A Road forward for Web3 Gaming
5 theses on incorporating crypto into games
(this post was originally published in July 2022)
While it has become somewhat of a mainstream opinion to declare the death of play-to-earn, and with it sometimes even the demise of all web3 games, I want to provide an optimistic, actionable outlook. We’ll also look at ideas on how we can build sustainable game economies with crypto elements and how games can benefit from aligned incentives across token holders.
The reports of my death have been greatly exaggerated — web3 gaming.
Thesis 1: More targeted tokenization
So far, many web3 games tokenized the majority of their in-game assets.
Players earned currencies and NFTs they could directly sell for cash which put a lot of pressure on game economies.
Challenge 1: Economy outflows
Let’s first look at the cycle most of the current web3 games have gone through. You have probably read about this a lot already, so I’ll make it short.
As earning was the main driver for players, they cashed out their in-game currencies to lock in profits. On a macro scale, the problem is that the whole economy collapses when almost everyone is a value extractoooor. Value first has to be created, it doesn’t form out of thin air. With no one on the demand side for currencies and assets who see a value in them other than money, prices fall, which translates into lower earnings for players. The game becomes uninteresting — existing players leave, and new players are less likely to join. P2E games often relied too heavily on player growth rather than recurring token sinks, which led to economies quickly spiraling downwards.
Challenge 2: Speculation crowds out other motivations
When in-game assets are tradable, they change why people play a game. This affects ALL players.
The go-to example is the auction house in Diablo 3. When players can buy assets from others, they become less valuable to players who earned them through gameplay. What indicated skill and time commitment could now be replaced with money. Long-time Diablo players lost motivation, and Diablo later removed the auction house.
Easily tradable assets take away the sense of accomplishment some players look for. Therefore, games with in-game marketplaces reach fewer players of this type (who often are value addooors for the economy) and are more likely to onboard players attracted by monetary rewards (usually value extractooors). Over time, speculators drive prices up, making assets needed to play the game unaffordable for non-speculative players. In the end, only speculators remain. As described under “Challenge 1”, a working economy becomes impossible.
An additional issue arises when all in-game activities are denominated in the same asset. Web3 games frequently awarded one in-game currency for all actions across game modes. This means teams set the value of each activity, expressed in earnings per minute, beforehand. Players only focus on financial gains and optimize their gameplay towards it. Therefore, some modes or gameplay activities may never be played, even though they make the game more varied and fun. In a way, it takes the choice of what and how to play away from the player. Player choice is a crucial element of games and part of what makes them entertaining and fulfilling. Daily caps on activities or earnings can help mitigate the issues but represent a hard-cut solution for players. An alternative would be a daily rewards pool shared by all players for each activity. If more players partake in one action, earning potential per minute decreases, leading to a self-rebalancing effect.
But wait, there’s more.
When all game systems are interconnected via the in-game currency, the failure of one part (e.g., hyperinflation) leads to the collapse of all systems. For example, falling prices make all game modes uninteresting for players if earning is the main reason to play.
Addressing the challenges
tl;dr “make a fun game” — Nah, just kidding. While this seems to be the answer given by the “web3 gaming is dead” proponents, it’s missing the point in my opinion. First, a productive input would be HOW to make a fun game. Secondly, if that’s the reply, why even bother adding crypto to your game? Hence, I want to share my thoughts on how to design the crypto game elements, the intersection of game and crypto, to build great web3 games.
To reduce speculation, games can limit the number of assets that can be traded, especially with other players. While one can control the behavior of NPC merchants (e.g., costs for items increase exponentially), p2p trading between players depends on market dynamics and player psychology. Therefore, limiting the use of NFTs makes the economy more controllable for game economists.
On the other hand, at first, it may seem like there’s less earning potential for players as they can’t sell all the items they receive. But think about it this way: You can decide to create a speculators’ paradise, which will fail after some time, or limit speculation to build an economy that has the potential to run for a long time. In the end, by preventing speculation from becoming a big part of the game, and ultimately the only thing due to crowding out effects, games allow other player types and motivations, all needed to build a sustainable economy, to participate as well. We will come back to this point later.
