This is the fourth article in our Thematic Analysis series. In this series, we talk about broader trends and emerging concepts in the crypto space, looking towards the future and analysing how Web3 is evolving in real-time. Let’s dive in!
Theme: Web3 Games
Introduction 👋
Cryptocurrencies and other Web3-related technologies have revolutionised how value is exchanged. Middlemen like banks and other centralised entities are gatekeepers who authenticate and secure transactions in exchange for high fees, control over user data, and, often, average services. Crypto aims to replace these centralised intermediaries with blockchains that are validated by decentralised entities all over the world.
An industry that has the potential to benefit from blockchain technology is gaming. Gaming has traditionally been considered an unproductive activity as there is no ‘useful output’ from it. The virtual assets gamers earn are only useful within the game’s ecosystem and cannot be ported outside it or monetised in any way. Tokenisation allows gamers to trade these virtual assets on blockchains for real money and be rewarded for the time and effort they put into games.
So far, crypto games have been more about hype than substance, with inflated valuations, Ponzinomics and sub-par gameplay. There has been a greater emphasis on the earning aspect as compared to the gameplay aspect. Even then, the in-game economies have worked only in bull markets, with a complete crash in value and heavy user attrition in this sustained bear market. The gameplay, which is the aspect that attracts gamers to a game in the first place and is overwhelmingly the primary contributor towards gamer stickiness, is sorely lacking in Web3 games today. Games like Axie Infinity aren’t very interesting to play in and of themselves, with the gameplay heavily revolving around ‘grift’, or repeating the same task endlessly and mindlessly. When the tokens you earn from grifting constantly go up in value, the boredom is bearable. But when you’re not earning enough money, then there is no further incentive to play the game.
The future, however, holds a lot of promise as large game developers enter the space to focus on the number one priority – gameplay – and early mistakes and misfires in economic design chart a path towards what to prioritise and what to avoid.
Let’s dive into the crypto gaming space and come out with a clearer picture and overall thesis for it.
Market Overview 🏪
Crypto gaming hit its peak towards the end of 2021 when US Federal Reserve interest rates were near zero. The low cost to borrow money resulted in soaring speculative markets, crypto gaming included. During this time, the most well-known blockchain game, Axie Infinity, reached its peak valuation at around $160 per AXS token – putting its fully diluted market capitalization at $43.2 billion. However, as you can see from The TIE’s GameFi price index, the market has fallen well off that high:
There are still a few games such as Splinterlands that have several hundred thousand users, but by and large the experience has been subpar as compared to traditional games. There are a few reasons for this:
Steep learning curve to understand how to create and operate wallets. Gamers don’t want to learn how to set up wallets and earn random tokens that seem like in-game currency to them, they want to play the game. Setting up a wallet is a significant friction in UX.
Scalability bottleneck and low throughput on most blockchains currently (high fees and slow transaction finality), which is not ideal for multiplayer, resource-intensive, immersive games that need extremely low latency.
Focus on tokens and earnings over gameplay and enjoyment, the primary factor contributing to the (at best) middling reaction to Web3 gaming. There has been a mismatch in the skill sets of GameFi teams – many are composed mostly of crypto-native devs rather than experienced game devs, leading to the focus on tokenomics rather than gameplay. The short development cycles to capitalise on the hype reinforce this disparity as well, with AAA games taking a few years (5-7) to build currently while many low-quality crypto games have released in the last few years. The games end up being not fun enough for gamers to want to play them, and not lucrative enough once the token incentives end for crypto natives to continue using them.
Ponzi Scheme-like tokenomics. Crypto game developers have not yet developed a ‘perfect’ tokenomics model – usually, the end result is hyperinflation of the game’s currency and an imbalanced relationship between sources and sinks of value, with the game only being able to sustain itself through increasing token price and attracting more users to buy the native token. Once the music stops and number stops going up, there is an even faster downward spiral of users and token price.
High barriers to entry. At the peak of its mania, it cost more than $150 to start playing Axie Infinity, a game with magnitudes worse gameplay than Fortnite which, like many of its peers, is free to start playing. There isn’t a huge incentive to start playing. When price to enter is low, the earnings are also low, and given the gameplay isn’t fun…well, we know where this is going.
