A deep dive into the challenges & opportunities in 2023
Gaming has been the one fixture throughout my life.
Since a fateful day in 1989 when my uncle introduced me to Super Mario Bros and the Nintendo Entertainment System (NES), gaming ran in my veins through adolescence and university — and then through multiple relationships and a multitude of jobs & careers.
From blasting monsters in Doom (1993, PC) and fragging friends in GoldenEye 007 (1997, N64) to battling Pokemon (1998, Game Boy) and strategising in StarCraft (1998, PC) — gaming became a part of my identity growing up.
Since I first picked up a game controller three decades back, the global gaming landscape has evolved tremendously.
The Pay-to-Play business models of the 1990’s and 2000’s — where you spent up to $80 on a set of discs that you push into gaming consoles and PCs — gave way to the tidal wave of Free-to-Play games that coincided with the explosion of smartphone and mobile gaming in the 2010’s.
The 2021 crypto bull run then saw an explosion of Play-to-Earn (P2E) games.
P2E is associated with Web3 gaming, which incorporates blockchain technology and Non-Fungible Tokens (NFTs) to provide verifiable decentralised ownership and the ability to earn token rewards.
In simple terms, this means you own (like, really own) your in-game assets and you can earn cryptocurrency while playing that can be swapped into real cash.
Sounds good right? Well yes… and no. Or maybe.
In this article, I want to discuss:
- What web3 gaming offers gamers & investors
- The role NFTs really play (forget the right-click-save JPEG memes)
- What isn’t great about web3 gaming now and what’s being done
- Which web3 games I’m investing my time into and why
You’re looking at an incredibly exciting intersection of gaming, crypto, decentralised finance, NFTs and the move towards metaverse experiences.
Let’s dive in.
The term web3 gaming is often used interchangeably with GameFi or Play-to-Earn (P2E), but there are important distinctions.
The latter two emphasises earning.
GameFi is the fusion of gaming with decentralised finance (DeFi), which spurred an array of web3 games during the 2021 bull market that typically paid gamers cryptocurrencies swappable for stablecoins on decentralised exchanges (DEX).
That was the general basis behind P2E, and it drew tons of players eager to earn an income doing what they loved — playing video games. GameFi and P2E placed earnings ahead of gameplay. (Note: Crypto-based earning in games has been around since 2013).
After the economic collapse of flagship P2E titles like Axie Infinity in 2021 (more on that later), this experimental niche of a gaming industry began evolving towards a more sustainable Play-and-Earn model.
This is welcome news.
Within the crypto industry, studios and their backers finally realised that compelling gameplay needs to take primacy above all else. Who would’ve thought?!
This is what web3 gaming is about — an evolution of GameFi and P2E into something more desirable for actual gamers, not just investors who want to get rich quick. Web3 gaming is the idea of great games supported by the benefits of blockchain technology, rather than crypto with gamification built on top.
These days, web3 gaming is also called blockchain gaming, which makes sense because of what web3 means: the next-generation internet built on blockchain that takes the web back to its decentralised roots.
Web3 is powered by decentralised apps (dApps) and oiled by cryptocurrencies, with digital ownership enabled by the technology of Non-Fungible Tokens (NFTs) that represent unique assets on the blockchain.
More on the premise of web3 and why crypto exists in my deep dive here.
One more thing.
Blockchains can’t contain much data, right? How can entire games run on them? This is a great question.
Not everything in the game runs on-chain. Very few Layer 1’s are performant enough to provide an experience that rivals traditional games running on your local machine that’s supported by cloud services like AWS — whether that’s console, PC or mobile.
But web3 gaming doesn’t mean migrating everything onto the blockchain.
The idea is more about launching Triple A titles developed by traditional studios leveraging industry standard tools like Unity or Unreal Engine, with parts of the game synced onto a distributed ledger at certain points in time.
For example, in-game assets like items, weapons, achievements and cryptocurrency rewards might be written on-chain and sent to your web3 wallet between rounds of games.
So what tangible benefits does web3 offer for the mature multi-billion gaming industry?
They can be summarised as:
- Increased transparency;
- Real ownership of interoperable in-game assets;
- Income — the ability to make money playing games.
Benefit #1 — Transparency via Blockchain
Blockchains are immutable public ledgers, which means transactions can’t be tampered with or changed. This provides a level of transparency in web3 gaming that deters cheating and makes it easier to detect fraudulent behaviour.
You can worry less about players faking wins and messing with your economy. Or the game developers doing shady things in the backend.
