Pantera Partners Analyzes the New Model of Chain Games "Play-to-Earn": How to Bring About Greater Social Change?

Written by: Paul Veradittakit, Founding Partner of Pantera Capital
Translated by: Lu Jiangfei

This week, we will delve into the field of blockchain gaming, particularly the "Play to Earn" model. Additionally, there is a "surprise" at the end of the article—I'll be launching a special Q&A with my good friend Amy Wu. Amy is currently responsible for crypto and gaming at the investment firm Lightspeed Venture Partners. Of course, I would also like to thank Brian Cho (an investor at Patron, who previously worked at A16z and Riot Games), Aleksander Larsen (co-founder of Axie Infinity), and Gabby Dizon (co-founder of Yield Guild Games) for their feedback.

In recent years, almost everyone's attention has been focused on the gaming sector, which is both surprising and understandable.

Gaming is a global industry: there are currently over 2.7 billion gamers worldwide, primarily concentrated in Asia, Europe, and Latin America. Furthermore, gaming has become firmly integrated into the daily lives of many people: 60% of Americans play video games in some form every day, with video game streaming attracting 1.2 billion viewers annually. For example, Fortnite, a popular product from Epic Games, had over 350 million monthly active players in 2020, generating 5.1 billion dollars in revenue, indicating that even a single game can achieve tremendous success. Analysts predict that the gaming industry's value will exceed 300 billion dollars in the coming years.

However, despite the promising trajectory of the gaming sector, there are still several significant drawbacks, including:

• Players do not truly "own" anything in the games. In 2020, global players spent over 50 billion dollars on in-game items, primarily purchasing clothing, weapons, and items that enhance performance and enjoyment, but these items cannot be used for any other purpose; they cannot sell, lend, or mortgage any game items they purchase. In other words, these transactions in games currently fall into the category of entertainment consumption rather than true investment.
• Interoperability between different games is very limited. To a large extent, many games on the current market remain walled gardens: they exist independently within different game worlds, each with its own items and experiences. Of course, this issue is not surprising! Game developers want complete independent control over their creative efforts, but what if they could collaborate with each other in more complex ways?
• Lack of optionality in business models. Currently, 80% of digital game revenue comes from free-to-play games (or "freemium games"). In some successful paid games, most revenue is generated through purchases of skins, such as CS:GO. This shift is good for players—paying $0.99 for a mobile game is almost unheard of—but it may limit the design space for certain developers. Form follows function, and as more game developers introduce new business models (such as secondary NFT sales commissions), new forms of games will emerge.

So I believe that the traditional gaming industry has long had certain flaws, and crypto can perfectly fill those gaps. Cryptocurrency allows developers to open up entirely new design spaces. Of course, I am not the only one who holds this idea.

The intersection of blockchain and gaming will undoubtedly become a hot topic in many industries in the future—similar discussions have already been numerous. However, this week, I want to focus on a specific trend that has recently gained widespread attention: Play to Earn (P2E) games.

What are "Play to Earn" games?

In the realm of "Play to Earn" games, any discussion would be meaningless without mentioning Axie Infinity. This game has pioneered an unprecedented type of gaming, much like how Candy Crush established the dominance of free-to-play games in 2012.

In terms of gameplay, Axie Infinity is similar to Pokémon: players raise and breed their Axies and then let them battle. Axies are cartoon characters that resemble salamanders, but the difference is that winners do not earn points through victories; instead, they earn the game's native token—Smooth Love Potion (SLP).

Image from: Decrypt

Unlike traditional "walled garden" games with built-in items, all assets in Axie Infinity are integrated into a decentralized universe: SLP tokens can be instantly transferred to another crypto asset, used as collateral, or cashed out as fiat currency. Axies and the game's digital land can be bought and sold as NFTs between individuals, and they even launched a governance token (AXS) that allows holders to decide the game's future.

Axie Infinity was released back in 2018, but its adoption surged only in recent months. In July of this year, the game peaked in revenue, generating over $15 million daily, pushing its fully diluted valuation of the governance token (AXS) to $22 billion.

From this perspective, Axie Infinity, a blockchain game built on Ethereum, has accounted for more than half of Ethereum's total revenue in the past 30 days, a truly astonishing figure.

Image from Token Terminal

Today, Axie Infinity has over 1.5 million daily active players worldwide, primarily concentrated in countries like the Philippines, Indonesia, Brazil, Venezuela, India, and Vietnam. For thousands of users, playing Axie Infinity has become a source of livelihood, sometimes providing earnings far exceeding their local job incomes. While most players are not native users of the crypto industry, many have learned about Axie Infinity through viral word-of-mouth marketing.

The explosive growth, global impact, and extensive revenue generation achieved by Axie Infinity are indeed remarkable. Regardless of how its future unfolds, one thing is certain: Axie Infinity has pioneered a new gaming model, namely "Play to Earn."

