Gaming is a spectrum
Going from play to earn, to spend to play.
Hey there,
Days like today remind us of how unforgiving bear markets can be. They constantly test how true you are to your thesis. Internally, we constantly debate about the themes that will continue to stay relevant during a market recovery.
Gaming makes an appearance in these conversations quite routinely. It is hard to have a strong view on because of the variables at play. Today’s issue looks at how we think the sector will evolve over the coming years.
It’s a given that we have to start this article with Axie Infinity as a reference point. At its peak, the game had over 2 million daily active players. This is an achievement, given the industry's size at the time. Turn-based card games have fewer players compared to a first-person shooter. Hearthstone, a card game by Blizzard, has about 200k concurrent players compared to Fortnite, which has 3 million.
Axie did an excellent job onboarding users, but the financial motives at play made it seem like a larger success than it was at the time. Instead of seeing the game as an on-ramp for millions, we built a narrative of potentially helping economies out of poverty with play to earn. The branding transformed it from a cool experiment to an unsustainable digital sweatshop.
At some point, it seemed the game’s sole purpose was providing employment instead of entertainment. The short-term success of Axie Infinity paralysed the creativity of all other blockchain game developers for years to come. Nobody wanted to own the crippling responsibility of maintaining livelihoods.
Remember the cool Physics experiment where every subsequent bounce is lower when you drop the ball? As an industry, we learn that lesson the hard way with every new narrative. Every bounce since 2021 has been a harsh lesson in the making.
Anyway, the relatively short-lived success of Axie Infinity made me wonder whether it makes sense to have games completely on-chain. To evaluate this, it makes sense to zoom out. Two key observations before we start -
Games or sports have been integral to our cultures since ancient times.
Our lives are much more digital than they were a decade ago.
The first will continue to be the case, and the second trend will solidify even more in the coming years. Why do I say that? I work from home in Mumbai with my friends who sit in Dubai. Although collaborating in person is next level, I am perfectly comfortable in this setting. In contrast, my cousins, who are a few years older than me find the notion of working from home quite absurd.
Recently, Joel shared a Bloomberg article that talks about how the scarcity of space has forced Beijing to pilot vertical cemeteries with digital screens instead of headstones. Before Beijing, even Shanghai opened a digital technology cemetery in August 2022. To quote the vice president of Fu Shou Yuan International Group Ltd., a leading funeral technology services provider –
The era of putting money just into the purchase of land and the amount of stone for funerals will soon be over. Rather, more money will be spent on science and technology and the emotional experience of cemeteries.
It turns out this has a practical benefit as well. It is far more affordable. For context, digital burials cost 1/3rd of what it would typically cost for burial in cities with high population density. In Japan, a proper burial can cost up to 70% of a person's annual income. Having graves in vertical buildings with digital screens is emerging as a viable alternative. These screens can show a memoir of the person's life using photographs, videos or even tweets if you'd like it to.
The point is, gradually, people are willing to spend more on digital items. And it can be observed in the changing in-game spending patterns. Virtual goods and subscriptions account for over half of the console industry's revenue. The fact that people are willing to spend on buying digital in-game items is reason enough for games using blockchains to exist.
Payments, Storage & Reputation
But why? Ownership. Public, permissionless blockchains (like Ethereum) are permanent records of everything you do. So the “item” you purchased in-game may stay with you even if the game shuts shop at some point. This may seem like a weak argument today, as blockchain-native gaming has not grown to a point where people have emotional attachments to the game.
Large titles like Fortnite or GTA 5 have not shut down in recent years. But hypothetically, if and when they do, users would appreciate being able to own the assets in-game so that they can port it to a different client that is community managed. On its own, this is not an investment opportunity. It is a hypothetical business case that may happen in the future. As things stand today, consumers don’t care about owning their assets as much as about having fun in a game.
What blockchains enable today is creating a robust financial backbone for games. We explored how this would work for user-generated content in February of this year. Since then, Towns.com and OnCyber have released their version of user-generated worlds. Users can develop and charge other players for gaming in these products. Blockchains are used to collect, disburse and verify payments in these models, while the games, their logic, and assets are primarily kept off-chain.
Mythical Games’ Blankos Block Party allows you to create your levels, like shooting arenas and race tracks. You will see practically nothing about blockchains on their landing page. The video below is a marketing teaser from them. It shows how “blockchain” games are shedding their addiction to mentioning the infrastructure and selling the application itself to the consumer.
The end user cares little about whether a game is built on a roll-up, Solana or an excel sheet. What they care about, is having the most fun, with the least effort. The dopamine doesn’t come easy.
A different way games are evolving to use blockchains is with reputation. If you are a gamer that has spent thousands of hours in games, you would not want to start from scratch in a new game. In theory, applications built on a chain can read each other’s state with the help of oracles. This allows composability among them.