A 16-year old Russian-Canadian named Vitalik Buterin cried himself to sleep one evening in 2010 after Blizzard nerfed his beloved World of WarCraft warlock’s Siphon of Life spell, making him “realise what horrors centralised services can bring”.
Good thing the young lad did something about it.
Within four years, Buterin along with Charles Hoskinson and Gavin Wood, launched Ethereum — a decentralised world-computer powered by immutable and tamper-proof smart contracts that replaces the need for centralised middlemen.
Benefit #2 — Ownership & Interoperability via NFTs
Gamers will tell you that digital in-game assets — typically hard-won through countless hours of grinding — are worth their weight in renown and gamer-credentials.
Powerhouse titles like Counter-Strike: Global Offensive (CS:GO) has seen the rise of vibrant trading economies where players can buy and sell items and skins.
The problem?
You don’t really own it.
Valve, the studio behind the game, could confiscate your AK-47 Redline skin at any time. Perhaps you’ve been accused of cheating? Or maybe they’ll switch up the weapon stats, so that the value of your favourite skin is — at the whim of a centralised company — sent to the doldrums.
Maybe one day they’ll stop supporting the game altogether.
Fortunately, this need not be a reality for future gamers, as blockchain technology provides a secure database for your game characters, items and rewards.
Such in-game exist in the form of Non-Fungible Tokens (NFT), which can be thought of as digital collectables on the blockchain, but really should be thought of as the solution in how blockchains store unique assets.
NFTs provide a way to give users verifiable decentralised ownership on the blockchain. Your in-game assets will sit in your self-custodial web3 wallet, like MetaMask or Phantom.
From an investment point of view — as NFTs are essentially the vehicles for digital ownership in web3, it isn’t difficult to see why the NFT market is primed to explode alongside the growth of web3.
Aside from ownership, NFTs confer another important benefit: interoperability.
Because you can take them with you everywhere across the blockchain — even across to other chains via cross-chain bridges — your in-game assets become hyper-mobile.
Buy that NFT on one decentralised marketplace, say OpenSea, and sell it another, perhaps Blur. Copyright issues aside, there is nothing technological preventing the possibility of porting your favourite skin from CS:GO to decorate a gun in Fortnite. Cool huh?
It gets better.
In GALA Games’ Spider Tanks, the maps on which players do battle are themselves NFTs, owned by players who will earn a cut of the $SILK revenue generated by players.
Heck, even the running of servers is federated onto the gamers themselves!
This means — in theory — a passionate group of gamers can keep a game running long after the game company goes six feet under.
True ownership is the name of the game. This is what web3 is about.
More on Spider Tanks later.
Benefit #3 — Income through Crypto
The third benefit strikes to the heart of GameFi and P2E:
Money money money! Ka-ching!
Web3 gaming naturally lend itself to monetisation, because blockchains are populated by dApps running on cryptocurrencies.
For awhile now, fintechs in traditional finance (TradFi) have employed gamified elements to engage customers and promote financial literacy in a fun way. Examples include banking apps with progress bars to aid in your savings goals and portfolio trackers that showcase your ‘level’ based on your transactions.
The difference is GameFi and web3 conjured up a gaming model that outright pays you for playing. But as we’ll learn soon— there’s no such thing as a free lunch.
Before we get into the bad, let’s summarise the landscape so far.
GameFi evolved out of DeFi and lets gamers play to earn cryptocurrency. This is known as Play-to-Earn.
Web3 gaming (a.k.a. blockchain gaming) is a game-first project with a player-owned economy that happens to offer opportunities for earning (Play-and-Earn).
In either case, players become stakeholders of the game through NFT ownership.
Web3 games also tend to have strong communities — at times leveraging Decentralised Autonomous Organisations (DAO) to steer decision-making on game changes. Very democratic right.
So what’s holding back web3 gaming?
Some minor and not-so-minor problems, as it turns out.
The cynical version of the story is web3 gaming is a rapidly-evolving “fail fast and fail forward” niche working through a slew of teething issues, from economic death spirals to the poor average quality of titles to UI challenges that hinder adoption to the stained reputation of NFTs.
Let’s dissect the problems and look at how they’re being addressed so that web3 gaming has a hope of eating up a bigger slice of the annual $300 billion gaming pie.
This is a major one. Maybe the biggest problem.
The initial batch of web3 games that blew up during the 2021 bull run had problematic economies that grew fast and imploded just as quickly.
Why? Put it this way:
There is no such thing as a free lunch…unless you’re early.
Remember this quote. It’ll probably save you a lot of money.
Axie Infinity—P2E pioneer
To understand what I meant by that adage, let’s look at the daddy of case studies — Axie Infinity.