Perhaps inspired by Axie Infinity, Gabby Dizon recently co-founded Yield Guild Games, a guild aimed at the new "Play to Earn" economy, managed by a decentralized autonomous organization (DAO) that provides scholarship incentives for those who want to play Axie Infinity and other "Play to Earn" games professionally, sharing part of their earnings. As a result, this DAO holds NFTs from various metaverse games, making its governance token YGG an index of the gaming earning economy. The project is still in its early stages but already has over 4,500 "scholars," with weekly trading volumes exceeding $1 million.

In recent months, alongside Axie Infinity, several other "Play to Earn" games have also gained popularity, such as CryptoBlades, Zed Run, Cometh, and REVV, many of which are developed by game developers focused solely on blockchain gaming, whose primary audience in the past was essentially crypto-native users.

However, after the astonishing success of Axie Infinity, I believe the "Play to Earn" gaming revolution is highly significant for major game developers, and this trend cannot be ignored. I even suspect that we will see some established players in the gaming industry begin to incorporate these ideas into their games and bring this gaming model to a broader audience.

This process may seem slow, but it could also come at you all at once. The real question is: why are "Play to Earn" games exploding now?

For long-term observers of the blockchain gaming field, frankly speaking, the "Play to Earn" game model has been a hot topic for years. Why has it only recently opened the floodgates? Has something changed?

While there is no clear answer to the above questions yet, we believe a series of industry development trends may have played a role in the explosion of "Play to Earn" games:

• Network expansion. Layer 2 Ethereum scaling protocols, new high-throughput blockchains, and other scalability solutions have made the flourishing of blockchain-native games possible. While there is still much work to be done, our situation is much better than it was a few years ago—remember the network congestion caused by the 2017 game CryptoKitties?
• NFTs going mainstream. Many innovations related to NFTs—including the ERC-721 standard—have spurred a recent surge in NFT applications. Game companies now have the tools to NFT-ify their games, and more importantly, the public can better understand why rare game assets have value.
• DeFi infrastructure. Many basic decentralized finance industry tools (such as AMM automated market makers) have been tested in practice and widely implemented, allowing game developers to incorporate these tools to financialize games. Moreover, purchasing, lending, mortgaging, and other basic financial activities can now smoothly enter the gaming realm.
• Web 2 interoperability. As many traditional tech giants begin to join the decentralized ecosystem, it undoubtedly opens up a new distribution mechanism for crypto-driven games. For example, recent changes by Apple to the App Store allow iOS users to more easily access NFT-based "Play to Earn" games directly, a significant change that enables games like Axie: Origin (a mobile app soon to be launched by the Axie Infinity team) to reach a broader audience.
• Metaverse. The pandemic has led many people to work from home, coupled with improvements in VR/AR technology and many other global trends, making the "metaverse" the new frontier for digital experiences—from working in virtual offices to playing adventure games. The rapid rise of the "metaverse" concept has even piqued Facebook's interest.

Surprise: Insights from Amy Wu

To add some color to the "Play to Earn" games, I invited my friend Amy Wu from Lightspeed Venture Partners to share some insightful perspectives, as she is currently responsible for investments in gaming and crypto.

Paul: What do you think led to the change in Axie Infinity? Why are they different from other blockchain games?

Amy Wu: The success of Axie Infinity is attributed to multiple factors, including word-of-mouth recommendations after the rise of the Philippine market, the interest generated by "Play to Earn" game documentaries, and increased awareness. However, I believe the key factor is their shift to the Ronin blockchain, which has allowed for seamless game purchase transactions and a great gaming experience. As for what makes Axie Infinity special, compared to other blockchain games (like Gods Unchained), I think the community around Axie Infinity, including PvP players and Axie collectors, is truly strong. Retention rate is an important metric used to track gameplay and community strength, and for Axie Infinity, this metric is significantly higher than for other blockchain games (over 30%).

Paul: Will "Play to Earn" games be the next monetization model for games?

Amy Wu: I don't think "Play to Earn" games are a monetization model for games, like free-to-play, paid games, or pay-to-upgrade games. "Play to Earn" games can coexist with monetization models; it describes more of a player acquisition strategy because this game model has an incredibly viral way of acquiring a specific type of player, with the main goal being to make money. In the past, gamers were spenders, but now these players are earners, which is a significant difference. Companies like Axie Infinity have enough "Play to Earn" players to offer many crypto-related financial service products (on the Ronin chain), which is valuable. Ideally, a game can balance regular players and "Play to Earn" players well; if you don't do this, you can still balance the game economy, but it requires more whale-level players to invest heavily in the game to achieve that.

Paul: What do you see at the intersection of blockchain games and traditional games right now?