So, if a player has crossed 40 levels in Mini Royale, a similar FPS game can allow this user to start from level 10 instead of asking them to go through initial levels that are too easy for their skillset. One way this model could extend is by offering free games to players that have crossed a certain level in a different game. Think of airdropping game keys, instead of tokens.
The cost of acquiring highly skilled gamers diminishes rapidly if reputational data goes onchain. Again, this hypothetical scenario may or may not play out in the future. It helps to arrange games on a spectrum to understand which applications may benefit the most from a blockchain in the short run.
The Spectrum
We often hear that over-financialization is the Achilles heel of blockchain games. Although it’s largely true, sometimes it adds a different dimension to games. For example, 0Xconglomerate shares that Word3, a Player vs Player (PvP) Scrabble game, introduces fluctuating prices for letters you want to use to play words. The additional constraint on a gaming resource adds a new dimension to the game and makes you more conscious of your moves.
The trick lies in understanding what part of the game is on-chain. For the sake of this discussion, let’s break down games into three parts – moves, states, and assets.
Moves are the actions performed by players
States are how these actions impact parameters like health or levels
Assets are collectibles that players earn or buy in games.
The gaming spectrum in Web3 today. Visualised by Saurabh.
The degree to which a game is or should be on-chain depends on factors like the number of player moves per unit of time, whether on not assets can be traded, and so on. For example, for an FPS game, every keystroke constitutes a move. Because the position of a player on the canvas matters in determining how much harm a bullet shot by the opponent can cause, putting all this information on-chain is rather silly.
Having tradeable assets on-chain while managing everything else from the game’s local server is a good idea for such games. But think of a game like Scrabble or a strategy game with limited player actions. If the stakes are high, one may record all of this on-chain. If not, the state changes can be recorded on-chain every time the player ends their session.
The kind of data that goes on-chain would vary depending on the nature of the game. Most AAA titles will have the bulk of their IP staying off-chain. Occasionally, there will be assets that a user can own, but it would still require the franchise to continue maintaining the game, its servers and storylines.
Gaming will be a spectrum for the foreseeable future. AAA titles will take years to use blockchains completely. But on-chain games like dark-forest can be developed in a matter of months.
In the immediate future, much of the "games" we will see will focus on luck or gambling elements. Their target market will be users from crypto that are no longer entertained by the flat, low-volatile state of the markets. Many will write off on-chain gaming as dumb casinos early on. But it is important to note that many technologies often start looking like toys before they mature enough to onboard retail users.
According to the Blockchain Gaming Alliance's (BGA) 2022 survey, the three most significant challenges to blockchain games are –
Onboarding / Accessibility
Poor gameplay
Players don't readily understand gaming concepts.
Game developers must think deeply about what game components are justified to be on-chain. The first is a UX problem where infrastructure plays a key role. If you think about when CryptoKitties went live, Ethereum was the only place to launch these games. Naturally, transactions were expensive, and it made little sense to have on-chain games.
But since then, several solutions, like rollups, have reduced transaction costs. On the scalability front, three solutions are worth mentioning.
Axie Infinity's parent company Sky Mavis built the Ronin blockchain. At the time of Axie's launch in 2019, it would cost $1.2 for a transaction on Ethereum. With Ronin, that expense is down to $0.00027. You can do close to 4500 times more transactions on Ronin for the same amount of money you'd spend to do a transaction on ETH.
Similarly, Offchain Labs recently released Arbitrum Nova. Much like Ronin, Nova's transaction costs are under $0.001. Games like Rhascau use Arbitrum Nova to build a better UX for users. The game can finalise balances and settle them much like it would occur with a traditional server-based game.
Solana developed state compression, which makes on-chain storage significantly cheaper. It creates a hash of off-chain data and stores it on-chain for validation. The cost to mint a million NFTs on Solana without state compression is ~12000 SOL. With state compression, it is 10.76 SOL.
The easy thing to do in the current market environment is to write off Web3 gaming as an opportunity. The arguments against them are quite simple. Yes, they take years to develop. Traditional studios do not have the skills or conviction to deliver great blockchain native games. And gamers would rather not bother with acquiring crypto or managing private keys.
But investors are likely forgetting the technical leaps we have made in the past few quarters. Transactions are now exponentially cheaper. Transaction signing is slowly vanishing from the user experience. And soon enough, users can store their keys on their iCloud storage.
These exponential improvements make the product far more appealing to the end user. Historically, the speculatory aspects of Web3 gaming are what attracted users. But the tech stack to build a great game, without ever mentioning blockchain or crypto to users, is here, now and today. And it seems as though the market is mispricing this shift.
There is an opportunity to arbitrage the market mispricing these technological shifts that have emerged in gaming over the past few quarters. Investing in them requires understanding which kind of game on the spectrum would grow to prominence at what point in time.
We may be at the early stages of multiple narratives forming within gaming. GambleFi, is, quite possibly, just the beginning of a trend that is here to stay.
More on that in another issue.
Signing out,
Saurabh