Is there a chance that crypto gaming will explode in 2023? There are mixed signs, with Axie Infinity, a former play-to earn darling, falling out of favor. Mainstream gamers also report that Web3 games have still issues with playability.
With projects like Illuvium getting attention, the bright spot is that AAA gaming is finally beginning to emerge in Web3. And there’s a ton of runaway, considering that Web3 gaming raised $4.5 billion in 2022. Comparatively, metaverse projects have raised $1.9billion.
Although the thesis is convincing for crypto gaming, it is not clear how to proceed. Are tokenomics helping gamers to immerse themselves in the game or distracting from the experience?
“I think the first big win will come from a game with tokenomics that don’t explode and implode in six months, and that also doesn’t feel like a ‘crypto’ game,” Geoff Renaud, co-founder and chief marketing officer of Web2-to-Web3 creative marketing agency Invisible North, tells Magazine.
“StepN showed a ton of promise for easy onboarding and user experience but was marred by bad economics. Once there’s a game model that feels frictionless — where you don’t even know you’re on the blockchain — and that has sustainable incentives for users, there will be a massive follow-on effect. Blockchain gaming needs to have one big win, and I have a feeling that’s more likely to be from a simple mobile game that looks like Candy Crush than a AAA title out of the gates.”
It is crucial to get it right in order to unlock mainstream adoption of crypto. Illuvium founder Kieran Warwick tells Magazine that blockchain gaming is the “best case of onboarding the mainstream to crypto, as it’s easier to onboard the masses through a game than a complex DeFi product.”
Commercial success is not easy, despite compelling numbers
Many believe GameFi has a bright future. According to a report by consulting firm MarketsandMarkets, the global blockchain gaming market will grow from $4.6 billion in 2022 to $65.7 billion by 2027. Naavik Ventures and Bitkraft Ventures foresee blockchain gaming growing to a market of $50 billion by 2025.
These projections seem plausible. Perhaps. DappRadar reports that GameFi accounted 49% of all DApp activity for 2022. There are over 3 billion gamers in the world, with about half of them in Asia-Pacific. Mobile gaming is also a big trend in developing countries.
The problems that face mass onboarding of blockchain gaming are complex and varied. No one seems to understand how tokenomics should work. Many gamers also view crypto games as scams and selfish attempts to monetize gaming. Axie Infinity, MIR4, and other relative success stories are not the only ones that have had success with crypto gaming.
Web3 is a great addition to gaming culture, despite its many criticisms. Take into account existing freemium gaming platforms (with paywalls). Gamers must pay for skins (clothes or accessories) in Web2 games. The Web3 model proposes that gamers should be able to own their in-game assets.
Web3 gaming allows gamers to trade or trade assets with earning potential. They can also keep their assets in case games are stopped or discontinued. It is possible to improve player experience by rewarding players for being loyal or early players. This allows them to acquire rare items when new games are released.
As it was for crypto’s cypherpunks, open-source culture is also part of gaming history. Sometimes game publishers were open to hackers hacking their games in order to make them more replayable and challenging.
As told in Netflix’s docuseries High Score, college students hacked and boosted Atari’s Missile Command in the 1980s to make the game harder to beat, creating a booming black market arcade in their dorm room and booster kits for the arcade machine. Atari legally settled with the students — but only if they agreed to work for Atari. In this conception, gaming IP hacking can escape punishment if you’re a true fan helping to improve the game. The idea of fan ownership is both a good and a bad thing in crypto and open source culture.
Similarly, what’s happening in Web3 today is an example of “a decentralized remix culture where there is a utilization of assets or traits related to those assets,” says Kishan Shah, chief operating officer of B+J Studios, which raised $10 million in September 2022 to bring its Raindrops Protocol NFT super app to life for blockchain-based gaming solutions.
Where will the winners be found?
What games, out of all the projects that make up GameFi, will be most successful? Indie games are often looking for something new, which opens up the possibility of blockchain gaming. As a result, smaller publishers are more likely than big studios to develop interoperable or player-owned game economies.