This may sound terrible, but crypto gaming is an extremely nascent space. As more capital and funding enters this industry, all these problems have a good chance of being ironed out. Let's discuss the pros, cons, and solutions in further detail.
How Does Blockchain Augment the Gaming Experience? 🎮
Ownership & Tradability
As a base rule, player ownership of assets is better than non-ownership of assets. Players should get tangibly rewarded for their efforts while having fun at the same time. If you’re an early player of the game, have spent a lot of time working through levels to get the best skins and items, you should be able to sell it, display your achievement on social media, or use it as part of your on-chain identity.
An Experiment in Cooperative Game Development
One major point of differentiation is cooperative game development, where game studios can work closely with their communities to build games. The studio would build the game and lead the development of the storyline, gameplay, tokenomics, etc., but incorporate heavy input from their communities. If games are built on public blockchains with interoperable standards (e.g., Ethereum L2s, a Cosmos app chain, or an Avalanche subnet), then communities can come together to co-create games, incorporate each other’s characters, and create an open economy that isn’t available today. Communities get to be intimately involved with the games they love to play, while studios and developers have closer relationships with and learn from their users.
There are many ways to achieve this equilibrium between communities and developers in a way to ensure both low latency and trustless ownership and tradability. For example, games can be part-centralised with game actions stored on off-chain servers while any transactions involving the exchange of value could be decentralised and stored on a public ledger. This enables resource-intensive actions to be computed and run more efficiently off-chain, preserving game mechanics and gameplay. Centralisation and decentralisation for a game is a sliding scale, and the entire game stack does not need to be on either extreme. Rather, as with most of Web3, a balance needs to be found in the middle.]
Stakeholder Alignment via Tokenomics
One of the core principles of and benefits from Web3 is how it uses token-based economic systems to align incentives across all stakeholders in a manner that, in a positive sum loop, result in a net benefit for the ecosystem.
It is critical that incentive alignment does not just end with players. Web3 is meant to encompass everyone, and there are many participants in a gaming ecosystem which contribute to its success, each of whom should be empowered and incentivised to perform different actions. Take an example from Derek Lau’s Gaming Industry Map:
As we can see, there are multiple stakeholders that all need to be pulling together to build and deliver games. It isn’t necessary that they all get incentivised via tokens – for example, hardware can be bought from hardware developers and games can be streamed on both Web2 and Web3 platforms. Other stakeholders, though, may not have as much of an incentive in participating in Web3 game development. Game publishers may not want economic value to leave their contained ecosystems, while their take rate would reduce in a system where earnings are distributed more equitably across the community and other stakeholders. The same applies to digital distributors like Steam, Apple, or Google, since they currently take ~30% of revenue generated by developers. In these cases, communities can potentially create new entities to fulfil traditional roles and incentivise them via tokens, but this is only one of many possible options.
New Business Models
Web3 unlocks brand new business models. A prime example is the democratisation of fundraising. Teams can have NFT or token sales to bootstrap capital to then produce a game, which is very different to the traditional model where teams raise funding after getting to each milestone. This gives game developers the ability to raise the requisite funds from a community of individuals, rally that community to become the earliest fans and adopters, and iteratively test the game through its development with a core set of users.
Moreover, the composability and potential interoperability of token-based game assets means that you can imagine a world in which two gaming communities collaborate to release a ‘special edition game’ incorporating both their ecosystems. A user that has played and gained rare items in both games can conceivably ‘merge’ the power of these assets in the special edition game, flaunt the assets, and already have a well-defined identity in the new game that they do not have to develop from scratch. This can increase gamer stickiness and loyalty and enable them to have an in-game identity that grows across games and time, allowing them to form a long-lasting bond with their games and identity. Maybe a bit far-fetched and utopian, but entirely in the realm of possibility.
Problems with Web3 Games 🚨
We have already extensively touched upon the problems with Web3 games today, but there are some root causes of these issues.
