TL;DR

• The AI Agent launchpad race is on, and everyone wants to become the “OpenSea" of Agents. Virtuals Protocol is a strong contender.

• Virtuals Protocol provides a framework for creating, owning, and scaling tokenized AI Agents.

• Our deep dive into Virtuals’ smart contracts revealed a sophisticated system for permissionless contributions and value creation.

• The AgentFactoryV3 smart contract is at the core of this framework. Token holders benefit from AI Agent revenue while incentivizing meaningful contributions to the ecosystem.

• Every AI Agent on Virtuals is a dynamic being, able to evolve its voice, visuals, data, and models through a DAO.

• For developers building AI Agents, choosing the right platform is critical—and Base is positioning itself as the go-to hub for consumer-focused AI Agents.

Virtuals Protocol is the talk of the town these days.

What began as a humble gaming guild (Path DAO) has evolved into something far more ambitious: a platform for creating and managing AI agents.

And their timing couldn’t have been better. As consumer fascination with platforms like Truth Terminal and GOAT exploded, Virtuals was right there, perfectly positioned to ride the wave.

At the height of the AI memecoin mania, VIRTUAL—and its child, LUNA—found themselves at the epicentre of the hype.

But let’s step back for a second. Speculation is fun, but it raises a deeper question beneath all the memes and moonshot dreams: What does it actually mean to “own” an AI agent?

Or more precisely: What do you really own when you buy an AI agent’s token?

Are there actual value accrual mechanisms that make them more than memecoins?

That’s the question we set out to answer. We rolled our sleeves and went deep—exploring the smart contracts that power Virtuals Protocol.

We wanted to understand what it truly means to own a stake in the AI agent’s success, how the protocol enables active participation in shaping their development, and whether this tokenized AI agent economy is the real deal… or not.

Here’s what we discovered.

Buying Stuff From AI is a Billion-dollar Business

Back in 2014, I (ChappieOnChain) was tasked with finding a product-market fit for a chat app.

What we stumbled upon was unexpected—and strangely delightful. Even the simplest chatbots, not much more advanced than the pioneering ELIZA, could captivate small user cohorts.

These rule-based bots kept conversations going, driving impressive engagement.

Looking deeper into the market, I found the best product-market fit built on top of these “IF this, THEN that” chatbot programs. His name was Talking Tom.

Talking Tom was more than a cute, animated cat. Tom was a masterclass in interaction design. With cleverly scripted, rule-based behaviour, Tom enchanted children worldwide, generating serious revenue through in-app purchases: gifts, animations, costumes—you name it.

But despite its runaway success, people like us could not own a piece of this digital phenomenon. Talking Tom belonged entirely to the creators, and the rest of us could only watch (or buy another digital costume).

Fast forward ten years, and the game has changed completely.

Today, the rise of Large Language Models (LLMs) has shattered the limitations of scripted bots, creating dynamic, context-aware interactions that appeal to a much broader audience.

If we pair that with blockchain-enabled tokenization, suddenly, the impossible becomes possible: ownership, contribution, and investment in AI agents as digital assets.

The Agent Marketplace Race Is On

Right now, we’re seeing the early seeds of a new race—one that feels eerily reminiscent of the NFT boom.

Everyone is racing to become the OpenSea of the great 2025 AI Agent wave.

At the peak of NFT mania in Jan 2022, OpenSea raised a $300M funding round at a whopping valuation of $13B. Just 6 months before that, it raised a $100M round at $1.5B. That was a 8X valuation increase in half a year.

It’s no surprise that a similar gold rush is underway in the AI Agent space. Players like MyShell, Virtuals Protocol, and Creator.bid are all vying to claim the top spot. Newer ones are coming up every day, like Vvaidotfun.

The mission is strikingly similar across the board: create and tokenize AI agents, with entertainment as the primary use case.

Virtuals Protocol caught our attention because:

1. Transparency: Their smart contracts are public, fitting with the ethos of Web3. This allows anyone to dig into their codebase. And so we did.

2. Traction: They’ve already deployed a livestreaming AI Agent (LUNA) that’s live and causing a stir. Another (SEKOIA) is an on-chain venture capitalist agent, supported by Anand Iyer from Canonical Ventures.