“The video games industry does about $120 billion per year in sales, a significant portion of which is virtual goods,” noted a16z general partner Chris Dixon, adding that “most video games have 100% take rates [commissions for sales]. Web3 (aka crypto) games reduce the take rate dramatically.” That is, Web3 gaming can change the whole economic model of the gaming industry.
So, the future looks bright, but getting there won’t be easy. Game-making is very hard and highly specialized, and just because crypto firms want to make games doesn’t mean they should. “Blockchain companies building games is stupid. Game design is a very specialized profession,” David Hong, an American based in Taipei who is the gaming lead for Red Building Capital, tells Magazine.
“Games should be coming out of gaming studios recruiting blockchain experts.”
Also, the big studios have established distribution channels and a waterfall cycle for their releases. The release date for a game on PC or consoles, as well as third-party retail sales, can all be decided years in advance. This makes it difficult for a start-up to decide what the game will look like. Tokenomics is another factor that can complicate matters.
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Everyone does not get the in-game tokenomics
One problem is that crypto gaming tokenomics are not sustainable.
“Everyone just copied Axie’s two-token economics,” notes Hong. Nobody knows what the best practices in-game tokenomics look like. Most now argue that “pure Ponzi schemes of 99% speculators and 1% players are not sustainable. This is because game-playing enthusiasts know that game mechanics are very intricate, and degens and power gamers will always break the system,” Hong says.
Warwick says he “called Axie Infinity a Ponzi a couple of years ago, as it required more users to keep entering the ecosystem. Axies were identified as having inflationary properties due to the breeding feature, which resulted in a significant decrease in the value of assets. The abundance of assets created a lack of scarcity, contributing to the devaluation of these assets.”
It seems unlikely that Axie’s developers set out to build a Ponzi scheme, and many pay tribute to the hard work they put in to build what would become a beta test of metaverse gaming. What’s more likely is that they just couldn’t make the token economy work without new gamers, like any startup pivoting to find a product-market fit.
Warwick is keen to explain why his game, Illuvium, has learned how not to fall into those traps and how the game’s story and lore create a scarcity for its NFTs. Illuvials are the game’s equivalent creature to an Axie.
Fusion of three Illuvials belonging to the same stage is a way to burn NFTs and create one Stage 2 Illuvial. To create the strongest creature in the line, you must burn nine NFTs.
Also, sets of Illuvials can be limited. Gamers have the option to collect Illuvials up until a series ends. At that point, they are unable to capture that set and must purchase them on an open market. There’s also a bonding curve that increases the difficulty of capturing the creatures, meaning that they gradually go up in cost over time. This is how the game explains that once an Illuvial has been captured, it becomes harder to find it in its Overworld home.
Furthermore, the concept of “real yield,” or sustainable revenue for gamers, is also emerging in blockchain gaming. Warwick says:
“Baked into our tokenomics is a system called revenue distributions, which means all of the in-game fees that are generated are distributed back to stakers in the protocol. We’re the only game that is currently utilizing this method (to my knowledge).”
Last but not least, elements like fire, wind, water, and water may become more popular as they are no longer considered undesirable. “Like Pokemon, you want to capture the most powerful,” says Warwick.
While these things may create scarcity, they also help tokenomics. However, the game has to appeal to the emotions. Like Hong, Warwick believes a game’s success “depends on its ability to tap into the psychology of collecting and creating a connection between the characters and the audience.”
Axie Infinity, for example, was inspired by Pokemon and Tamagotchi when creating its creatures. Elsewhere, building a universe of characters that players can connect with — like with Nintendo’s Mario, for example — and contrasting them with lesser-known characters — like Bowser and Wario — who are also beloved by players for their distinct personalities helps create a compelling ecosystem. It’s important to create characters that players can relate to, even for those who pick Wario because they see themselves as the villain.
The most difficult task for any game developer is creating a good game.
What makes a game good?
We all have our favorites, from retro classics such as Space Invaders, Mortal Kombat, and Fortnite to Grand Theft Auto and Halo depending on our age and preferences.
