The Financialization of Entertainment: Cryptocurrency Will Initiate a Paradigm Shift in Gaming

Written by: Mechanism Eva Wu

As the cryptocurrency gaming space becomes increasingly saturated, opinions on it have rarely been nuanced, often falling into two camps: "everything is a Ponzi scheme" and "cryptocurrency games will fundamentally change every aspect of work, life, and play forever." As traditional gamers and developers transition into cryptocurrency investors, they bring their personal and professional identities (and capital) into these concepts, making the discourse in this field rich with personal opinions.

In this paper, I share my recent views on cryptocurrency games, elaborating on several points. I discuss the following topics:

(1) Short-term vs. long-term trends.

(2) The current reality: financial incentives are driving growth.

(3) Opportunities and execution risks for entertainment-focused cryptocurrency games.

Financialization of Entertainment

Traditional gaming has already been on the path of entertainment financialization; people can earn money through trading skins, streaming, and being professional players. Cryptocurrency has simply elevated this to a new level. Currently, I observe two main emerging categories:

(1) "Play-first" cryptocurrency games, where the core is fun gameplay, and cryptocurrency is used as a competitive advantage to further attract players.

(2) "Earn-first" cryptocurrency games, where the main allure, gameplay, and enjoyment ultimately come from making money through participation in the cryptocurrency game economy.

Both types of games hit at the core of why people play games: the threshold for satisfying desires in games is lower than in real life, allowing people to fulfill their basic desires (see: Maslow's hierarchy of needs). Conversely, humans enjoy playing the same life game in parameterized and alternate realities. The most popular games exploit mimetic desires, creating loops in the game to satisfy those desires while also shaping them.

Games are for Making Money, Money, Money

Currently, the leader in the cryptocurrency gaming space is Axie Infinity. Despite criticism from many gaming experts regarding its lack of fun gameplay, it has achieved a valuation of $35 billion ($AXS). Players focused on this game can earn thousands of dollars each month, and low-income players are flocking to the game in search of economic opportunities (especially in the Philippines, where players account for 40% of the global total).

Axie Infinity and dozens of games that clone it tell us that perhaps fun is not the key to the development of a cryptocurrency game; the key is the game mechanics that reward players with real-world income. The game Illuvium will not launch for another two years, but its current valuation has already reached $11 billion ($ILV), primarily due to the introduction of pre-launch tokens and staking mechanisms.

The early appeal of "Play-to-Earn" (P2E) games currently faces the following questions:

(1) How concerned are people about the core game itself?

(2) Is the earning potential of the game and the market value of its NFTs the most important?

(3) More fundamentally, if money is the goal, is it a real game, or just a gamified micro-economy with "cryptocurrency" as its core game mechanic?

While it may sound like a major sin in the gaming field, in many ways, cryptocurrency investing and trading can be seen as one of the largest massively multiplayer online role-playing games (MMORPGs) on the internet, which many find highly addictive and entertaining.

Timing Predictions: "Play-first" Games vs. "Earn-first" Games

Earn-first Games: Economy-Centric, with Cryptocurrency as the Means

Due to shorter development times, the influx of investor funds into surrounding guilds, and asymmetric returns attracting new players in droves, earn-first games will see the fastest growth and competitor fluidity in the short term.

The early appeal of earn-first games

Because token incentive mechanisms guide and maintain the interest of players and speculators, "earn-first" cryptocurrency games can enter the market more quickly. As investors and traders compete to become the big winners in the game, successful play-to-earn games may generate high speculative premiums. Cryptocurrency natives find investing in these games particularly exciting (regardless of whether they are fun) because these games experiment with concepts like "NFT flipping, airdrops, staking, farming, and ownership economies."

Although the initial goal of these cryptocurrency-native games is to pursue enjoyable gaming experiences, a quick analysis of the user base reveals that the real driver of player growth is the opportunity to make money. For players of such games, gaming, work, and investment are intertwined—they consider which NFTs they must buy, play that game, and farm that token, creating a calculable opportunity cost in terms of time and strategy.

The rapid increase in cryptocurrency guilds, communities, and esports leagues focused on "earn-first" games in the short term proves that the opportunity to make money is at the core of such games. Guilds like YGG and Merit Circle (which just raised over $100 million) exist and trade at significant premiums because the "earn-first" games they are involved in provide opportunities to earn money. If you are optimistic about the current gaming guilds, you will also be optimistic about those games centered on earning, as the earning component of the game is the core.

Traps

All games in the world are pursued for genuine fun, but developers must maintain a pragmatic attitude toward the current user base of the game, why they play, and who their primary target audience is. At this stage, cryptocurrency games typically target two main audiences with some overlap: traditional gamers and cryptocurrency investors. If a game's marketing and distribution strategy revolves around cryptocurrency exchanges, token issuance platforms, and guilds, then even if the developers have the desire to create a game, they still do not view traditional gamers as their target. Currently, most cryptocurrency games target cryptocurrency enthusiasts and low SES players motivated by earning opportunities (which is still a large and growing audience).