There’s a design spectrum between no trading and fully-open-everything-is-an-NFT-or-ERC-20-trade-with-everyone market. No matter how much trading a game allows, it’s vital to tax trading heavily.
To incentivize trading, we can award different NFTs/tokens for various activities and make player progress dependent on multiple resources. This leads to higher trading volumes and, therefore, more taxes/token burning. Another benefit of such a system is that activities are no longer rewarded with the same token/asset. Trade prices between assets (the market) now set the value of each action. Easy tasks will see many people participate in them, leading to increased supply and lower prices. Hence, players are incentivized to search for different activities. The market will value a resource needed for progress, so the action producing the asset will be a worthwhile endeavor at least some players will partake in. If an activity feels underrepresented in the market, the game designer can, for example, increase the asset’s relevance for progress or reduce the tax on it.
Lastly, by making multiple activities a valuable task, players have to choose/specialize. For example, a player may increase their fishing skill while other players upgrade their ax for chopping wood.
Another question is whether to tokenize inputs or outputs. Games can increase trading volumes by tokenizing inputs as every player has to trade them. Players then convert the inputs into rarer assets. These outputs can still require work (e.g., need to farm a non-tradable asset to upgrade). Such a system prevents situations like the Diablo auction house. A rare asset still indicates actual skill and time commitment. At the same time, players have the chance to get a head start by buying items instead of farming them, which represents an earning opportunity for other players. To ensure that players can cash out when they no longer enjoy the game, one of the main arguments for web3 gaming, a deconstruction mechanic can come in handy. Here, players convert their output assets into input assets (with a heavy tax).
The alternative is to award non-tradable assets which can be upgraded into NFTs, for example by being fused with a resource that requires skill and commitment. Such a tokenization system minimizes asset bloat/inflation. It’s easier to control the player experience as players will only have limited trading with others. On the other hand, the overall trading volume will remain lower.
In my personal opinion, both systems can work. Each game designer has to decide where to fall on the continuum between open and trading-oriented versus controlled and trading-minimized.
In a similar vein, it may be valuable to limit trading between assets from different activities to some degree. The goal is to isolate systems from each other to have fewer interdependencies, meaning more control. Moreover, this helps reduce the danger that failure in one system negatively affects other areas of the game.
Game devs need control levers to steer the economy, similar to central banks. One caveat is that players don’t have to participate in the economy. Therefore, it’s essential to have a fun economy. The economy should fluctuate along an equilibrium and not stand still. Otherwise, it’s boring, and not much trading will take place. For comparison, a perfectly balanced game is not the goal in game design. It’s often good, for example, to have overpowered weapons and adjust the meta over time. This keeps players engaged. The second caveat is that it’s challenging to map real-life examples onto virtual economies as these are often simplified versions of reality. Making in-game economies more complex isn’t a solution, as most players are not interested in highly complex economic simulations. Therefore, central bank policy will look differently in games.
To find out which assets to make tradable and which to isolate, game designers can map economic pillars (currencies, resources) to game pillars/playstyles and use different currencies/resources for various systems. Make them intertwined to some degree, but refrain from making them all interchangeable. To isolate systems, games need multiple resources and currencies. Siloed systems are easy to control. However, they are also dull. Therefore, an economy needs interaction between systems. Furthermore, interchangeability increases player agency, giving them more choice on what in-game activities to focus on.
NFTs > Fungible Tokens (FTs)
By rewarding players with NFTs instead of FTs, games can move the player focus from monetary rewards to in-game utility.
There are several factors at play here:
NFTs come with in-game utility. In comparison, the in-game value proposition for FTs is more abstract. Players can buy assets with the token, but that requires an additional step. By making the in-game asset the default option instead of “get token > decide to buy an asset with it, “ the economy will see less outflow on average.
Additionally, FTs are easier to sell because of their higher liquidity. Players are just a little less likely to sell their NFTs for cash due to illiquidity, which makes a big difference when observing the whole economy. A bit of conversion rate optimization here and there adds up quickly. For example, a highly efficient market puts players’ focus on financial optimization, while a barter system (NFT <-> NFT) incentivizes social interaction.
