Crypto gaming is a controversial topic. Hardcore gamers hate it. Game developers hate it even more. According to 2022 State of the Game Industry (GDC), 70%+ of game developers (of 2,700) are not interested in cryptocurrency or NFT as part of their game. Whereas artists, celebrities and athletes have embraced NFTs, gamers and game developers have voiced vehemently how much they despise NFTs. Ubisoft pulled back their NFT marketplace after receiving huge backlash. Dan Olson’s famous video on “The Problem with NFTs” was watched more than 6 million times in 2 months (as of March 2022). On the other hand, crypto enthusiasts love crypto gaming, because they believe gaming will make crypto even more mainstream. In fact, according to a lot of news outlets, video games (and art) is the most obvious use case and will drive mass adoption for crypto. Reddit cofounder Alexis Ohanian predicted that play-to-earn games will be the only type of games people play in 5 years (Forbes).
The crypto gaming market is relatively small compared to the traditional gaming market. In 2021, the global video games market generated $180 billion USD in revenue (Newzoo). According to Blockchain Game Association, crypto NFT generated $2.3 USD billion revenue in Q3 2021 or $9 billion USD in revenue if we annualize Q3. While the crypto gaming market is only <5% of the traditional gaming market, it is catching up to some traditional entertainment industries. It is
50% of the global music industry ($22 billion)
50% of the global box office revenue ($21 billion) (Note, box office averaged ~$40 billion in annual revenue 2017-2019)
As a gamer and someone planning to spend her career making games, I am particularly vested in trying to figure out what the heck crypto means to gaming. Is it going to be the biggest shift the gaming industry will experience, or is it just a ponzi scheme that will be buried in the abyss when the market crashes? In this article, I will lay out the most salient arguments for and against employing blockchain technology in the gaming industry. I will also offer my thoughts on these issues in an attempt to lay out one viable path for blockchain games.
Main arguments supporting crypto
1. Ownership
Argument: Players can own game assets such as non-fungible tokens, or NFTs. Even if the game shuts down, players still own and can access their tokens. In the current state, if a game studio decides to shut down their game, players have no recourse or access to their inventory.
Counterargument: NFTs are just a bunch of links. True ownership doesn’t really exist because generally only the smart contract is stored on chain; the metadata (i.e., the content) of the NFT is stored off-chain. Furthermore, if the metadata is stored in an off-chain centralized location, it could be vulnerable to hacking or disruption. If a disruption occurs, the smart contract will point to a broken link. Due to the immutable nature of the smart contracts, rerouting the link to the metadata is not possible (One37PM).
SW’s Take: Ownership is the legal right to use, possess, and give away a thing (Cornell Law School). If a disruption in the storage leads to a broken link and the owner can no longer get utility from or sell the asset, ownership is still intact. No one will deny that you still own the NFT, as it is written in the smart contract. The NFT is just not as useful as it was before because the utility might be tied to the underlying metadata or the ability to sell the NFT, which could be undermined if the metadata is not available. In this case, there is theoretic ownership but less practical ownership. Owning some physical assets has the same risk as owning digital blockchain assets. For example, owning a car. If a car gets stolen, the title owner still owns the car, but the utility and ability to sell is impaired.
The more important question is, do players care about truly owning a digital asset. I think so, especially when the assets took a lot of time and investments and owning those assets is an important part of the gameplay (e.g., Legendary cards in Hearthstone) or a status symbol (e.g., Gladiator mount in World of Warcraft). The beauty of physical card games such as Magic the Gathering or Yu-Gi-Oh is that true ownership (and open economy – more on this later) enabled players to monetize their sweat equity and investment into the game. Those who don’t own their accounts or assets have to resort to selling them on the black market.
2. Open vs. Closed Economy
Argument: Blockchain provides for easier transactability of assets outside of the game because it is an open economy. Traditionally, players sink so much cash and energy in playing only to have their rewards trapped inside the game. To unlock the trapped value, players prop up gray markets to provide liquidity for these assets. Blockchain provides a permissionless infrastructure to unlock this value. Using a decentralized exchange, players can trade assets, fungible (in game currency like gold) or non-fungible (rare skin like The Reaper).
Counterargument: Gaming platforms and games have already created a form of real-money exchange without blockchain technology. Steam Marketplace allows users to spend the proceeds made from one in-game item for a different in-game item, or even brand new Steam games. However, users are not allowed to cash out so all proceeds remain locked inside the Steam ecosystem. Roblox has a similar economy where players can buy and sell in-game items with its Robux currency. Players can cash out if they meet certain requirements. Games have been less successful with their real-money exchanges. Diablo 3 shut down its Real Money Auction House in 3 years (Wired). World of Warcraft’s WoW token curbed illegal gold farming but led to an inflation in the economy (Polygon).
