Player retention in gaming is everything.

Despite this, publishers optimize for company profit at the cost of player value and well-being. They are able to do this due to their end-to-end ownership and control over the development, distribution, and management of games. A prime example of this is Electronic Arts (EA), a game publisher that has gained a villain-like role in the gaming community due to their prioritization of their own microtransaction monetization models over the player experience.

EA’s response on reddit — the most downvoted comment in Reddit history

The core vision behind play to earn (P2E) is to address these issues by offering real player ownership of in-game assets and their surrounding world, ultimately creating greater stickiness and retention of communities. In contrast to the current global 30-day retention rate of 3% of mobile games, we have seen some initial success with the first prominent P2E ecosystem: Axie Infinity — which has a D0-D90retention rate of 40%.

Edit: Not everyone who downloaded Axie Infinity was able to play, hence the actual D1-D90 retention rate is approximately much higher than 40%.

As a result of Axie Infinity’s success, we’ve seen a surge of new P2E ecosystems attempting to replicate similar success. Despite this, many of the projects still aim to centrally control and coordinate the end-to-end production of games — thus potentially replicating the same structural mis-alignments found in legacy games.

These Web 2.5 games look to leverage ‘crypto as a feature’ by enabling digital asset ownership via NFTs or financial ownership of an economy via ERC-20s, but at the same time aim to limit context and participation around other more cryptonative properties of ownership, such as governance. Typically, the teams behind Web 2.5 games look to build highly polished but closed ecosystems where the entire player experience is centrally controlled by a single organization. These projects consider themselves ‘game first’ and mostly still optimize for Web 2 growth metrics, arguably under the same value extractive mentality as those of legacy game publishers.

Analogous with CeDeFi, these games look to build closed-loop, centrally-controlled ecosystems on top of inherently open and permissionless crypto networks.

While we don’t expect all P2E ecosystems to be decentralized from the start, anticipating a more gradual process of decentralization as seen with Axie Infinity, we believe this Web 2.5 trend of game development stems from a fundamentally incomplete understanding of composability, interoperability, and the power of decentralized coordination technologies.

We believe that Web 3 games will win over Web 2 and Web 2.5 games because they leverage community ownership, real economic value, and native composability to drive greater player adoption & retention. We believe that the Web 2.5 approach to building P2E ecosystems is not enough to prevent the value extraction of communities. This is because there would still be key reliance on a single coordinating party that owns the end-to-end development and management of the economy and end player experiences. Instead, we believe we need to treat P2E ecosystems as open source public goods where all aspects of the economy and surrounding play experiences are built out in the open.

Through token incentives and community ownership, we are able to unbundle the role of a publisher through a bottom-up set of contributors, players, and guilds which instead drive worldbuilding, product development, and governance. By bringing these responsibilities out into the open, we are no longer dependent on a single company to achieve the goals of the entire ecosystem but can leverage open-source contributions from anyone on the internet.

Due to the live economics at play, the P2E dynamics surrounding games take on a whole new level of importance. These economies are not only just places where community members play, but also worlds in which they have financial upside, ownership over revenue generating businesses & valuable digital assets, and defined jobs & responsibilities.

We can think of P2E economies as virtual nation states. Its citizens will want to live in the most democratically well run country with the best opportunities for them (fun, work, social, culture). For these virtual economies to retain its community members, they must fairly and transparently make decisions that have serious economic implications to their citizens such as:

Rather than pure user growth, we believe community-run P2E economies will optimize for functional governance, the ‘quality of life’ for their community members, ‘GDP’, and economic stability. And in turn, by making decisions better aligned with the interests of their community members, they’ll not only retain but attract better community members by providing a safely managed economy to rely on (Public Goods & the Protocol Sink Thesis). The virtual nation-state analogy becomes ever more real as we increasingly spend more time in virtual spaces and are able to take our identity, friends, and assets with us as we move from world to world.

Unlike Web 2 games where data is siloed by centralized databases, P2E economies can act as open, interoperable SDK-like platforms upon which contributors can build in a permissionless manner. This enables us to treat the economy as a base layer protocol for other community-generated games and experiences to emerge — where each one acts as a new user acquisition channel for the ecosystem while also being another driver of engagement for the existing community.

And by doing so, we are able to offer the opportunity for developers to build and ship games to a live and vibrant community from day 1.

Within the Axie Infinity ecosystem, this may look like funding new mini-games that help drive certain goals of the Axie ecosystem such as: better player onboarding, where the creators of the mini-games are rewarded with tokens in real time in correlation to their game’s onboarding success rate. By avoiding reliance on a single team, and by building out in the open, a game is able to scale the width of product insights and approach product development in a far more scientific and engineering-based manner.

This ecosystem approach can be applied to all other operational areas of the P2E ecosystem from community development to areas such as worldbuilding and lorecrafting (think community fanfiction or other derivative works that would typically be forbidden from monetization in traditional models). Grassroots capital allocation can emerge via large-scale community funding mechanisms such as quadratic funding or even player-owned guilds that steward certain responsibilities and tasks, such as Axie P2E scholarship guilds that help drive distribution.

https://twitter.com/The_ReadingApe/status/1440292285309022221

With players having greater control and mobility in the metaverse, we believe interoperability will be a core driver of cross-world distribution. The more open and integrated these economies, games, and worlds are, the more creativity can take place through experiments and permissionless integrations, widening the top of the funnel for the P2E ecosystem. We believe that interoperability is more than just about “bringing your sword from one game to another”, but instead can exist in many forms:

We believe the opportunity cost of not building for interoperability will overshadow the net cost of doing so.