This Pokemon-esque breeding and battling game rose to fame in 2021, exploding to a peak of 3 million Daily Active Users (DAU) that brought in $1.3B in revenue. At one point, top bracket MMR players were able to rake in $200+ USD per day.
This made Axie popular in developing countries like the Philippines, where the daily minimum wage is around 10 bucks. Grinding and earning Axie’s SLP token became a full-time job.
Guess what — the price of SLP has since crashed 99% in a classic death spiral.
What happened?
It starts with a problematic economy.
In the game, ‘Farmers’ grind SLP, which ‘Breeders’ buy in order to create (mint) new Axie NFTs. New ‘Farmers’ — likely attracted to the rising earnings — join the game to buy these Axies and begin farming SLP, which starts the cycle anew.
Does this sound a bit like a pyramid scheme?
You might be onto something.
Axie’s economic model is built on the presumption of growth, where an ever-growing player base sustains demand for Axies and keep SLP prices stable.
But this is unsustainble. At some point, the game will reach market saturation or the financial markets start looking bearish.
In one way or another, new liquidity will dry up. And it did.
With SLP circulating in ever increasing numbers (inflation) and not enough new players to absorb the supply, the price of SLP began heading down in 2021 H2. This caused a collapse in the value of Axies that dissuaded new players from joining, perpetuating a positive (self-reinforcing) feedback loop that’s been difficult to arrest.
A classic death spiral.
This brings me back to the quote of no free lunches unless you’re early.
We all want to get rich quick, but where’s that value going to come from?
If you’re early enough, you’ll find your exit liquidity from the newer players. If you’re unlucky to be late, then have fun being the bag holder.
Since Axie’s economic fall, the web3 gaming industry has adapted and evolved — absorbing economic lessons from titles before them.
Broadly speaking, a sustainable game economy requires three things:
- The ability to expand and contract game assets and token supplies without causing death spirals;
- Developer control over economic levers that can induce the above;
- Stable prices with limited volatility.
Modern web3 game studios now employ economists to help design their game economies. This is such a critical job title as mistakes can quite literally make or break your game, as we’ve seen.
The fundamental issue in Axie Infinity was that an Axie only cost a fixed amount of SLP to be created, yet that can go on to produce an infinite amount of SLP through its lifetime.
A once-off 600 SLP investment to generate 200 SLP/day forever.
It doesn’t take a rocket scientist to figure out this was problematic.
Had the game incorporated some strategic sinks to suck up excess Axies and SLP tokens — mechanics that result in them being burnt (removed) from the circulating supply, a death spiral might have been avoided.
STEPN—Transition towards Play-AND-Earn
STEPN, the world’s premier Move-and-Earn (M&E) web3 game launched in late 2021, studied Axie’s short-comings and introduced a host of economic innovations in an effort to create a stable economy.
This included a myriad of game mechanics that incorporated sinks to burn excess sneakers, gems and STEPN’s inflationary GST token. The app even employs a deflationary second token, GMT, that helps to balance the economy.
Ultimately, the STEPN team couldn’t prevent a semi-death-spiral during 2022 — albeit it wasn’t fatal. Factors outside of the team’s control, including a crash in the broader real economy, saw GST dump 99% — just like Axie’s SLP token.
The good news is that significant progress was made on two fronts.
First, sustaining a game economy during a bear market, where central banks the world over were withdrawing liquidity and hiking rates, is exponentially more difficult than keeping prices stable during the good times characterised by careless quantitative expansion and near-zero interest rates.
Put it simply, if Axie managed to dump 90% during a bull market, they might have outright died in a bear market, which STEPN did not.
Second, the STEPN team managed to develop a silver bullet ‘Rainbow sneaker’ mechanic that resulted in a self-sustaining economic system without the need for new players. This was an incredible achievement.
I talk about all of this in detail in my STEPN 6 month review.
Spider Tanks—Economies crafted by no-BS Economists
Spider Tanks, a team PvP brawler game that serves as GALA Games’ flagship title, implements the best — albeit brutal — economic model I’ve seen yet, employing a Victory Points and Honor system to ensure capital outflows are heavily controlled and disincentivised.
The economists at GAMEDIA really didn’t mess around here.
Rather than directly giving players the game’s SILK token, Victory Points are allocated to players who win games, which map to SILK tokens at the end of the day based on capital inflows and outflows. At the same time, an Honor system incentivises players to do things good for the economy while penalising players for cashing out.
Many players absolutely loathe this model, but it breaks the ponzinomic nature of GameFi economies and — like STEPN — endows the game with a self-sustaining economy during the bear market.
Bravo, I say.