SW’s Take: Transactability can occur in open (decentralized exchange), semi-open (Roblox) and closed economies (most games), as demonstrated by the above examples. They all can work, given the right designs and incentive alignment. The difference is who controls the exchange and who “owns” the value. When the exchange is decentralized, activities are driven by market forces (e.g., general crypto market), game design and token supply and demand. When the exchange is semi-open or closed, the gatekeepers (e.g., Roblox and game developers) can greatly influence the health of the economies, sometimes for the better. They also often charge a fee for the service, anywhere from 5% (Steam Transaction Fee) to 75% (Roblox). I believe that all these economies can work alongside each other, but certain systems are more suitable for certain genres and games.
For games with very light economies and where players care less about owning and transferring value, a closed economy makes more sense
For games with deep economies and where players care a lot about owning and transferring value, an open economy could make sense
For games that have varying economies but are tied together in an ecosystem via a central currency or token, a semi-open or open economy could make sense
The more important question is, do players want an open economy? I think so. If there is value to truly owning an asset, that is, there is utility derived from the ability to use, possess and trade the asset, there could be a need for an open economy. “Illegal gold farms” and “gray markets” exist outside closed economies due to player demand and inefficiencies in the existing system.
3. Player-Owned vs. Dev-Owned Economy
Argument: Players get to participate in the economic upside of a game. Currently players don’t have a way to benefit from the success of games. The value of the game (i.e., revenue) accrues to the game developer (~70% of revenue) and platform providers (~30% of the revenue). With crypto games, players can play and earn from the game by owning a cryptocurrency or NFT. If the game becomes popular and the cryptocurrency or NFT increases in value, both the developer and the players who helped to make it a success could get financial rewards. In that respect, players are invested in the success of the game.
Counterargument: Game developers are giving away a huge portion of the economics. Instead of purchasing game items from game devs, players can purchase directly from other players and pay a small platform fee to the game devs. This is the most brutal form of cannibalization. Why would game devs give up a lot of money for $ and move from a product/service based model to a platform model?
SW’s Take: If players contribute to the success of a game, should they be entitled to its economic upside? I think so. But a shared economy isn’t going to work for all games because not all games are large enough to support this new model of economic distribution. A shared economy will only work if the game developers can still make a living and players are taking out less than they put in collectively. Scale could be built with either a very deep economy (e.g., lots of ways to trade and/or large transaction values) or tons of users (e.g., lots of transactions). Most games do not get to that size. Only games that can appeal to a large user base (e.g., Roblox, Pokemon Go) or have very deep economies (strategy or RPG games) can “afford” to run on a shared economy.
4. Governance
Argument: In traditional games, gamers have little say regarding economy changes, new game metas, and etc. Typically, gamers have to adjust their play style to keep up with new game updates. With blockchain gaming and DAO governance structure, gamers can influence the direction of the game.
Counterargument: Most of the governance tokens are owned by developers and VCs and whales who can afford the high upfront cost. On average, VCs and the game dev team own ~40% of the governance token of the top 9 games (by market cap). On one hand, it makes sense to reward people who are investing heavily in the project upfront. On the other hand, that means it will likely take 3+ years (or however long for all the tokens to be distributed) for the public to get a meaningful majority vote on the governance.
The game devs also have no obligation (no legal repercussion) to do as the community or majority vote says. For example, even though 55% of the community voted to not wind Wonderland down, the founder of the project decided to close it (Coinmarketcap, Tweet thread). When a whale decided to veto a PancakeSwap proposal with 65% vote, the dev team kept proposing it again and again until the whale just gave up trying (PancakeSwap Twitter).
SW’s take: Player governance sounds good in theory but is hard to implement. Token issuers also don’t have any legal duties to do as they promise because there are few regulations holding them accountable (yet). Secondly, total democratic governance also makes little sense in practice. Majoritarian governance will be detrimental long term because most individuals lack the skills, expertise, and long-term incentives to maximize game growth. Gamers might not know what’s best for the game, hence why game and economy designers exist. Gaming DAOs will need to adopt a representative democracy, where certain members vote for the community, so decision makers take action at scale.
In my opinion, governance tokens are a loophole - they enable companies to issue equity-like securities without the regulatory burdens. When regulation catches up, governance tokens and voting might resemble either 1) stocks with proxy voting or 2) participation in investment funds. Governments and consumer protection bureaus will want to protect investors by requiring token issuers to put in more protective clauses and disclosure, pushing these companies to become more like public companies. Or they will institute criteria for investors, including net worth and/or earnings requirement (e.g., need to be accredited), pushing these companies to become more like investment funds.
