We first wrote about NFT games in May of last year. In that article, we focused on the history of gaming and pretty much a comparison of business models in traditional gaming and crypto gaming projects. Over time, our views on the crypto gaming space have evolved. Further, we have seen quite some criticism of NFTs coming from mainstream gamers. We saw Steam ban crypto games, Discord backtracking on some crypto integrations (their user base is still heavily gaming) and Ubisoft catching a lot of flak on their NFT announcement. So today, we want to talk about where we go from here. This article will have three distinct sections:
- Misconceptions and valid criticisms
- The benefits of using NFTs and blockchain tech for gaming
- Our somewhat educated guesses about how things might evolve
Misconceptions and valid criticisms
To kick us off, we'll talk about valid criticisms, some misconceptions prevalent in the space, and a few things about the current state of things that are alarming to us. As with most of our articles, we will try to be objective and invite everyone to join us in that approach. Even if just for the next 10 minutes.
Starting with misconceptions, a quick note on AAA games, a term used left, right and centre in crypto, and what it actually means. This thread is a nice place to start.
Basically, AAA refers to how big and expensive a game is, not necessarily its quality. An average development budget for AAA games is $80-100 million, with a marketing budget of a similar size and teams of 100+ people. Given these characteristics, AAA games are developed by large publishers (think Sony, Nintendo, EA, Activision, Bungie, etc.) and take on average about 3 years to produce. Here's a visual showing budgets of top AAA games for reference.
Before we get into the meat of the article, we wanted to briefly point out that when it comes to the games themselves, crypto games are not that different from traditional games. They don't actually run on-chain. Dark Forest and maybe the Wolf Game are the only games we know that do. Aavegotchi is another one, but they don't have a game yet, and once they do, it will run in the browser. Basically, all crypto games will either run in the browser or require users to download a game client, which is how traditional games work.
However, what is different are the open economies enabled by blockchain technology and NFTs, true ownership of in-game assets, and a different economic model for the publisher. Furthermore, a token allows for things like distribution of ownership and governance and effectively aligns the incentives between the developer and the community.
Now to valid criticisms of crypto gaming.
- The quality of crypto games today is rather bad. Before you wave this off and say that it will change in the next 12 months, please consider what it takes to build a good game before we even consider integrating NFTs, blockchain tech, wallets, etc.
- Not only are the games bad, but the user experience is horrible too. Downloading a game client, crypto wallet, funding it, buying NFTs on OpenSea to be used in gameplay, signing transactions for simple tasks, and cashing out any rewards while often having to move between multiple chains throughout the process. I mean, who would want to do all that?
- Not every game needs to have a financial element. Crypto people tend to lean towards maximalism, but the truth is that the financialisation of everything is not a good thing. There are many examples where the introduction of financial incentives lead to broken games (Diablo 3 being one of them).
- Crypto games excessively focus on tokenomic, or ponzinomic, design instead of making a game fun to play. Crypto gaming is, therefore, much more GameFi than gaming.
- Valuations are out of control, particularly relative to traditional games. Points 1 and 2 above and the lack of users compared to non-crypto counterparts make valuations even more baffling. There’s a second order effect here where high token prices lead to high USD prices for things like land or in-game items denominated in the native token.
- Distribution is a problem. Getting a crypto game onto Apple Store or Play Store is a challenge. Steam already said they are not supporting crypto games. Epic is a maybe. Furthermore, these gatekeepers take a 30% cut of revenues which changes the economics of crypto games. At the same time, there's a limit to how much you can distribute directly. Although distributing through shareware was quite successful in the 1990s, including for Epic MegaGames, a predecessor to Epic Games.
- Most crypto games with land haven't thought enough about the consequences of having scarce land or that digital land might not even have the same network effects as real-world land.
We find two more things rather frustrating when it comes to crypto gaming today.
1. Crypto games today are, first and foremost, pay to play games.
Players need capital to start, often thousands of dollars. We came across four different games in the last couple of weeks, whether through Twitter, podcasts, or random comments. When we checked them out, we realised that they required an investment ranging from $2000 to $5,500. In comparison, even the most expensive, mass consumer game consoles only cost $500. Some of the games weren't even live yet. We often call crypto a democratising force where there's equality of opportunity. Well, that's simply not the case in crypto gaming.