Sleepagotchi — Evolution towards Play-to-OWN?
As web3 games saw their economies crash throughout 2022, studios began shifting the narrative of Play-to-Earn towards Play-and-Earn (P&E). Both STEPN and Spider Tanks market their products as P&E, even if it didn’t start that way.
Going further, a branch of web3 gaming is evolving into another — arguably even safer — economic model called Play-and-Own (P&O), where you’re no longer paid crypto but earning digital collectables (NFTs).
This is the model adopted by Sleepagotchi — a Harvard-incubated sleep-and-own game that rewards users with NFTs for sleeping well.
Both P&E and P&O represent signals by the web3 gaming industry that the priorities of both game developers and gamers have changed.
Specifically, web3 titles must be enjoyable games first and foremost, and that web3 gamers must to evolve their attitudes away from considering web3 games as primarily financial investments. For some, this will be hard.
Let me be very direct here.
Many web3 titles right now are simply less-fun conventional games with crypto slapped on top.
And done so in a way that looks like a Pay-to-Win NFT cash grab.
I’m talking about subpar games developed in a rush by crypto bros who aren’t experts in game development, many of which launch in beta mode — which should be 80–90% feature complete — when they should have been labelled alpha.
I’m talking about unfun games that prioritises earnings above gameplay, with the player experience taking a back seat. Rather than asking
‘What transaction system makes sense for this game, if at all?’
…web3 game developers have often gone for
‘Hmm…what game can we build on top of this financial model?’
Yikes.
Winning often depends on how much money you spend on in-game items and NFTs, rather than skill.
This just absolutely turns off conventional gamers, with ‘crypto’ and ‘NFTs’ now stained terms in traditional gaming communities.
Upside
But things are looking up.
Web3 studios are increasingly poaching top talent from traditional gaming. The ethos is fast evolving into games-first and crypto-second — games so fun that the ability to earn is just the icing on the cake.
Some investors, studios and titles to watch out for in 2023:
- GALA Games — a web3 gaming platform launching AAA titles;
- Animoca Brands — VC fund bankrolling a huge array of web3 titles;
- Immutable X — Layer 2 designed for web3 gaming;
- Illuvium — an open-world fantasy game built on Unreal Engine 5;
- Star Atlas — an open-world MMO strategy game built on Unreal Engine 5;
- Artemis — a gaming metaverse by the creators of PUBG;
- Random Games — a web3 gaming studio backed by the creator of GTA;
- STEPN & Sleepagotchi — lifestyle games that properly leverage crypto & NFTs to incentivise good habits.
These days, hundreds of games are released every day, with studios having precious little time to make a good first impression.
Requiring users to set up a web3 wallet just to earn in-game assets only serves as an unnecessary and annoying barrier to entry.
It wouldn’t be such a problem if wallets were easy to set up, but the reality is crypto is still way too hard for mainstream adoption.
Private keys are annoying and tricky to manage. Those coming from TradFi and web2 view the idea of seed phrases — and the notion of ownership tied to the protection of those phrases (rather than your identity) as abstract and confusing ideas.
“Not your keys, not your wallet.”
This cliché declaration often heard from crypto enthusiasts and libertarians broadcasted from the top of their ivory towers do not do onboarding any favours.
For the majority of people, web3 wallets are annoying. Self-custody is hard. Private keys are baffling. Web3 transaction messages don’t make sense. Ethereum gas fees are a joke. Lack of easy fiat onramps make things difficult. Getting your head around how CeFi and DeFi works takes dedication and an above-average level of curiosity.
All this just to play a damn game?!
Upside
The good news is every blockchain studio and web3 VC understands everything I just mentioned.
Mass adoption means easy.
We all get it.
And I can happily report that tons of innovation are being poured into making crypto onboarding and UI/UX easier. This includes better wallet design, clever new ways to manage your private keys, plus innovations in the Layer 1 & 2 space that makes transactions faster and cheaper.
Specifically for web3 gaming, many new titles now don’t require a web3 wallet to get started. Many of the top current and upcoming games leverage more scalable chains. GALA Games uses their own GYRI sidechain. Illuvium runs on Immutable X. Star Atlas is on Solana.
A lot of progress is being made.
Video Games have evolved tremendously ever since the first labels were shipped to the open market in the 1970s.
From the release of pay-to-play titles for early consoles and PC to freemium mobile games in the last decade, the gaming experience and business models have transformed in line with technological advances.
There are now 3 billion active gamers in the world, playing in a global gaming market now worth $300 billion annually and growing fast. If there’s one use case to drive hundreds of millions of people into web3, it’s gaming.