Firstly, NFTs and their marketing set a bad precedent for games. NFTs started with art and then evolved into a set of 10,000 profile picture type collections where the expectation was to buy earlier and low and sell to someone later at a higher price. These NFTs had no utility other than flexing, although their broader ecosystems are being currently built out and they could be a lot more fun and useful going forward. The NFT craze happened in the midst of the bull market mania, which pushed their prices up to ridiculously high and unsustainable levels, causing a lot of greed and speculation to seep into the space. This mentality creeped into gaming projects who also released limited NFTs for access to their games, not realising that this turned off a lot of core gamers who thought of the projects as untrustworthy cash grabs looking to exploit and monetise their communities. Moreover, the speculative aspect attracted crypto traders who just wanted to make a quick buck to these NFT projects, bringing in a lot of negative attention to the space and leading a lot of commentators and gamers to (maybe rightly) deride the entire Web3 gaming community.
Secondly, DeFi set a bad precedent for games. The same liquidity mining scheme of staking now for inflationary rewards in the future was applied to games. These Ponzinomic loops allowed capital to flood in quickly but also caused it to dry up as fast when the rewards stopped. Copy-pasting DeFi and NFT logic to games was a stopgap solution. This caused earnings from games to become unsustainable. Inflationary rewards attracted capital, but also diluted all existing holders of the token. There was constant downward price pressure that was masked by the massive inflow of capital in the space in 2021.
Lastly, as mentioned above, costs were a massive barrier to entry for the average gamer. In addition to that, gas fees on blockchains increased dramatically. This resulted in a lot of additional costs to gamers and increased user friction. It also automatically advantaged players who had a greater amount of capital.
Well, how can these problems be fixed? Well, it’s not rocket science:
Build a fun game first – prioritise rewarding play and not clicking!
Significantly reduce the cost to entry – or make it free, otherwise you’re not going to be able to compete with today’s free-to-play behemoths.
Get rid of ‘staking’ – it isn’t really staking since you’re not using it as a method of securing the network, but rather as a mechanism to incentivise players to hold on to their tokens.
Separate the external and internal economy as much as possible.
So, what should be kept in mind when designing a Web3 game?
Designing a Web3 Game with a Sustainable Economy 🪙
An economy can be described as a flow of currency and resources that move around the system. A currency is something that has no use other than to exchange for the items in the game. A resource is something that has a use in-game. It may also be traded for other resources. This distinction is very important as it will give you a better insight into the economy you are creating.
There are 5 different inter-connecting actions that players take that affect the flow of money in and out of an economy, just like a regular real economy. These are:
Sources & Sinks
A source is a way to gain a currency, such as selling items, opening chests, or slaying enemies, while a sink is a way to lose currency, like buying items, dying, or repairing and upgrading gears.
There are 2 important aspects of these sources and sinks an economic designer will have to focus on: how many of each will their different currencies have, and the balance between these gains and losses, which will translate into what we refer to as ‘generosity’. We’ll touch upon this concept below.
Converters
A converter, as the name states, changes one resource into another. This is a way of removing the resources that enter the economy via Sources. Some resources in the economy are useful in the state you get them (like ammo, health, money) but others on their own will not be useful. In some games, the conversion rate will have a direct impact on the pacing of the game. A game could use converters in the following (non-exhaustive) ways:
Convert 1 unit of Resource X into multiple units of Resource Y, increasing the number of items in the game and acting as a Source;
Convert 1 unit of Resource X into one unit of Resource Y, keeping the number of items in the game stable;
Convert multiple units of Resource X into one unit of Resource Y, reducing the number of items in the game and acting as a Sink.
Traders
A trader buys and sells resources with their own agency. In ‘traditional’ game economies, this is one of the rarer pillars to have in the game, but they add an entirely new level of complexity (and this is the only pillar that most developers focus on in their blockchain games). Traders will not necessarily contribute to the creation and utilisation of resources but can nevertheless have an important impact on sources and sinks. For example, if a trader buys up a lot of Resource X over time but then suddenly dumps it, the price and value of Resource X will sharply drop. Therefore, it is vital to control the autonomy traders have and judge the impact of a free-flowing marketplace on the overall gaming experience.
Inventory
The inventory is a collection of items a player can hold and is usually limited. An inventory helps in enforcing upper bounds on the number of assets or items a player can individually hold, which stops hoarding and significant fluctuations in price if a player decides to sell those items.