NFTs are more personal than FTs. Using visuals and storytelling (lore) can create emotional value. Players that get emotionally attached to characters or items won’t sell their NFTs.
Putting NFTs at the center also makes sense from a game design perspective. NFTs resemble resources while FTs act like currencies. Resources have a value in themselves, while currencies are the bridges between resources. Therefore, games tend to have more resources than currencies. For designing currencies and resources, keep the economic map in mind.
The thing about Land NFTs
Web3 gaming companies have used land sales to raise money pre-development. Although that’s a great way to kickstart a project, it comes with challenges for the economy. Without communicating a straightforward utility for lands, investors may foremost expect a financial return. As a result, prices skyrocket, which crowds out real players who would add value to the game economy. Instead, extractive speculators take their seats.
In the worst case, nothing gets built in-game on top of lands as owners have no interest in actually playing. They only speculate on numba go up. The problem can even extend from normal value-creating in-game activity to user-generated content (UGC) if land plays an integral part in the system. As we’ll discuss later, UGC presents a good growth opportunity for web3 games, so the potential negative impact is immense.
In another scenario, landowners may rent their property to other players but “tax” activities. Instead of taxes acting as sinks, they get cashed out by the rich. Landholders have infinite revenue at zero incremental costs. They often use their profit to buy more land, resulting in increasingly centralized land ownership. The player base gets divided into two classes — landowners and plebs. The latter group may get locked out of many features. If they leave, the speculative bubble bursts.
As a consequence of speculation, other harmful behavior will appear, such as bots sniping land NFTs at mint. Additionally, those already owning land often want restrictions (as observed in the real world in the form of NIMBYs) which presents a risk to player growth. Landowners holding a game’s governance tokens elevates the issue.
Game designers face a tricky trade-off, especially when they have sold land to investors. If the land is integral to the game, it will lower player retention and engagement. If it isn’t, land owners/investors will see a minimal return. All in all, current land models feel more value extractive than additive. So, what could we do differently?
Land value tax (LVT) seems like a worthwhile idea to explore. Their goal is to reduce speculation while incentivizing in-game usage. Land gets taxed while everything built on top of it (e.g., houses) doesn’t, as these activities add value to the economy. This distinguishes land value tax from property tax. Land squatting becomes expensive with an uncertain payoff. As a result, land ends up in the hands of productive players that use it in-game and can create a surplus (revenue > costs). It becomes cheap to buy land (reduced speculative premium) but expensive to hold.
Several ways of incorporating LVT exist, which I won’t discuss here. One option would be to look at market data of trades to value the land and use a regression or ML model for land with no recent transactions. An alternative would be Harberger tax which relies on self-assessment + automatic listing at the self-assessed price. Players are game-theoretically incentivized to quote the real value they derive from the land. Otherwise, they might sell below value (underprice) or pay too much in taxes (overprice).
LVT may be good for the economy but comes with the risk of productivity maxing. Only the most productive players hold land as they can pay the highest tax. But making land ownership so competitive isn’t fun for less competitive player types (most players). Some systems, such as Harberger tax, also add complexity and require a certain level of sophistication in the target group for land ownership within the player base.
But as always, game economists can design along a continuum between a purely productive and a purely speculative land system depending on the tax rate. Game devs can then use tax money to build a sustainable game. For example, funding in-game public goods or UGC, token burning to balance the economy, market making on AMMs, or even some form of UBI.
Aside from LVT, other approaches could minimize the issue of speculation, like giving land owners only non-tradable in-game assets (no real-world ROI) or not making land scarce and limiting location-specific value accrual.
Thesis 2: Smarter inclusion of crypto
As described above, it’s impossible to create a working and fun game economy where crypto’s use case is earning a tradable ERC-20 token for clicking buttons. Below are some trends which could be more sustainable, and I expect to see more often in the future.