Two years ago, the world caught a glimpse of the potential of web3 gaming via Axie Infinity’s rise to fame. The game is but a shadow of its former glory, leaving many in financial ruin.
Unfortunately, this hasn’t been a unique story by far.
Blockchain is an incredible tool, but it’s not a panacea. It’s not a magic bullet. It does not represent a cure-all for all problems in gaming — or any other sector for that matter.
So far, blockchain has mostly been used as a gimmick to excite crypto enthusiasts and switch off — and even exploit — conventional gamers. As a result of this misalignment, many haven’t been able to appreciate how blockchain can help them and why web3 is worth paying attention to.
Nobody wants to play games made by crypto people (who are experts in making money) rather than gaming people (who are experts at making fun games).
But things are looking up. Web3 gaming offers indisputable benefits when executed correctly:
- transparency through blockchain;
- verifiable digital ownership & interoperability through NFTs;
- way to earn real money via cryptocurrencies.
Studios and VCs are poaching AAA game-makers into web3 to make cutting-edge and fun games built on top of the best technologies and engines, bringing much needed quality into web3 gaming.
The challenges of managing an inflationary token economy are becoming well-understood, and web3 studios are now hiring economists to bring longevity into web3 gaming.
Crypto innovations to lower the barrier of entry and ensure smooth onboarding are trickling into web3 games. This includes free-to-play models that don’t require any interactions with crypto upfront, making it easy to get into web3 gaming.
Web3 gaming companies are also getting more strategic in understanding what they need to succeed. This includes mobile, partnerships and strong tokenomics, allowing web3 studios to compete with traditional companies.
Going further, web3 gaming is believed to be the lowest hanging fruit of the move towards the global tech push towards the metaverse, which brings 3D immersion to the internet. The metaverse, which is primed to be built on top of web3, is expected to become a multi-trillion dollar industry that transforms our social and professional lives.
I’m addicted to lifestyle web3 games.
These are apps that incentivise good daily habits for things like exercising (STEPN), sleeping (Sleepagotchi) and reading (Read2N).
Let me explain how I wandered into this scene.
Here are the things I enjoy that’s relevant to web3 gaming:
- Gaming + Longevity. I love games but I only want to invest my time into activities, habits and hobbies that I can refine over a long time.
- Making money. Who doesn’t want the option of retiring from their day job early?
- Crypto & NFTs. I love the world of crypto, so much so that I run a crypto YouTube channel. And I enjoy researching the most promising NFT projects, particularly those with a compelling utility layer.
The first point is where web3 gaming mostly fails me.
There aren’t many AAA titles in web3 that really has me excited right now.
The day web3 pushes out their own classic franchises like Doom and StarCraft is the day I’ll properly sink my eager teeth into web3 gaming.
In fact, web3 gaming needs to aim even higher than my above requirements, because 3 of the 6 pillars of Play-to-Earn games — economic sustainability, player retention & perceived longevity — are very questionable for many web3 titles out right now.
I don’t want to buy expensive NFTs only for the game economy to crash in six months, resulting in an exodus of players and an almost impossible task to recuperate my initial investment. (This happens way too often.)
Staying on the topic of crypto and NFTs, there are too many web3 games that try to build a game on top of crypto — often to rake in easy money — rather than build truly useful utility into NFTs which are then incorporated into games.
I’m looking for web3 games with novel use cases for NFTs.
Putting everything I just said together led me down the path to lifestyle web3 games.
Take STEPN for instance. It’s not a real game to me — more like a fitness app with gamified mechanics — so I can relax my high standards for gaming.
The team leverages a psychological concept called loss aversion to incentivise players to get out and get healthy every day. It works. I’ve clocked over 2,000km on the app over 9 months and made thousands of dollars.
STEPN also represents a terrific use case for NFTs, where the ownership of NFT digital sneakers grants me access to the ability to earn.
On a similar vein, I use Sleepagotchi to help me sleep better, and Read2N to get me to do a bit of fiction reading every day.
In short, I don’t think web3 gaming is quite there just yet in terms of quality for me to invest the majority of my gaming time. Almost all of my favourite games and titles still lie in the traditional gaming world, with nothing comparable in web3 by a fair margin — yet.
The crypto barrier of entry is fine — even exciting — for crypto enthusiasts like myself, but they will no doubt impede many mainstream players.
Still, I have stumbled into a cool niche within the web3 gaming indusry — an exciting area that fuses my love for gamification, crypto, NFTs and making money into an attractive package that also keeps me healthy in the real world.
That is a remarkable find after thirty years of exploring the gaming industry.
Thanks for reading.