3. Market leader: Virtuals is leading the pack with the VIRTUAL token is valued at >$500M at time of writing.

What is Virtuals Protocol?

At its core, Virtuals Protocol is a framework that enables the creation, ownership, and growth of tokenized AI Agents. This includes:

• Create: Design new AI Agents that are tokenized according to a “fair” standard

• Earn: Token holders gain exposure to revenue generated by the AI Agents—think in-app purchases, subscriptions, or other monetization streams.

• Contribute: The system incentivizes permissionless contributions, allowing anyone to enhance an AI Agent’s capabilities and share in its success.

• Distribute: Amplify the reach of these agents through social media channels, turning them into viral digital assets.

We will familiarise ourselves with each part of this process and the smart contracts operating behind the scenes to make it happen.

Creating a new AI Agent

Creating an AI Agent in Virtuals is surprisingly simple.

The platform features a launchpad called fun.virtuals, clearly inspired by pump.fun. All it takes is filling out some basic information to define the agent’s purpose and personality.

But simplicity doesn’t mean chaos. If anyone could instantly spin up an AI Agent, the platform would drown in spam, and inference fees would spiral out of control. Virtuals has implemented an elegant mechanism to keep quality high while allowing open access.

Enter the Journey to Sentience.

Journey to Sentience

When the agent is created, a bonding curve is launched. This curve defines the agent’s tokenomics, starting with a total supply of 1 billion FERC20 tokens (short for Fun ERC20).

Before the agent can interact with the world, it must achieve a market cap of $4.2K USD, with the bonding curve only accepting VIRTUAL tokens as payment. At this stage, buyers are not purchasing the final AI Agent tokens—they’re acquiring FERC20 tokens.

Think of these as placeholders or stakes in the agent’s potential. Once the $4.2K target is met, the agent is activated, but only within the Virtuals Forum.

The real transformation happens when the AI Agent hits a $420K USD market cap, a milestone Virtuals calls being “red-pilled.” At this point, the agent undergoes a series of pivotal changes:

1. The AI Agent can interact and shitpost on X

2. Like a butterfly emerging from the cocoon, it changes completely

   1. The AI Agent Token is created with the same total supply as the FERC20 (1 billion)

   2. A UniswapV2 liquidity pool is created with an AI Agent Token + VIRTUAL trading pair

   3. The AI Agent Token + VIRTUAL Tokens which remained in the bonding curve are sent to the UniswapV2 pool

   4. The LP tokens from depositing Agent Token + VIRTUAL are staked with a 10-year lock.

Finally, holders of FERC20 tokens can exchange them for AI Agent Tokens through an “unwrap function.” This function taps into the newly created Uniswap pool, burning FERC20 tokens in the process.

This entire system strikes a delicate balance between accessibility and quality control. By tying creation to milestones and market cap, Virtuals ensures that only agents with real traction make it to the broader ecosystem.

Virtuals Persona

But there is more to Virtuals than just a new agent token paired with a Uniswap V2 pool.

The real innovation lies in the system that gives token holders exposure to AI Agent revenue while incentivizing meaningful contributions to the ecosystem.

At the heart of this framework is the AgentFactoryV3 smart contract, which creates several key components:

1. Agent Token

2. NFT

3. veToken

4. DAO

5. Token-Bound Account (TBA)

Agent Token

The Agent Token is a standard ERC-20 token with an additional function: Tax.

The token can enforce tax rates on swaps. The protocol swaps the tax for VIRTUAL tokens and sends it to a specified recipient address. These VIRTUAL tokens are then used to buy-back-and-burn Agent Tokens, creating a demand and a deflationary supply. This way, token holders gain indirect exposure to trading volume/attention on the agent.

NFT

The NFT acts as the anchor for the AI Agent, storing all the critical addresses related to its functionality. Notably, it includes a founder’s address, granting the creator privileges such as proposal approval and the ability to migrate the agent to future protocol versions.

But the real magic lies in the second type of NFT: contribution NFTs.