Crypto as the metagame
Crypto adds layers around the core game. The core game remains (relatively) untouched, while crypto elements target additional player types and build an economy on top of the game. Brooks Brown uses the analogy of football (translation for burgers: soccer). The rules are straightforward, and everyone can play it for free. Organizations expand on that with teams, tournaments, merch, video games, and sports betting. But this doesn’t stop non-professional athletes from playing football and having fun doing so.
Due to crypto’s nature, I expect the metagame to be primarily financial. It’s better to separate the financial game from the rest instead of having the main game turn into an economic exercise. Some players might enjoy that but TAM is small. EVE Online is a financial game with a solid player base but is still niche compared to mainstream games.
While the crypto metagame will bring in new player types, it also helps to explicitly differentiate the current divide seen in F2P games. Whales play a different game than the rest of the players, aimed at optimizing numbers. Separating these could be a first step towards making games less exploitative, without regular players serving as content for a few whales.
Games can keep the core game wholly separated from the metagame to reduce risks or try to link layers. The latter comes with the potential benefit of creating a flywheel effect. For example, using crypto to integrate eSports into the core game natively builds a stronger relationship between the player base and the eSports audience. Regular gamers get introduced to the thrill of eSports while playing, which may convince them to watch tournaments. Vice versa, a viewer will find a game that more closely resembles the experience they just watched and may therefore pick it up themselves. Additionally, this increases the chance to re-activate inactive players through big eSports tournaments. In the following section, we’ll look into an example of how one could bring eSports into the core game.
Combining F2P & Crypto
Keeping the base game free-to-play increases TAM. Onboarded players can later be converted into spenders, with NFTs presenting a new form of microtransactions. NFTs may command a price premium to standard in-game assets if players value true ownership and are open to spending more because of the ability to resell later.
Mobile games are having difficulties being ROI positive due to recent ad regulation, which makes targeting whales hard. Historically, a small subset of players, called whales, were responsible for the majority of revenue. Without being able to target them, games bring in a general, broader audience. Instead of selecting the highest LTV players before app install, the filtering now only really begins post-install. Games, therefore, should focus on more detailed segmentation based on in-app activity and segment-specific monetization strategies. NFTs have a chance here as ‘the new thing’ that some players want to try out.
Another advantage of a F2P + crypto model is more accessible onboarding. Players don’t need to understand how wallets, NFTs and AMMs work before even playing their first match. Game publishers’ job is to convert installs into an active player base, not non-crypto players into advanced crypto users. By easing players into using these new products over time, games will see higher conversion rates. And, of course, players shouldn’t need to pay a high entrance fee by buying NFTs or understand how scholarship systems work.
Moving away from an NFT-gated game experience to F2P means game devs can no longer rely on upfront investments. Overall, this should positively affect game economies as it forces teams to develop more sustainable sinks.
The Classic F2P game and its web3-enabled part can either be strictly separated or partly overlapping. The latter can increase conversion rates and doesn’t fragment the player base as much. On the flip side, games have to ensure the web3 elements don’t show adverse spillover effects on the non-crypto parts of the experience (e.g., increased speculation).
Let’s look at an example of such a model. Instead of making crypto the metagame layer(s), games can also use tokenization as a voluntary layer on top of the core gameplay to enhance the experience (rather than crowding out core motivations by focusing on monetary incentives). By introducing wager matches and tournaments next to traditional matchmaking, skill-based titles like Battle Royale games can bring the tension of eSports to all player levels. A way to separate the two player bases (interested in tokens vs. not) could look like this:
A player earns tokens based on their placement in a match
Depending on the number of hits received, the player’s armor decays
After a threshold of hits is reached across matches, a player no longer earns rewards
To continue earning, the player needs to repair their armor by burning tokens
This system gets players used to rewards and gives them some tokens to play around with in wager matches, hoping to convert them. At the same time, we prevent unnecessary inflation as players uninterested in tokens won’t receive any after a short time while adding a recurring sink in the form of a repair mechanic. If enough people can be turned into engaged players this way, who are often more willing to spend money, the system can even add to a balanced economy, besides being a UA driver.