5. NFT Interoperability
Argument: Players can bring their assets from one experience to another. We can see NFTs from different projects in the same metaverse.
Counterargument: Interoperability is difficult due to technical challenges and misaligned incentives. There are no standards across the industry on the specs (e.g., height and width of the pixel) and attributes (e.g., strength, defense) of each game asset. Furthermore, some assets just don’t have counterparts in other games (e.g., a gun from Call of Duty has no counterpart in Animal Crossing). Read more about interoperability from @tha_rami’s tweet thread on why it doesn’t work. Publishers and game developers have no incentive to bring in outside assets into their games. Why would they sign up for something that 1) they have no control over and 2) could potentially cannibalize their ecosystems?
SW’s Take: NFTs interoperability is not an either-or decision. Interoperability has a spectrum and already exists within semi-open ecosystems. Many UGC platforms such as VRChat and Roblox allow persistence of avatar and cosmetics across different games within their ecosystems. In a crypto context, interoperability is also evolving. The most extreme form of interoperability (where utility and persistence all remain) across all games would be difficult because publishers and game developers (currently) have little incentive to open up the games. However, interoperability could work when there is coordination. From a top-down approach, the game developer would permit interoperability within its walled ecosystem. For example, Sky Mavis, the team behind hit crypto game Axie Infinity, is sponsoring outside teams to build games and experiences using its NFT Axies, therefore giving Axies utility outside of Axie Infinity. For a bottom-up approach, the game team develops a common NFT system that connects multiple games. The Loot Project is an example in which all NFTs originate from a common lore and come with pre-existing metadata. Game teams would then build experiences around these NFTs and the NFT owners can use their loot assets for multiple games.
Main arguments against crypto
1. Business Model / Play-to-Earn
Argument: Mainstream business model, play-to-earn (P2E), is unsustainable. Axie Infinity, one of the most popular crypto games, popularized the P2E model.. Players in the Philippines (called scholars) earn more than average daily wage (>$40 USD) from playing Axie Infinity (CNBC). However, since the price of the tokens was propped up more by speculation rather than genuine demand for the game, the token prices collapsed once new player growth and capital inflow stalled (longer, more detailed analysis Naavik). To simplify, people spent money expecting a monetary return, rather than for fun. As soon as capital inflows dried up, players started leaving because there was less profit. In Axie’s case, SLP (the main utility token of the game and commodity to be traded into USD) dropped by more than 8x and the earnings arbitrage quickly disappeared.
Counterargument: Axie dev team recognizes this issue and is actively working to rebalance the economy. In the long-term, Axie hopes to build a game where people spend money without expecting to take money out of the system, like traditional games nowadays. Secondly, many crypto games are exploring the free-to-start concept in which players get a (non NFT) starter pack to onboard the game. Axie Infinity is rolling out Battle v2, which offers training Axies, and Gods Unchained has a Welcome Set that contains 70 free cards. Mini Royale: Nations is going free-to-play first as players don’t need to spend a dime to enjoy the FPS gameplay!
SW’s Take: P2E is a type of shared economy. Current P2E economy is not sustainable because, while the economy is large enough, players want to take out more than the economy can support. Crypto games are lagging in the fun department and as a result, a sustainable source of capital inflow to support the economy. New crypto games are gaming-first and crypto second, which could address the capital inflow challenge. In the future, crypto games must evolve to cater to different types of players, those who spend money to have fun and those who play to earn.
2. Environmental Impact
Argument: Crypto projects are destroying the environment. The most popular chain, Ethereum, is built on a system called “proof of work” that is incredibly energy consuming (The Verge). Currently, a single Ethereum transaction consumes as much electricity as an average U.S. household uses in a workweek (Fortune).
Counterargument: More and more games are being built on new chains (e.g., Solana and Avalanche) and sidechains (e.g., Polygon) that are proof-of-stake, which consumes >99% less energy than proof-of-work (NBCNews). Ethereum is also transitioning to Ethereum 2.0, a proof-of-stake mechanism, that will cut energy usage by 99.95% (Ethereum blog).
SW’s Take: Most game developers don’t consider Ethereum when evaluating which chain to use, due to the high gas fee and latency associated with the proof-of-work system. Most new games are being launched on Eth layer 2 (e.g., Polygon, Immutable) or proof-of-stake (e.g., Solana, Avalanche, etc.) networks.