2. Incentives are broken.
We see most teams launching a token before there's even an alpha to capitalise on the hype and raise capital. With valuations where they are, teams are not incentivised to build for the long-term, which leads to short-termism, cash grabs and outright scams. Furthermore, there is even an argument for not delivering a game at all or taking years to do so. Afterall, it’s much easier to sell hype, promises and a narrative than actually deliver a product that will be scrutinised and has to live up to a lofty valuation.
The benefits of using NFTs and blockchain tech for gaming
Despite valid criticisms, we believe there are still many advantages to using NFTs and blockchain tech for gaming. Let's run through some of those.
1. Open and trustless economies
Before we get into the benefits of open and trustless economies, it's worth pointing out that while traditional games can't quite do trustless, they can undoubtedly do open with a centralised database. It's just that they haven't, for decades. Not only that, but their control over fiat on and off-ramps and exchange rates usually leads to extractive behaviour.
Open and trustless economies have many benefits. Players can monetise their time. They can exit a game without losing all the capital they've invested into it. The prices for items and characters are set by the market in an open and transparent manner, not the game developer. These are meaningful improvements to the existing system.
On the subject of trustlessness, it’s worth noting that crypto games themselves are not trustless. Often, if not always, the developer has control over the rules of the game and changes to characters through buffs and nerfs, for example. If a developer wanted, they could make your character worthless in the game, even though you would still own the NFT. However, the in-game economies are trustless as long as they utlitise a public blockchain where transactions can’t be censored.
2. Equity-like exposure
This is the fundamental difference between web2 and web3. Gamers, who are directly responsible for a game's success, should have an option to own a share of that value creation.
We also see tokens as a tool to align incentives between a developer, players, streamers, and other ecosystem participants. Funding third-party developers with a native token could be a meaningful value add. Community game mods, for example, tend to add a lot of value. Funding their development with a token would have many benefits, from further utility for the native NFTs to potential sinks for the soft currency like SLP in Axie Infinity.
Equity-like exposure, however, should come with equity-like regulations which is a risk worth mentioning.
We do not expect token holders to vote on everything. In fact, we don't think that token voting is even the best model for governance in games. Given the time, capital and effort that goes into developing a game, we would prefer and expect the developers to maintain meaningful control over the decision-making. Furthermore, if we want to see any type of real-world, valuable IP (think Disney) in games, we will need some centralisation as the likes of Disney will need assurances in order to licence their IP.
That said, the ability of governance token holders or actual players to have a say, contribute to prioritising features or expansions, etc., is really valuable. Again, you don't need a blockchain for this unless you want it to be trustless. You could drop some kind of token within a centralised database system or allow voting with reputation or XP points. But we've seen minimal effort and experimentation from traditional developers on this front.
4. Different economic models
Crypto games monetise through economic activity, which is possible because of open economies and things like transaction fees and royalties enabled by smart contracts. This is why designing balanced in-game economies is crucial in crypto.
Circling back to equity-like exposure for a moment, it's pretty evident that having players with an economic stake in the game turns them into a marketing engine. We've seen that time and time again in crypto, with projects often not spending any capital on marketing. If you remember, with AAA games, the marketing budget is usually the same as the development budget. Crypto games can significantly reduce marketing spend by leveraging a well-aligned community with a stake.
Predictions, guesses, and a wish list
This section is where we make some predictions about the future. If nothing else, it will be hilarious to come back to this article in a few years and have a good laugh.
Our overarching sentiment is that crypto gaming desperately needs a "trough of disillusionment" period. We expect that to happen in 2022. Valuations are obscene, there are barely any users, the user experience is bad, barriers to entry are high, in-game economies are laughable, and incentives are misaligned. It is feasible, however, that the space continues to grow and innovate while taking a few years to live up to current valuations. This is more of a muddle through scenario, not necessarily the "trough of disillusionment" outcome.
At a high level:
- AAA studios are unlikely to launch NFT games or will take a long-time to do so. However, we expect them to study what works and doesn't work in crypto and potentially adopt some of the features, like open economies, within their own centralised ecosystems. Keeping an eye on the profitability and revenue numbers, not users, for crypto games is the best way to predict the behaviour of the majors. At the end of the day, traditional gaming companies, more often than not, are publicly traded and have to optimise for shareholder returns. At worst, we expect the pressure from crypto gaming to lead to changes in behaviour and the adoption of more gamer-friendly policies and strategies.
- Crypto will spawn a few world-class gaming studios.