Such a way of enhancing gameplay through crypto isn’t generalizable, though. It may work for eSports titles, which bring their own requirements (skill-based, fun to watch, …). Adding wager matches or other forms of betting to hyper-casual games, for instance, doesn’t seem like a good idea. But I’m sure game designers will find different approaches.
Crypto for incentive alignment
To put it generally, crypto economics excel at incentivizing value-add, bootstrapping communities, and blitzscaling growth by providing a framework for open participation.
Games are no longer just games. They bring people together to socialize, attend events, watch eSports, etc. With the trend of games-as-a-platform (some may now call them metaverses), providing a constant flow of new content becomes critical. Some game platforms like Roblox rely on UGC, but
a) they take a significant cut from creators.
b) they still hold total control over the platform, leading to disparities in power and preventing third parties from committing a lot of resources without assurances due to business risk.
c) UGC is limited to in-game content & doesn’t expand to broader areas where value-add can happen, like streaming, eSports, or merchandise.
Crypto networks act as neutral settlement layers which enable permissionless participation (e.g., anyone can build on top of NFTs), giving creators the required guarantees. Furthermore, game studios can now incorporate game-external value-additive activities like streaming into their UGC strategy while benefiting from the trust assertions of blockchains. Making game platforms an open economy incentivizes builders worldwide to participate, which wouldn’t be possible in web2 with traditional legal structures for building trust as regulations don’t scale internationally.
UGC can help create local flavors (e.g., culture-specific events or skins) for different target markets, which has proven to be a great way to expand to new markets.
It matters only for a subset of players, but for them, it means everything.
Such, at first seemingly unscalable efforts are a great use case for UGC. UGC is primarily performance-based in compensation. The platform reduces risk as expenditures only occur after a positive effect. UGC is also ideal for remixability. Users may not be the most creative in building new things, but they don’t have to. By combining different trends, UGC can ensure a game stays with the Zeitgeist, keeping it relevant over a long time and producing virality to acquire and re-activate players.
Turning games into platforms further helps to introduce additional token sinks and increases spending depth, overall making the economy healthier (often a problem for web3 games) and increasing revenue potential.
Thesis 3: Game genres
Some genres and games seem better suited for web3 mechanics than others. For example, MMORPGs involve a lot of trading, which can be taxed, and has many social components where crypto can help with coordination and alignment. Card games focus on NFTs rather than FTs, and players need to collect multiple card decks to be able to compete with enemy decks, acting as a significant sink and taking focus away from monetary rewards.
Hyper-casual games are an ongoing trend on mobile, representing >25% of all game downloads. Under specific circumstances, I can see how crypto might be able to add value here. This doesn’t only apply to hyper-casual games, but we’ll use it as an example:
For simple games, adding web3 elements (even in an abstracted way) is a big challenge both for game designers and players.
Games need to be reasonably complex to add crypto as a meta layer. For example, simple games that don’t take a lot of skill are not eSports-ready for players and not fun to watch. Or their economies tend to be dumbed down, which makes building a fun financial game on top harder.
Hyper-casual games are an ultra-competitive market, where CPIs and retention rates matter the most. Social elements, like UGC, have shown to increase retention and revenue. Challenge: Hyper casual gamers usually play several games in parallel, so getting enough attention to turn them into contributors is difficult. Maybe crypto incentives can help here. However, I see UGC as an addition to what core teams are building. The market is just too competitive to give up control. Therefore, I expect hyper-casual games to experiment with web3 elements, but not fully commit/decentralize.
If studios want to distribute tokens to players, not only creators, the gameplay should be complex enough so that a certain degree of skill exists. Being able to segment players effectively is an integral part of reward distribution. Otherwise, the likelihood of it being a farm and dump similar to the first web3 games increases. There needs to be a hurdle to earning rewards so that people can’t just come in and are sure to make a certain amount each day.
All in all, I mostly see the UGC as an interesting use case for crypto in hyper-casual games. NFTs, p2p trading, and other elements are less likely to get adopted. Hyper casual games make 95% of their revenue from ad monetization. They don’t have the right target group to sell NFTs to. And their gameplay is likely not complex enough to add metagame layers.