Amy Wu: Currently, the blockchain gaming industry is experiencing explosive growth, with dozens of new teams forming every week, and a lot of venture capital and crypto capital eager to invest in this emerging vertical category. It can be said that now is the best time to become a blockchain game developer. Most of these teams are crypto and NFT native, and my advice is to bring in people with native game design and development DNA into the types of games they are making because, ultimately, it's not easy for a game to survive long-term. Those top hit games need years to "lay the foundation," and you can't expect to achieve long-term success in just a few months. Some blockchain game development teams have already realized this, and I think players will see the golden age of blockchain games in a few years, but releasing games early can provide a first-mover advantage.

How can we achieve long-term success in blockchain gaming?

If gaming ultimately becomes a way to earn income, the impact will be tremendous. A worker typically engaged in the "gig economy," such as an Uber driver, might see "Play to Earn" games as another income option, and a more enjoyable one at that.

This represents a new type of work, from digital real estate agents to NFT art curators, and "Play to Earn" games will be highly sought after in the metaverse. In the past, spending related to gaming for casual gamers was considered "consumption," but now they can view this gaming-related spending as investment. It is not an exaggeration to say that this could even lead to a greater social transformation.

Recently, with the rise of the NFT game Loot, we have seen what the future of NFT gaming might look like. Loot is an unusual "game": 8,000 bags were minted as NFTs and purchased by users, containing randomly generated adventurer gear of varying rarity. For example, a bag might include a "gold ring," a "skill robe," and a variety of other items. However, while NFT holders "own" these "bags," they do not serve a real purpose—this is a "bottom-up" project, with many NFTs created even before the game itself. After Loot was released, the community quickly began to take action: the floor price of Loot bags once surged to over $20,000, artists began designing these items (some even with AI!), and some game developers started building interactions between Loot and the metaverse.

All of this, and more, happened in less than 10 days. A passionate community of Loot holders and supporters is gradually building a "game"—this is undoubtedly a paradigm shift in the gaming industry, and it is incredibly powerful. Loot may be the first but certainly not the last NFT game to follow this new model, and you will find that "community first, then game" has replaced "game first, then community."

With that in mind, here are some questions I have been pondering lately:

• In the "Play to Earn" game economy, what makes a game excellent? I worry that the term "earn money playing games" might convey the wrong message: the earning aspect should be a fun, well-designed byproduct of the game, not the primary consideration. First and foremost, the game must have high entertainment value, strong community support, and a long-term sustainable development plan. If any of these three points cannot be achieved, I find it hard to imagine that the game economy will generate lasting value. Therefore, while "Play to Earn" games are an exciting idea, they cannot exist in isolation: players still need an excellent game. I would bet that the most fulfilling and engaging games will keep people invested for long periods, ultimately forming the most vibrant economy.
• How do "Play to Earn" games fit into my investment portfolio? For Axie Infinity, there are various ways to get involved: purchasing Axies, digital land, the game's native tokens, or joining a guild like YGG. However, each asset is very, very different— for example, in metaverse-based games, purchasing land requires time and resources for your property to be better developed, which is very similar to the real estate industry in the real world. Moreover, betting on the right games is extremely difficult; unless you are a passionate gamer or an industry insider, it is hard to predict which "Play to Earn" games will succeed and which will not. To address this differentiation issue, you need to use some new financial analysis tools, such as Index Coop's Metaverse Index, which allows a broader group of investors to access this exciting asset class.
• What infrastructure will develop around the "Play to Earn" gaming industry? Yield Guild is very exciting because it is a relatively logical part of the entire ecosystem. At least intuitively, a centralized organization that invests, advocates, and mobilizes for earning money through gaming is appealing, reminiscent of how craftsmen joined guilds in medieval times. However, it seems that something is still missing for this brand-new "Play to Earn" gaming economy. Will earning players establish a coalition in a decentralized autonomous organization (DAO) format to lobby for a more player-friendly income distribution? Or, like gig economy workers, will there be a platform for earners to access basic benefits (like healthcare)? The "Play to Earn" gaming economy will create a new working class, and I hope that in the future, we can build some products that make their lives easier.

Conclusion: It has been a while since "Play to Earn" games emerged, but it feels like they have only recently come to the forefront. This summer, Axie Infinity experienced explosive growth, and many are excited about Yield Guild. Following this wave, "Play to Earn" games are gradually becoming a focus for gaming giants and cryptocurrency thought leaders—under this powerful tailwind, it is worth paying attention to what projects will be built in the future. For investors exploring the "Play to Earn" gaming space, this is certainly a very "interesting" moment, but from a broader perspective, it also marks a shift in our views on labor, leisure, and value—therefore, "Play to Earn" games are undoubtedly an important trend to watch.

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