Most games will not bridge the promotional gap from early markets (cryptocurrency enthusiasts) to mainstream markets (traditional gamers or low SES players). Nevertheless, games like Axie Infinity are paving the way for others, attracting a large number of people hoping to make money by playing games.

Some early successful cryptocurrency games simply embraced the native principles of cryptocurrency, providing opportunities for people to earn money while having fun. Meanwhile, some developers will spend years creating works comparable to AAA games. They target general gamers but face a significant potential risk—they may spend months or even years developing a mediocre game that lacks competitiveness in providing earning opportunities. Compared to attempts to mimic the fun of traditional games, a more feasible approach for developers in this field is to focus on creating a minimally viable game and making an engaging earning mechanism the core of the game.

Will the Music Stop?

"Earn-first" games also inherit a difficult sustainability issue; they cannot create a continuously growing economy. Currently, Axie Infinity's revenue has begun to decline, which may lead the earn-focused player base to be unwilling to continue playing the game. If new players cannot win and achieve profitability, the inflation of Axie Infinity will outpace growth and trigger an economic recession, affecting the hundreds of gaming guilds involved in Axie Infinity. Most of the user base of this game plays for economic incentives, so attempts to make the gameplay "more fun" are unlikely to solve the impending economic recession.

Research from Lars & Naavik indicates that a typical player's daily income in Axie Infinity has fallen below the minimum wage in the Philippines. High-level players earn above the minimum wage, but their income has also been declining since August.

That said, this Ponzi-like economy with inherent inflation issues is actually more durable than people imagine, especially as a flood of venture capital rushes to invest in the next big hit play-to-earn game. Similarly, poker and slot machines remain online casino games focused on earning, constituting a multi-billion dollar industry that has persisted for decades.

While "earn-first" games are not entirely the same as online casino games, we see that "earn-first" cryptocurrency games also blend the desire to earn with financial mechanisms and game mechanics. Although "earn-first" cryptocurrency games cannot linearly evolve and replace traditional games, they can innovate their own paths and business models, allowing people to continuously earn money and have fun from games.

As a summary of this section, I do not believe that the current new versions of cryptocurrency games will simply unlock "the next stage of gaming" or trigger a paradigm shift in the industry. In the short term, cryptocurrency in the gaming field does not appear to be an evolution of traditional games but rather products choosing a completely different path. While financial incentives are currently attracting player interest, in the long run, games that use cryptocurrency to unlock fundamentally new game mechanics will be better positioned.

Just as DeFi protocols cannot rely solely on inflationary tokenomics and yield to sustain their products, those games that emphasize fun rather than prioritizing cryptocurrency can exist as standalone products, making them strong competitors in this field. However, these games will experience some lag before we see more games enter the market, as they require longer development times and come with a series of execution risks. More content follows.

"Play-first" Games: Fun Gameplay and Cryptocurrency

In the medium term, we will see more games prioritizing gameplay introduce cryptocurrency concepts and innovations. These innovations will occur along a spectrum, from cosmetic skins becoming NFTs to token models where players can exert ownership in the game.

In the initial few new releases, developers will attempt to forcibly integrate the "play-to-earn" concept, tokens, and NFTs into very traditional games. I predict that P2E as a concept will undergo extensive experimentation in the next 2 to 5 years. However, in the long run, I believe developers will use cryptocurrency to unlock entirely new game mechanics. For example, games could introduce creative concepts such as dynamic NFTs that mimic wear or build a game from the ground up using user-generated content (like Loot). Ultimately, cryptocurrency will become a vast sandbox for experimentation in the gaming world.

This is why cryptocurrency games can usher in a new golden age for gaming. With great graphics, engaging stories, and emotionally stimulating incentives, these games can take exciting new approaches to leverage cryptocurrency to enhance the sense of achievement and immerse players more deeply.

Opportunities

Cryptocurrency also provides new power in the gaming field. In current traditional games, some key stages of the game creation value chain generate most of the industry's profits. Cryptocurrency allows game companies to monetize almost any stage of game creation, flipping the existing "free-to-play" business model. Most notably, games can monetize and guide community funding even before the game is ready. In fact, traditional games primarily consider capitalization in their design, with several models: game purchases, free-to-play, and subscriptions. Changing the revenue model of games is the most exciting and novel aspect. Without free-to-play, we might not even have the well-known esports of today.

At the same time, cryptocurrency also allows a different type of participant to replace traditional gamers: gaming enthusiasts, collectors, and earners. These individuals may not necessarily play games but can support the space through participating in other transactions, betting, attending events, watching streams, speculating, and collecting game memorabilia. Cryptocurrency enables these new types of actors emerging on the periphery of gaming to contribute practically to the future of games in novel ways.

Similarly, it also has the opportunity (and is a double-edged sword) to allow gamers to own their achievements and items in games, essentially financializing their enjoyment. While most players have yet to awaken a strong desire for ownership, it only takes one successful cryptocurrency game to stimulate the player base, prompting them to question why they have long been unable to own their game assets. However, this also comes with risks.

Risks

While cryptocurrency and related games sound promising, games supporting cryptocurrency will not become mainstream simply because experienced game developers enter the space. In fact, many games introducing cryptocurrency are asking for trouble, and people's understanding (and experimentation) of how cryptocurrency interacts with games is limited, leading to extremely challenging design problems.