The below image from GD Keys highlights how these elements interplay with each other:
Some Pointers for Designing Web3 Games 🫵🏾
Pointer #1
Define the number of sources and sinks of a currency by how much agency you want your players to have in playing or progressing through your game systems.
Pointer #2
The balance between sources and sinks should vary over time and can be used to influence player behaviour. Giving them greater currency and agency at the start of a game (sources > sinks) can incentivise them to continue playing and make them feel like they are succeeding in the game, but this cannot continue throughout the game. If sources are always easy to come by, then the currency will hyper-inflate and essentially become useless. Moreover, players will become bored if it is too easy to play the game and they can buy anything they want, whenever they want it. As the game progresses, each player has different motivations that can be gleaned from the actions their character has been taking. Sources and sinks specifically related to those motivations can be tinkered with and made bespoke for each player (or group of players with similar motivations).
Pointer #3
Ensure that players are not rewarded in disproportionate ways when they perform certain activities, since these can unbalance the game’s economy and incentivise players to just try to get those excess rewards at the expense of others.
Pointer #4
Generosity is a measure of how much currency is awarded to players throughout the lifecycle of the game. Being too generous, or not enough, will lead to a drop in player motivation and should be tracked and tuned carefully by designers.
Pointer #5
In case game economies crash and currencies hyper-inflate, have a Plan B (or C, D, E, etc.). If the economy needs to be jump-started, use methods like increasing the price of items so that the currency still has value, introduce new forms of currency, or adjust the balance of sinks and sources to achieve equilibrium.
Predictions for the Future 🔮
Given the state of Web3 games today and how nascent they are, it is premature to make any predictions. Regardless, we’ve given it a go!
Web3 Games 🤝🏾 Web2 Developers
Web3 games made by Web2 developers will start to hit markets in the next 2 to 3 years. They can cause a massive onboarding of new crypto gaming users, since the games will focus more on gameplay and will be augmented by token economies, rather than be built around them. AAA games made by Web2 developers have long development cycles, cost upwards of $200 million to build and market, and hence need to perfect their game designs prior to launch. Web3 games have had lower budgets and much shorter development cycles, which they have rushed to market to capitalise on hype. A heady mix would be a well-thought out, well-structured AAA game incorporating Web3 elements and tokenomics.
Core Gaming Loops 🤝🏾 Token Economic Design
Core gaming loops will be addictive in the best games and will be the main reason players keep coming back. If these core game loops are crypto-fied in the correct way, monetisation opportunities will be high. Gaming NFTs will be crucial to this with new innovations like Soulbound tokens and evolutionary NFTs having a potentially crucial impact on game design.
Managing Web3 Game Economies
Web3 gaming economies will have actual monetary value, which could rise to billions of dollars for some games. Ensuring monetary survival of in-game resources and currencies is crucial. Hence, every game will have some kind of central bank or governor elected by the community – maybe a Head of Economic Design – who will be responsible for ensuring a stable, balanced game economy while fielding and incorporating input from the community.
Ponzinomic Games in the Near Future
In the near term, crypto games that focus more on economics than gameplay will launch quicker due to shorter development cycles. Many of these will have Ponzinomic design choices that will stifle growth of the crypto gaming space and lead to more vitriol from gamers and the broader ecosystem. This cycle will only be broken by the first ‘successful’ Web3 game, which will outline a path for other games to follow.
Gaming Guilds
Gaming Guilds will have massive amounts of financial muscle in the future with vast DAO treasuries at their disposal. A gaming guild can own tokens and resources from various Web3 games and employ the best gamers. This offers opportunities for gamers to earn stable income and for investors to diversify revenue sources by investing in these guilds, which are essentially indexed returns of the most successful gamers across games.
Closing Thoughts ⌛
The Web3 gaming economy is very nascent and has a lot of issues that need to be ironed out before it hits the mainstream. The potential, however, is apparent and economic designs enabled by tokens have the potential to hugely augment traditional games and be the trigger for the next stage of the evolution of games.
Bibliography 📖
Disclaimer
This is a personal blog. Any views or opinions represented in this blog are personal and belong solely to the article authors and do not represent those of people, institutions or organizations that those authors may or may not be associated with in professional or personal capacity, unless explicitly stated. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.
👇🏽 please hit the ♥️ button below if you enjoyed this post.