3. Ponzi Scheme
Argument: Blockchain and NFTs are all scams. Lots of projects raise money and don’t deliver projects. NFT Minecraft Project raised $1.2M in tokens but was deleted a few days later (Kotaku). Tons of people are scammed daily on Discord. Google searches for “NFT scam” hit an all-time high the week of Jan. 1 (Google Trends).
Counterargument: The technology is innocuous but the people are not. Scammers are preying on the public’s ignorance, and perhaps greed, to make money. We need more credible and experienced developers to lead crypto gaming projects.
SW’s Take: I agree with the counterargument.
4. Gameplay Impact
Argument: Blockchain does not improve gameplay. It seems like just another business model innovation, “another way for publishers to make more money from players.”
Counterargument: Blockchain will not change core gameplay or game mechanics, but it can expand gameplay strategy and endgame meta. New crypto players (e.g., play & earn players and investor-players) have different primary motivations and ways to engage with the game compared to fun-seeking or competitive players. Behaviors change when incentives change. For example, for a character collection role playing game (RPG), the ability to own and later sell a character NFT could enable new progression by owning a specific type of character. The ability to sell this NFT also means there is an efficient way to “burn” the NFT from the player’s inventory or “recycle” the NFT to another player. Endgame metas like managing a real-world economy (e.g., EVE Online economy) could also be enabled by real ownership and permissionless trading.
SW’s Take: A shared economy can expand the player base (e.g., bring in play & earn players and investor-players) and offer new game metas for players. However, some players will be resistant to blockchain because they see it as a new way to extract more money from players. NFT should not be designed to enable a pay-to-win strategy. Instead, it should give players more playing options and true control over their assets.
5. Solution Or Problem?
Arguments: Ownership and open economy can all be addressed without blockchain technology using a centralized database. Blockchain is a solution looking for a problem.
Counterargument: Blockchain gives “ecosystems of people and applications the ability to exchange value with each other without requiring central gatekeepers. In fact, there’s entirely new ways that games will be able to extend their ecosystems through modding and even open-sourcing their client software… Blockchain expands modding to include modding that interacts with the economy (custom auction houses, charting, etc.) as well as even outsourcing gameplay to the community itself” (Jon Radoff).
SW’s Take: What blockchain offers is a paradigm shift and a new relationship between game developers and players. Blockchain is permissionless. For the first time, players have agency and control over their assets. The game developer is a partner, not a gatekeeper. See my take on open vs. closed economy.
Conclusion
Blockchain technology promises a paradigm shift. It redefines the relationship between players and game developers. There are 3 fundamental assumptions or leaps of faith that one needs to believe in to embrace crypto gaming:
Players care about ownership
Players care about control / don't want gatekeepers in the system
Players want to participate in the economic upside / shared economy
If you believe in two or more of these assumptions, then crypto makes sense. Even if blockchain doesn’t fully play out as it promises, there are some observable and exciting ways it is positively impacting the gaming industry. They are
Expansion of the player base: Crypto games is expanding the player base to play & earn players and investor-players. Folks who were traditionally unable to or uninterested in play are now motivated to engage. Currently, the player influx is mainly driven by speculation and earning potential. Crypto games could permanently expand the player base when games become economically sustainable.
New way to fundraise: Game devs can fundraise directly from players through token, NFT or other sales at an unprecedented scale. The most funded Kickstarter game was Frosthaven, which raised almost $12 million dollars. On the other hand, crypto gaming projects are raising multiples that (e.g., Sipher raised ~9,950 ETH early December, or approximately ~$40 million dollars).
Community-driven development process: Engagement with community and evangelists is a much bigger part of the development process. Crypto gaming teams spend much more time communicating updates and managing expectations than traditional game dev teams. This is a different attitude and relationship with the player community compared to the traditional game developers who rarely engage with the community until the alpha/beta phase.
Thank you so much for reading. It was an amazing thought journey and I couldn’t have written it without the support and constructive criticism from my friends, colleagues and mentors.
Spot on Sophia. I discovered this article through LinkedIn.
There are nearly 1000 games coming across chains in the next 18 months. Many of them will have a sustainable economy paradox. I wish someone was working on Game-Economy-for-a-Genre as a product / service.
I also believe that Blockchain will lead to several mini-ecosystems. For example - mobile games / casual / indie games could become an ecosystem of their own powered through a single token and a set of NFTs as a way to access the ecosystem. For example - Have a look at InfinityArcade - just discovered them
I am working on enabling gamers in Asia access these games - the market is still about yield
a. What is the yield
b. Any estimation to how long will the yield persist
c. How do I get in - individual investment, guild or asset trade marketplace
What are you working on - in this vertical.
Shall we catch-up for 30 & explore syngeries ?