Even so, these crypto games cannot rely solely on AAA graphics; they also need to possess product quality that can outperform existing games. If a game masters the crypto economy but is of mediocre quality, it can at most siphon users from other cryptocurrency games without impacting the $200 billion online gaming industry. I believe that in the next decade, those games that successfully use cryptocurrency to unlock new game mechanics will ultimately succeed, rather than those that simply add earning mechanisms to traditional games.

Currently, the best games simulate and parameterize our real lives, but they come with guardrails and belong to closed economies. Tokens or NFTs can financialize parts of the game, removing major guardrails and fundamentally changing gameplay, allowing games to inherit the entire financial landscape of the "real" world. When faced with a game exposed to the forces of speculators, investors, and arbitrageurs, traditional game developers may feel a lack of experience in designing and controlling gameplay and player psychology. Such games have incentives outside of the game, moving around the prices of tokens and NFTs. The first step is to acknowledge this reality and purposefully consider these different forces when designing games.

While many game developers try to compensate for their lack of knowledge with cryptocurrency-native venture capital firms or consultants (who love to boast that they can handle token economics), in reality, the number of games that collaborate with cryptocurrency natives, experienced game developers, and economists to adopt a "player-first" approach to solve difficult design problems is negligible. Developers should seek partners to guide them in identifying the many opportunities and external factors that cryptocurrency brings to their games.

Introducing ownership and monetary value will affect players' psychology

"Ownership" (especially through NFTs) has become a buzzword, and people easily forget that the main reason for tokenizing assets in games is that it introduces monetary value or makes assets easier to compose. If you ask traditional gamers, you'll find that they still believe they "own" assets, even if they are not NFTs. While most current cryptocurrency games use NFTs as a store of value, NFTs can also be designed for other creative purposes, such as establishing identity across different games or sharing them with friends.

Tokenizing in-game assets introduces a challenging design problem because adding monetary value to game assets can negatively impact gameplay. For example, when Diablo 3 introduced a real-money auction house (exchanging game assets for money), some players loved it, but the game ultimately experienced player attrition. The auction house case illustrates that the financialization of game assets can disrupt the natural rhythm of item drops, causing some players to feel a lack of reward from the game. This is a design problem that has yet to find a repeatable solution. For Diablo 3 players, introducing monetary value changed how people played and why they played. Players who used to play for the sake of playing found themselves playing for rent, and this potential psychological shift led players to stop enjoying the game itself, prompting them to seek out other games that did not so closely resemble the real world.

Game psychologists point out that much of the joy and addiction associated with games comes from unexpected and random rewards; the ability to easily obtain known rewards with money may actually deprive the game of its fun. NFTs and many play-to-earn games are rapidly moving toward pure financialization, which may ultimately stifle key gameplay elements. Particularly for avid gamers, the opportunity to gain a material advantage through speculation in competitive games is seen as a significant vice.

Traditional gamers adhere to the survival of the fittest in gaming mechanics, making it very elusive to add tokens or NFTs (and the complexities they bring from the real world). If a game does not "get it right" and does not align with their understanding of what a game is and who should play it, it will undoubtedly attract immediate backlash from the traditional gaming community. Such games should focus on tokenizing cosmetic skins (rather than skins that affect gameplay, to avoid the pay-to-win incentive) and consider using non-transferable tokens, allowing players to "mine" through gameplay.

Insight: Developers hoping to build large games with earning mechanisms need to be extremely cautious, weaving cryptocurrency economic incentives and NFTs in a way that maintains game quality; otherwise, they risk ruining both the game and the incentives for earning players. Additionally, cryptocurrency-native game developers face a blue ocean opportunity to create a new generation of games, where utilizing cryptocurrency is not merely about adding a token or asset tokenization mechanism. These types of games require longer development times, but once a few people find the right formula, they indeed have the chance to bring billions of traditional gamers into the cryptocurrency gaming ecosystem.

Conclusion

In closing, I believe cryptocurrency will unlock a paradigm shift in gaming. While it is currently unknown what this shift will look like, I believe that in the short term, we will see "earn-first" cryptocurrency games like Axie and Zed Run attract players through financial incentives, forming an attractive "black hole." Peripheral guilds and DAOs can complement this growth. In the medium term, we will see traditional games first attempt new monetization models using tokens and NFTs, trying to bring both traditional gamers and "earn-first" players into the fold. And in the long run, we will see a new generation of games adopting cryptocurrency, rather than simply adding earning mechanisms.

For game developers seeking creative risks, this is a major blue ocean, with attention and capital on its periphery, ready to be deployed at any moment. Cryptocurrency brings not just games with added tokens or simple NFTs, but an innovative gaming world. It allows game developers to create a new category of games, providing design freedom around cryptocurrency and a new player base, embedding professionalism, earning, and ownership directly into the gaming experience.

Regardless of your views on these different segments, they will have an interconnected future in gaming; these games will also intersect, learn from each other, and collaborate. If you are building this future, we would love to hear your insights.