Blockchains also enable a new subset of games — fully on-chain games. On-chain games will span multiple genres, similar to browser games. Existing genres will be ported over, such as strategy games or Poker (not a bad idea to do it on-chain as centralized services are highly regulated nowadays). New experiences will be developed, for example, there may be games that aim to be played by bots, where the meta game of bot creation becomes the main gameplay.
On-chain games offer permissionless interoperability, meaning others can build game modes, marketplaces, new games, clients, plugins, and more without asking. The core team doesn’t need to engage in biz dev and tech support to the same degree as in permissioned systems, which makes such a structure more scalable. With improved incentive alignment through crypto, third-party creation is the strong point of on-chain games. Plus, players and builders have the assurance that no one can block their access.
On-chain games are still at their beginning and face a lot of bottlenecks. Scalability, zkSNARKS (or other privacy-preserving tech), and the developer experience all need to improve. Permissionless creation will lead to loads of content, potential scams, and a more complicated user experience. Curation and abstraction will become essential, similar to how the Steam Workshop made modding more convenient. I don’t expect on-chain games to become mainstream but to have a working, niche economy for itself, like the modding scene.
Thesis 4: AAA is overrated
To be frank, the vast majority of current web3 games, even if they say they are, aren’t AAA. I don’t think that’s necessarily a bad thing. Maybe AAA isn’t needed.
Your AAA is not AAA — Nintendo Kwon.
AAA isn’t a well-defined term. It refers to games with large budgets and long development cycles. But AAA isn’t a badge of quality for gameplay. It’s associated with better graphics, big marketing budgets, well-known IPs, and large amounts of content (games-as-a-service).
As web3 games slowly make their way into the mainstream, they require crypto as a whole to become easier to use. That’s an infrastructure challenge, not something games are supposed to change. We are still at the initial experimentation stage where graphics and marketing to the masses matter less. Players will come to try new experiences. Only that motivates them to overcome the hurdles known as onboarding to crypto.
In the experimentation stage, fast iteration cycles are needed to accumulate knowledge quickly. Smaller studios and non-AAA games are more flexible here. Big studios are less likely to be first adopters. Building a AAA game is resource-intensive and therefore comes with high risks. AAA games usually play it safe and will mostly stay away from adding web3 components, also because of backlash from their player base.
On top of that, big studios will also tend to avoid smaller experiments since even if they succeeded, it wouldn’t add much to their bottom line. As a result, smaller studios may have an advantage. They can use NFTs to fundraise and later scale via aligned contributors (e.g. additional content through UGC). The further development of infrastructure (e.g., high-end game engines with advanced creator tools like Core), which lowers the barrier to entry for game developers, supports this trend.
Thesis 5: Web-based experiences
Disclaimer: This section is more hopium than a thesis.
With web2 companies like Steam taking a negative stance towards crypto, plus walled gardens such as Google’s and Apple’s app stores trying to control payment rails and taking large cuts, having web3-native distribution platforms should be a priority. They fit crypto’s ethos of open accessibility and cutting out intermediaries. Without it, players will still be at the mercy of monopolies. Going from web2 platforms to web3 distribution channels is like switching from a CEX to DeFi.
Building web-based experiences based on open internet standards is the most resilient solution (next to on-chain games). On the other hand, they often lack functionality. The bull case is that with increased attention, coupled with crypto incentives, we may be able to move the development of tools in this area forward.
Challenges are that using open standards minimizes lock-in and therefore value capture, plus app stores are an essential part of users’ search process. While some players are willing to overcome small hurdles to play a game, changing the habit of the masses is a massive undertaking. I hope we can move the needle enough to start a new trend.
Developing games is challenging. Creating games with web3 elements is even more complicated. Observing current trends, I think we are on a better path than a year ago. I’m critical but optimistic.
Investing in a game’s token is risky, given the arguments above. Even if a game gets a player base, being relevant over a long time frame is something not many teams can achieve. Platform and studio tokens are a more appealing investment thesis for me for now.