The story, characters and gameplay are key, as are games with enticing rewards systems that make your hard work worth it — unlocking new levels, characters, weapons, secrets and achievements. Gamers have a reason for playing, and blockchain will give them digital ownership over the rewards.
Good graphics help a lot, too, say most gamers — but not always. There are still many arcade games that appeal to new generations. Gaming VC Hong is currently obsessed by Torn, a very basic arcade game. He plays against his brother in law. “The social element is important,” he says, and the community must be authentic. AAA publishers cannot offer something like indie games with high-quality graphics.
A key factor in a game’s success is its difficulty. However, in online games — which are arguably the most popular these days — it’s about ranking up, improving skill levels, progressing, getting better gear and cosmetics, and playing with friends.
Hong believes that Web3 gaming requires incremental changes. “It must be palatable for Web2 gamers. Is it possible to imagine anyone wanting to use a different platform? Word and Excel still work for me. There should be value for time spent in the game, but everything else should be the same as Web2 games.”
It’s difficult to find a good crypto game to invest because Web3 games are not yet popular. “I don’t really get into the details of the game. I don’t invest in some drawings and a storyboard. Nobody knows what the market wants. I can only look for good quality teams that understand gaming psychology and good token models,” muses Hong.
Hong continues to meet with as many teams every day in order to discover the magic tokenomics model.
There are many interesting experiments underway. For example, Racer Club Labs is creating a blockchain-based “BYO” (bring your own) tokens racing game for 2,500 NFT communities. There are 10 heroes in each Racer Club. These heroes were created using IP assignments of NFT holders who have already been part of these communities.
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Imagine that, during club creation, a Mutant Ape Yacht Club holder assigns their unique 2D NF to be immersed in a MAYC Racer Club as a 3D hero. The MAYC Racer Club is a 10-set club license that can be sold or traded individually when this happens ten times.
The idea behind creating scarcity is to use existing NFTs or tokens, rather than issuing new ones.
“To date, gaming still has no proven tokenomic model. Esports is the bridge that will take us to the mainstream. My prediction is that whoever does it right wins the race this year,” Racer Club Labs co-founder Matt Ng opines.
Racer Labs is based on NFTs from around the world, but there’s little chance that major companies will adopt this approach. Warwick says it’s a pipedream:
“The interoperability conversation is bullshit. Interoperability across the board is a lofty goal, but it is still many decades away. It’s unrealistic to expect characters like Mario from Mario games to appear in Call of Duty. There are many technical and logistical factors that need to align for interoperability.”
He believes that interoperability can begin within the games of the same franchises or the same studio.
The transition from play-to earn to play-to own to play and develop
Lifelong gamer Elisabeth Hare tells Magazine that gamers need more — and that blockchain can give it to them. “We need a paradigm shift where the power comes back to the people. Blockchain gaming is necessary because of the current state of gaming. Gamers don’t own what they are buying, and they constantly need to buy things.”
She acknowledges that game developers have been exhibiting poor behavior, such as releasing bugs-based games designed around monetization, which has hurt the demand for blockchain gaming.
“Take Overwatch, for example. Activision Blizzard took the game apart, republished it as a sequel, and heavily monetized. The actual ‘new’ element of the game has been delayed at least a year. This is one of the reasons why I’m not surprised gamers are skeptical about monetization.”
Hare believes games should have gameplay mechanics that go beyond earning. Hare is eager to see if there are any Web3 games that prove her point. “The perception in the gaming community is that NFTs provide more ways to extract money from the consumer. It’s a money grab.”
Education and careful design are therefore essential. NFTs were released by AAA studio Ubisoft in response to gamers’ outrage. Ubisoft responded that gamers didn’t understand NFTs.
“With emerging and controversial tech, gaming companies need to clearly demonstrate the benefits of that tech, or implement it in a way that’s appealing or essentially invisible,” Hare says.
There needs to be a “shift in the way NFTs and Web3 concepts are communicated to gamers, in that the Web3 parts should be hidden in the product,” says the lifelong gamer.
While a Fortnite skin NFT for Minecraft is still a ways off, the quest for the Web3 gaming gem remains.
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