It was DeFi all along
Thoughts on P2E and the Web3 gaming industry's future
Lately I’ve spent a lot of time thinking about why Web3 gaming hasn’t taken off despite the massive funding the industry has received. When I ask myself, what makes a game fun and keeps me coming back, I tend to refer to my all-time favourite game, Team Fortress 2 (“TF2”). When I still played the game, what made the first-person shooter interesting for me was its high skill sealing, the variety of playstyles it accommodated, its robust community, and the constant map and weapon updates. Furthermore, an in-game economy was introduced in 2010 and players could start trading with each other. Nothing that can be bought on the marketplace really affects the game’s balancing. All weapons are attainable through random drops by just playing the game, and the most expensive items on the marketplace are purely cosmetic. TF2 was released in 2007 and it’s still the 7th most played game on Steam with an average of almost 100k monthly players despite it not having received any noticeable updates since 2017.
It’s clear that Web3 games have the potential to reach similar or even larger audiences compared to TF2, and these games could be the avenue through which the next massive onboarding of crypto users occurs. However, it’s likely that if changes aren’t made to the current mechanisms deployed by many GameFi protocols, the playerbase might never grow meaningfully.
Introduction
Web3 games have experienced difficulties with retaining players. The narrative has been focused on the pay-to-earn (“P2E”) model, in which games behave more like DeFi protocols with a thin layer of game-like utility sitting on top. P2E can be summarised as buying an asset to be able to play the game. Through that asset, you earn tokens that are used to buy more yield-earning assets or upgrade your existing asset in order to earn more tokens. The model is inherently flawed as it mostly invites mercenary players who leave the game once farming rewards start diminishing. This phenomenon is evidenced by a c. 75% decrease in the market cap of top GameFi tokens, albeit magnified by the bear market.
Moreover, an average person doesn’t understand finance but knows what it’s like to play an engaging game. Therefore, to achieve mass adoption, Web3 games should start focusing on core gameplay and then add an optional financial layer. It is also important that player onboarding is effortless, which requires a good UI and minimising the actions a player has to carry out before being able to play. A player should not have to buy a game’s tokens/NFTs in order to interact with it.
As a consequence of blockchain technology, good games don’t necessarily have to have the same structure as AAA games released on PC/console or applications developed for mobile gaming. This idea is well summarised in the thread below:
Web3 enables game developers to explore new frontiers. The key to success is creating new gaming and social structures instead of focusing on monetary aspects. Games that introduce a novel idea and are fun to play will inevitably become profitable for developers.
Not all games have to be fully integrated on a blockchain. For example, a multiplayer game’s economy could be detached from the core gameplay and reside on-chain, while the game itself could be played without having to interact with a blockchain. Then, frictions connected to player onboarding would be minimised, and once consumers become dedicated to the game, they would be incentivised to migrate on-chain.
Using a first-person shooter as an example, all players could immediately have access to common loadouts that they can tweak and unlock weapons by playing the game. When a player connects their wallet to the game, they could attain additional character and weapon features (think rarity class, kill counter, special effects, etc.) through crafting, loot boxes, random drops and trading.
Market Control
Market control refers to the degree of control a game developer has over a game’s economic activity. Total market control means that players can only buy items from the game, while free markets allow players to trade and sell their assets however they please. The highest grossing legacy games have commonly employed tightly-controlled markets, enabling them to extract value through microtransactions. In my opinion, developers should avoid implementing this economic model into Web3 games because it severely undermines interoperability, UX, and the ethos of crypto.
Developers should instead aim to create an economy which can function freely but enables users to access common and essential items effortlessly. In-game free markets have historically been unsuccessful since they can easily be exploited by astute players who manipulate the digital asset supply with the intention of benefitting at the expense of other players, ultimately leading to an economic death spiral. Thus, it might be wise for a game to maintain some regulatory power over its economy. Players should be able transact with a game for low-value, high-usage items since it creates a better user experience, while rarer items would only be attainable through in-game efforts or by buying them from other players. Consequently, a liquid market with organic price discovery would form.
Trough high liquidity, games could generate revenue by collecting a small fee on traded items instead of forcing microtransactions on players. This revenue model incentivises games to a) continue developing the game in order to maintain/grow the playerbase, b) introduce new, interesting in-game assets so that trading activity stays strong, and c) maintain a healthy economy.
In-game Assets
For most game genres, economies should mainly consist of limited-impact items such as cosmetics that do not give players an advantage. First, this eliminates any pay-to-win dynamics that are notoriously hated by the vast majority of players. Second, limited-impact items are a great way to build meta communities. Because cosmetics derive their value from personal preferences and the social status they provide, they are a powerful tool for bringing players together. This phenomenon can be seen within e.g, the Moonbirds community, where owners of Moonbirds with similar traits have created their exclusive subgroups, eventually leading to an increase in the value of these owners' NFTs. A similar effect would likely occur within a game’s community, which would enhance the stickiness of the playerbase and discourage farming the economy.