Economic sustainability and growth occur when the value flowing into a system is greater than the value leaving it. In game design, the mechanisms influencing value flows in an economy are sinks and faucets:

For economies to be sustainable, the sinks need to take more of the token supply out of the economy than the faucets that bring the token into the system, otherwise, there will be natural downward price pressure as supply increases over time.

An example of a future token sink is the introduction of Axie body part vertically-integrated upgrades, whether cosmetic or rarity-related, purchased with SLP. Currently, the game’s only SLP sink has been overly reliant on horizontal asset production whereby Axies can come together and breed new ones, but the quality and general appearance of each Axie remains unchanged.

Vertically integrated token sinks

We can expect to see such tweaks proposed in other emergent P2E games too as they work towards economic sustainability. We can expect communities to crowdsource games and other player experiences that plug into the player economy as either new sinks or faucets — in order to achieve stability.

We may even see other allied virtual nation states integrating sinks or faucets of another economy into their own native experiences in order to assist another P2E ecosystem that is facing economic instability.

We believe that the biggest P2E ecosystems in the future can potentially start out looking small and humble.

By considering P2E economies as the economic and social base layers for an entire ecosystem of games, we believe that building a P2E ecosystem is less about game development and much more about worldbuilding, culture, and incentive design of the underlying economy.

While we would agree that over the long term, well-designed games will engage and retain the biggest player bases, we don’t believe you need to necessarily launch a highly polished game from the start in order to be successful — but instead, a minimum viable game (MVG) that is enough to complete the economic value accrual loop.

One advantage of crypto is being able to immediately launch a token economy from day 0 and begin building minimally viable economic value accrual mechanisms long before there is a fully polished end player experience. This is in contrast to the waterfall development approach that traditional game studios take to launch fully polished games from the start.

A path to launching a minimum viable game may look like the following:

Axie Infinity has perfectly embodied the concept of a minimum viable game as its first major raise came before the breeding and battle components were even released:

Despite the game comprising over 2.5 million daily active users, Axie Infinity’s roadmap is far from complete. Axie Infinity’s focus on community building and their iterative development approach is a testament to how MVGs can be used to bootstrap large scale virtual economies.

Driven by our hands-on experience building token networks, we believe that the most successful and vibrant P2E ecosystems will prioritize community and culture first rather than game play.

We believe getting worldbuilding, culture, and incentive design right is mission-critical for building a thriving P2E economy.

With the minimum viable game model, shared world building in an early P2E community becomes an important driver of engagement and participation. As such, we expect to increasingly see more P2E ecosystems take a content first approach (eg. Loot, Treasure, CryptoManga). We can expect that early user acquisition for P2E ecosystems will look more like skilled dungeon masters co-creating a D&D world with a community, especially when there is not yet a game ready or even one being built at that time.

One example of this is Loot; due to the Yearn-like fair distribution and creative potential of text-based NFTs, dozens of developers saw the potential of a new digital economy that they could build together. Over the following months, 86 community projects came up to expand the possibilities of Loot, including new derivatives, tooling, and guilds around items, maps, lore, and visual renderings.

While we currently lack the tools for player-driven world building, we expect innovations here over the next few years. We suspect generative AI technologies playing a key role as humans shift from a content creator role into a curator role. We see world building as a collaborative process that fosters a community of potential players and other contributors even before there is a game.

People enter a community because they resonate with its culture, and they stay because they become owners of it. Culture is strengthened by demonstrating integrity around a set of values, and principles that inspires others to follow suit. It is co-created within a community, and thus why it is important to curate who is part of an early community.

While the legacy metrics place an emphasis on “how many players does your game have”, we believe P2E ecosystems need to focus on “who are the players and contributors”. As such we highly encourage P2E ecosystems to carefully curate it’s early community members and players. This can be done via manual whitelisting and other measures such as gated participation via pledge of allegiance or contribution.

Getting the culture right will allow teams to fully take advantage of the fact that by unbundling the publisher, P2E games-as-communities increases the surface area on which values-aligned participants can create impact in the economies they are a part of, and enable them to accrue ownership in the worlds they help create.

Axie Infinity Discord

While culture may initially attract members and contributors to a community, they only stay if they are fairly rewarded for their work and develop an ownership mentality.

Diagram from “Hard things about communities”

When designing the distribution of in-game assets and shared upside in the economy, gaming studios should look to ensure that the most valuable community members and contributors are rewarded for their relative work and commitment. When this contributor feedback loop is repeated, trust, loyalty, and fanaticism are developed.

We think of token incentives as scarce resources that should be distributed carefully and meritocratically to the most valuable community members. We expect to see greater experimentation around token ownership and in-game asset distribution models. For example:

We believe P2E games should be careful about designing incentive structures that are based on gameplay alone. By doing so, they expose themselves to the risk of skewing their membership towards mercenaries, who are more likely to jump from game to game in search for higher returns (similar to how yield farmers jump from farm to farm in DeFi protocols). We believe that P2E economies should design their incentives to focus more on retaining missionaries and loyal community members as opposed to being used to drive pure user acquisition.

Rather than fancy graphics and large funding rounds, we believe the most successful play to earn games will start out with building a great culture, community and a vibrant economy first.

We are just at the beginning of understanding how to build out in the open. Our mission at 1kx is to become the most helpful investors to builders looking to build the next big play to earn the ecosystem.

If you’re building something in this space, we’d love to chat~