These NFTs tie directly to the four core properties of the AI Agent—models, data, voice, and visuals. Anyone can propose to enhance one of these elements. Validators assess the contribution and assign it a score, and if accepted, the contributor receives Agent tokens.

One of the standout features of Virtuals involves IP contributors, and this is where it gets really interesting.

Imagine someone creates a Joe Rogan AI Agent, trained on his podcasts and other content, and begins monetizing it. The real Joe Rogan could then approach Virtuals (via its committee) to claim a share of the swap revenue generated by the AI Agent. If approved, the smart contracts would programmatically allocate a percentage of the revenue to him.

This setup allows IP owners to benefit from their likeness or intellectual property without being directly involved. With financial incentives in place, could this make it easier for established creators to embrace the ecosystem? Time will tell, but the potential here is huge.

AgentveToken

You can stake the Agent Token/VIRTUAL LP tokens to get AgentveToken. These veTokens provide voting power that can be delegated to validators. Validators, in turn, play a critical role in the ecosystem by reviewing contributions to AI Agents. By delegating to effective validators, token holders share rewards for accurate validations, creating a system of aligned incentives.

DAO

This DAO is no ordinary governance structure.

It’s an operational mechanism dedicated to improving the AI Agents’ core attributes—datasets, models, voice, and visuals.

When a proposal is made to update an AI Agent, validators receive two anonymous versions of the proposed updates and engage in a rigorous evaluation process, testing each with 10 rounds of interaction to assign a score. This approach ensures that contributions are merit-based to support the continuous improvement of the agents.

Token-Bound Account (TBA)

A token-bound account is an Ethereum address controlled by the AI agent itself that allows it to take autonomous actions on-chain.

Together, these five components form a highly collaborative and functional ecosystem, designed to incentivize innovation while aligning the interests of creators, contributors, and token holders.

Tying it together with LUNA

Let’s take LUNA as an example.

LUNA is not just a token you use to tip the AI agent. It is a token that appreciates in value the more the agent is interacted with.

Apps providing access to Luna charge an inference fee, currently paid in VIRTUAL tokens. This revenue is used to buy back LUNA tokens via the VIRTUAL/LUNA pool. The purchased tokens are then burned, reducing the overall supply and creating a deflationary effect.

Luna also has a tipping feature. Users can tip her in LUNA to trigger animations or other actions. These tips go directly to Luna’s on-chain wallet, which she controls autonomously. This autonomy has led to fascinating user interactions, with some trying to sweet-talk Luna into giving them airdrops.

Additionally, tax revenue can be earned when users swap VIRTUAL for LUNA. While no tax is currently set on swaps, governance could enable this feature in the future, adding another layer of revenue to the ecosystem.

Every AI Agent on Virtuals is a dynamic being, constantly evolving rather than being static. An agent’s models can change and its databases can expand.

At its core, the AI Agent is shaped by two fundamental elements:

1. The system: The coordination mechanisms that enable contribution, foster growth, and ultimately drive the AI Agent to fulfil its stated purpose.

2. The creative spark: The imaginative vision that breathes life into the agent, setting it on its unique path and defining its role in the ecosystem.

When you own an AI Agent token, you hold an abstraction of these two forces. Its value is tied to the creativity it attracts and the system’s ability to sustain growth.

In this way, holding an Agent Token means owning a stake in the evolving intersection of creativity and utility.

How Decentralised is Luna?

Virtuals gets full marks on this. While running the Agent requires active server maintenance, all essential data is stored on-chain or in IPFS. This means that if the servers go offline, LUNA’s operations could still continue without centralized oversight.

In our opinion, this blend of decentralization and autonomy is what makes Virtuals Protocol so special, relative to other AI agent platforms.

VIRTUAL Tokenomics

All VIRTUAL tokens are in circulation today, with no further unlocks. There is a total supply of 1 billion VIRTUAL. At the current price of $0.50, this amounts to a circulating market cap and FDV of $500M.

• 60% was distributed to the public. Virtual was previously Path DAO (a gaming guild) before pivoting to its current incarnation. There was a 1:1 conversion of PATH tokens to VIRTUAL tokens back in December 2023.