To further incentivise engagement and content in a game, community members should always be able to submit their own item, map, and mod designs. If a design is implemented by a game, the designer could e.g., receive a share of the game’s revenue that the design has created. In comparison to the legacy gaming industry, an advantage that blockchain technology and smart contracts create is that an agreement between a designer and a game should be fairly easy to create and enforce. Thus, community designers wouldn’t have to worry about unfair value extraction.
Tokenomics
Gaming protocol tokenomics has been a widely discussed subject because of the prevailing P2E narrative. The primary reason for a crypto game to introduce a token should be to improve the game economy in some way that wouldn’t be possible without a token. My belief is that improvement primarily occurs by players being able to easily and reliably 1.) move value within a game’s ecosystem and withdraw it when needed, 2.) attain a share of the revenue that a game creates, and 3.) impact a game’s development. Until now, most projects have decided to apply a two-token model. However, I believe that to achieve the abovementioned improvements, games should consider a tri-token model.
1. Currency Token
A token that would function as the native currency of a game and would be used for buying high-velocity, low-value items from the game’s marketplace, opening loot boxes, obtaining seasonal passes, and transacting with other players, but wouldn’t be needed to play the game. To maintain price stability, players would acquire currency tokens from the game for a fixed price, which they could always redeem if they didn’t end up using them. The token’s sole purpose would be to anchor a standard for transacting within the game’s ecosystem. This design would also prevent yield-farmers from collapsing the economy and the game from increasing the token supply indefinitely because tokens would always be backed and couldn’t be created out of thin air.
2. Equity Token
In order for players to have skin in the game (pun intended) and benefit from a game’s growth, a fixed-supply equity token could be created. When staked, the owner would receive a share of a game’s revenue. The tokens could be used to incentivise developers and community projects, as well as for funding the game.
3. Governance Token
A governance token would also be of great importance. The holders could e.g., vote on what community-made cosmetics would be added to a game, seasonal campaigns such as Christmas themed missions, or aspects of a game that need to be balanced. By enabling players to participate in the creation of a game, their preferences become easier to meet and they are more devoted to the game.
The tri-token model described above aligns the interests of all stakeholders and enables players to accumulate value while mercenary actors are prevented from exploiting the economy. By decoupling the core game from the economy, developers can create the game they want without having to make as many compromises because these decisions wouldn’t have a direct effect on the game’s monetary policy. Moreover, even if, for some external reason, the value of all of the tokens dropped to zero, players could still enjoy the game unaffected.
Sinks and Faucets
Sinks and faucets are essential for a well-functioning game economy and they need to be meticulously designed. This is something that several existing Web3 games have struggled to get right. In particular, it seems that sinks haven’t been robust enough and several projects have death spiralled.
Historically, organic sinks—that is, sinks that players utilise voluntarily—have been successful in fostering active and enduring economies. A good example of an organic sink is crafting. By enabling players to combine and burn oversupplied items that they own in exchange for a chance of receiving a rare item, inflation is effectively tamed by market forces.
On the flip side, if developers have to introduce new non-organic sinks such as taxation out of the blue, the economy might be expanding too rapidly. Non-organic sinks also put additional pressure on developers since they constantly have to tweak parameters. You end up in a situation where actions comparable to central banking are needed and as we all know, these actions have a tendency of breaking financial systems at some point.
Introducing several rarity classes such as common/rare/legendary remedies the complexity of actions required to contain inflation. Common items should be attainable so cheaply that even significant inflation doesn’t affect the original pricing. Contrary, inflation would only increase the simplicity of obtaining these items.
Outlook and Conclusions
The legacy gaming industry is extremely hit-driven—multiplayer games have become the standard and are heavily driven by network effects which means that players flock to a few game titles and stay with them for a long time. I don’t expect the narrative to change before a novel Web3 idea that somehow unifies games is introduced and more prominent gaming studios start emerging.
Nevertheless, a development that has been exciting to follow is the accelerating transition from free-to-play to player-owned games. I suspect that this could be the next substantial narrative and a key factor in eliminating value extraction through microtransactions that gaming studios have indulged in. Instead, independent creators could monetise their ability to produce content on top of existing platforms while players would benefit from increased freedom and potential profits through the sale of assets that they have full ownership of.
To conclude, GameFi has struggled to maintain its playerbase as it hasn’t been able to find its footing yet. I think that the required actions to reach the next level are clear, but high-quality execution is needed. Going forward, the number one priority for Web3 game developers should be to create engaging and fun games, while building economic structures that are separated from the core gameplay. This is the key for onboarding more players and signals that a project isn’t just another P2E cash grab. The most successful games to date have amassed huge playerbases because they have introduced novel ideas and mechanisms, enabling players to embark on new adventures. There is no reason to think that the path to success will change now, especially with the endless possibilities emerging from blockchain technology.
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