming.
• As Web3 and AI continue to develop, the Virtuals Protocol is expected to play an important role in this emerging field, and AI agents that improve user experience and generate revenue on decentralized platforms may become key assets.

Fundamental risk factors

• Despite a market cap of nearly $200 million, Virtuals Protocol reported just $48,000 in revenue as of August 2024, suggesting its main growth phase may still be in the future.

 Source: Virtual's Substack

• Over 50% of $VIRTUAL’s trading volume comes from decentralized exchanges, leading to increased volatility. However, over $10 million in liquidity in DEX pools keeps price impact low, but price stability may still be an issue for large investors.
• The buyback and burn mechanism is designed to generate deflationary pressure, but its long-term sustainability is uncertain. Similar strategies in other projects face challenges in maintaining value.
• The Virtuals Protocol is not yet listed on a tier-one exchange, which limits liquidity and user adoption, potentially slowing its growth and weakening market acceptance.
• The protocol is in a highly competitive AI market, and it is difficult to stand out and gain market share in a rapidly expanding ecosystem.
• Recent interest in Virtuals Protocol has been driven primarily by the AI meme narrative driven by Luna, an AI-related initiative. Despite the potential of AI Companions, public attention could quickly shift, leading to uncertainty about continued engagement.
• Virtuals Protocol is also subject to typical blockchain risks, such as potential hacking or code vulnerabilities. Without strong security measures and robust coding practices, these risks could damage its reputation and erode user trust.