- We expect a lot of free-to-play (F2P), mobile and indie studios to make a shift to crypto gaming. This is already happening. The economics are just better. We think crypto gaming is the next economic evolution in gaming, with a free to play to earn (F2P2E) monetisation model being more powerful than a traditional F2P variant. This comes down to a few things mentioned above, from monetising through a tax on trading activity in an open economy to alignment of incentives leading to cheaper and more effective marketing engine.
- Fully on-chain games are a no-go. Storing logic on-chain is prohibitively expensive and transaction costs, even on roll-ups today, are too high.
Now let's talk about things like in-game economies, governance and interoperability. It feels to us like most teams building crypto games have little knowledge about the history of games and virtual worlds. It’s worth checking out this summary of Raph Koster’s presentation on the subject. We especially liked this slide.
With that in mind, here are our predictions.
- We expect the in-game economies of crypto games to get much more complex and multi-faceted. We will see experimentation with soulbound items, with tradability of inputs but not the outputs and vice versa, etc. Check out this article on sinks and faucets in gaming economies to get a sense of what's coming. Hopefully, 2022 will be the year of crypto gaming, not crypto GameFi.
- Governance is tough. As Raph says, players don't want to govern themselves. Further, governance in gaming is very different from governance in DeFi. Games take years to build, require teams of 100+ people, new content has to be shipped continuously, etc. So it's natural that game developers will want to keep control, and they should. Instead, we expect gaming projects to experiment with different governance models that keep the community engaged and allow community members to provide input without ceding too much control. Community elected councils, guild representatives, governance by gamers, not governance token holders, are all exciting models.
- Interoperability is just not happening. Even interoperable cosmetics are hard as different games might have different specs, formats and graphic requirements. Furthermore, we are not seeing any signs of game developers prioritising interoperability. Instead, they build in silos. Perhaps the best we will get in the short to medium-term is the interoperability of achievements and players history, which might unlock items or rewards across different games.
(Side note: this deck from Folius Ventures has some great ideas. Specifically, things like “right to govern should be linked to in-game participation” and “Right to rent-seek should be linked to in-game participation”.)
We'll wrap up with a couple of things on our wish list for 2022.
- We would love to see the emergence of the truly free to play to earn (F2P2E) genre. You get a starting character for free, everyone gets the same one, and you go from there. As you play the game, you are airdropped valuable items. It could be resources or gems used in power-ups or crafting. It could be a small value amount of governance tokens. Naturally, a market will develop between those with capital and those with time. That's okay. But the current environment of having to pay $5,000 just to play a game is not sustainable. It just doesn't make sense to us that we, as an industry, say that users should benefit financially from the time and effort they put in, yet the crypto gaming space requires paying $5,000 to unlock that ability.
- Another interesting experiment that we would love to see is building a gaming ecosystem from the asset level. Loot tried that - the grassroots, bottom-up approach to building a game but it didn’t succeed for a variety of reasons. However, starting at the asset level would make interoperability easier to achieve. The Magic ecosystem is interesting from this perspective. Given their shorter development cycle, this experiment would have to start with mini-games or mobile games.
A different approach to building from the asset level could be third-party extensions or mods of existing games. Something like a racing game using Axies developed by a community or a third party. This would provide additional utility for Axies and can use SLP as its in-game soft currency. Guilds, for example, could take on the role of funding these ecosystem build outs. They have the assets, they have the player liquidity and they have the capital. Further, the value of guild’s assets (like Axies) is currently entirely dependent on the game developer (Sky Mavis). However, if a guild designs another game around these assets where they control the rules and economics of the game, their reliance on the game developer for value creation would be somewhat reduced.
One of the best real world examples of this approach is playing cards. The deck is the primary asset and includes 52 cards. There are 100s, if not 1,000s of games out there, all based on the same standard deck. A crypto example of this would be Sorare where there are multiple gaming experiences based on the same set of assets. There’s One-Shot League with Ubisoft, SorareData Cups, SorareMega, Sorarebuzz and so on.
We hope you found some value in our perspective. While we continue to see many benefits in adopting NFTs and blockchain technology for games, the current state of the space is a concern. In our view, crypto gaming is ripe for its "trough of disillusionment" moment in 2022.
Despite that, we expect to see a lot of innovation and experimentation as developers play around with in-game economics, governance and, perhaps, explore the interoperability white space.