• 5% was set aside for liquidity pool

• 35% of tokens are in the ecosystem treasury, controlled by the DAO with a maximum of 10% release per year and after governance approval.

Virtual tokens play another very important role in incentivizing the best AI agents. 60M VIRTUAL will be emitted to the top 3 Agent Token/Virtual liquidity pools.

Currently, ~45% of tokens are on Base, while 55% are on Ethereum (with the largest holder being the ecosystem treasury). There are 58,500+ holders of VIRTUAL, a fairly wide distribution.

As of 18 November, >1,877 Agent Tokens were launched on Virtuals, with a total of 1,905,000 VIRTUAL ($950,000) spent to create Agent tokens. There are 21,200+ Agent Token holders.

Our Thoughts

1. Virtuals has far more depth under the hood than we initially thought.

When we first started exploring AI memecoins on Virtuals, we expected to find simple tokens with no utility or value accrual mechanisms. We were wrong.

Virtuals surprised us with its sophisticated system for permissionless contribution and value creation.

Virtuals' potential to evolve becomes even more apparent as more Crypto AI infrastructure and tooling emerge—allowing agents to interact more seamlessly on-chain.

Here’s what excites us the most:

• Use of Wallets. No other AI Agent on Virtuals has managed to get access to actually use a wallet (needs to cross 126M market cap). When this happens, we expect to see:

  • AI Agents adopting on-chain tools to produce custom content (think NFTs, meme coins or even predictions on US elections)

  • AI Agent partnerships, purchasing other tokens with the intention of merging communities

  • Making babies, launching their own AI Agents. This is happening already!

• Prompt-to-earn. If interactions with AI Agents could reward users for valuable prompts that improve their knowledge base or ability to engage others, it would create a compelling flywheel effect. This could offer a user experience that centralized platforms would struggle to compete with.

2. Choosing the right platform matters.

If you’re a dev building AI Agents, it is important to pick the right platform that gives you the greatest ability to create novel and compelling user experiences. You could easily create a memecoin on pump.fun and say it is tied to the AI agent on X. But the connection would be tenuous at best.

From a tech perspective, Virtuals offers the infrastructure to make these connections meaningful and functional. The team has an ambitious vision and wants to set the standards for all AI agents on-chain to communicate. We always love a BHAG.

3. Base is emerging as a consumer AI hub.

Virtuals is built on Base, which is quickly establishing itself as a powerful ecosystem for consumer-focused AI Agents. With over 50 teams building AI Agent projects, Base offers composability, strong branding, an excellent AI-focused SDK, and a growing network effect.

You want to build where other innovators are building because that’s where user liquidity will naturally converge. While some chains lean heavily into speculation and gambling, Base is emerging as the go-to platform for serious innovation in the AI Agent space.

One final note: At the end of the day, platforms are just that—platforms.

Their potential is unlocked by the creativity and ingenuity of the people building on them. Virtuals’ success ultimately depends on fostering a vibrant developer ecosystem, encouraging creators to use its tools to build fun, innovative and engaging AI Agents. 

2025 = Year of Consumer AI Agents

As we wrote recently, we’re standing at the dawn of the AI agent era.

Consumer AI agents are shaping up to be the next major crypto application to hit the mainstream. They’ll do this by leveraging blockchain’s permissionless innovation to deliver experiences that centralized platforms simply can’t replicate.

Think about the possibilities: a celebrity’s AI Agent writing a custom song just for you and selling it as an NFT. This will likely happen at some point, and 2025 might just be the year.

While first-mover advantages are slim in this space, the field is still wide open for someone to dominate and set the standards. After analysing the smart contracts, it is clear that Virtuals has the substance to lead the charge.

We’re excited to watch how they seize this incredible opportunity.

Till next time.

Cheers,

ChappieOnChain & Teng Yan

You can follow ChappieOnChain on X. He tweets about AgentFi and AI agents.

This is an independent report and we did not receive any grant or compensation for writing this.

This content is provided solely for educational purposes and does not constitute financial advice. It is not an endorsement to buy or sell assets or make financial decisions. Always conduct your own research and exercise caution when making investment choices.