Web3 Games: Current Status and Future

Written by: Joel John & Siddharth

Edited by: Nanfeng

Introduction: Web3 games are often criticized for their poor graphics and user experience. In this article, I will analyze the reasons why Web3 games will continue to exist from the perspectives of economic changes, shifts in gaming business models, and the evolution of the labor market.

It’s easy to criticize the current form of Web3 games. They have clunky experiences. Users need to store keys, go through ramps, and spend thousands of dollars to enjoy the game. Why bother with these when traditional console games offer a better experience at a fraction of the cost? Who wants to face a crowd of Web3 game enthusiasts screaming WAGMI (We’re All Gonna Make It) when players are losing money on a clunky Web3 game product? Well, I don’t. I love Grand Theft Auto V and Red Dead Redemption, and current Web3 games are far from competing with them.

But as an investor who has spent a lot of time in gaming, I believe there are aspects of Web3 games that we are overlooking. So today, I want to take some time to explain why this field is not a fleeting trend that may disappear in the coming years. This topic piqued my interest while reviewing the industry NFT index on the Nansen platform. I noticed that this index, which includes 50 games, has dropped 65% since the beginning of this year (as shown in the figure below). In contrast, the S&P 500 index has fallen by 17%. Bitcoin has dropped by 37%. Luckily, we have StepN to help people earn a living by walking.

Why No One Cares

Putting sarcasm aside, the arguments against Web3 games are relatively straightforward. First, there are high barriers to entry in terms of technical skills and funding. When you start engaging with Web3 games, you find that their graphics are far from traditional AAA games. Assuming game graphics can be overlooked, these games often lack storylines. But who plays games for the story these days? Perhaps Web3 games have a strong community? Maybe not. The Web3 game community may be filled with users hoping to make a quick buck. Well, maybe there’s a lot of money to be made? Probably not. The market is saturated, and since Q2 2021, capital income in the "play-to-earn" (P2E) gaming economy has decreased.

The oddity of Web3 games is that we have created financial instruments from some historically "interesting" things. Generally, no one cares about virtual land sold at high prices in the "metaverse," because historically, ordinary people would stroll in real parks on weekends rather than wander in digital spaces with their digital avatars. However, according to the Financial Times, this is changing, and people are gathering in "virtual nightclubs" in the metaverse.

Ubisoft originally planned to launch NFTs in games, but had to abandon the plan due to low support.

If we artificially inflate the price of visiting local amenities (like parks) through the use of digital devices and somehow call it a beautiful and reasonable future, people will naturally be upset. This happens when studios like Ubisoft try to hard-code NFTs into the gaming experience (with low support). It’s just that this commercialization is happening in the digital realm, not in actual physical spaces. Historically, business has been a manifestation of skill, talent, and dedication, but today, business is dirty and hypocritical. The "pay-to-win" model in games stifles equality and fairness, leaving people frustrated (Note: In this pay-to-win model, players can spend money to buy items or skills, gaining an advantage in the game).

Don’t worry, this article is not a lengthy piece on why the current state of Web3 games is terrible. I believe many people dislike Web3 games because we always view them from a traditional perspective. But these new types of games will be important because they focus on (1) ownership and (2) asset liquidity. They are not trying to reinvent the wheel but innovate upon it.

Why You Should Care

The limitations brought by the centralized secondary market Steam in the traditional gaming sector, source: Crypto gaming enthusiast @Ancient001's speech at a gaming conference last month.

I learned about the importance of ownership in gaming from a talk by crypto gaming enthusiast @Ancient001. This can basically be summarized into three factors—verifying the scarcity of an asset, the source of the asset, and the user's ability to truly "own" that asset. When a traditional game studio releases a limited edition in-game asset, it is difficult to verify that claim. In the ticketing world, it has become common for issuers to buy concert tickets and resell them at a markup in the secondary market. Nowadays, nothing stops game studios from doing the same.

In contrast, when you purchase an NFT today, it is very easy to verify the historical ownership of that NFT through Ethereum's distributed ledger. Now, try doing this on Steam, the traditional gaming secondary market: you can see the records of past purchases of a game item, but you can hardly verify and validate it. Why is this important? Because incidents of fraud and money laundering using in-game assets are very frequent. This is precisely a problem that Valve (an American video game company) recently acknowledged.

Finally, there is the concept of ownership. The reason why digital assets running on an immutable blockchain ledger are interesting is that it is difficult to seize them without due legal process. One might argue that USDC can now "blacklist" addresses, but this only happens in significant events like hacking or extortion. Allowing users to own digital assets without the risk of asset obsolescence enables historically underserved social groups to participate in ways that were previously impossible. The gaming market has existed for over 20 years, but the ability to withdraw gaming earnings to accounts that won’t be banned by PayPal or banks has only recently emerged.

Web3 game Axie Infinity is controversial because we have never had a mechanism that allows the most sophisticated financial institutions to interact with retail participants. While we have Robinhood and Citadel, these interactions occur within a specific region of the world and focus on regulated and historically precedent assets. How do you assess which NFTs in Web3 games will skyrocket in price?

The surge in Axie’s assets is because the game connects a low-wage labor market, primarily organized through gaming guilds made up of sophisticated traders and hedge funds. Web3 games serve as a pathway for both leisure and financial engineering, where the incentives are no longer just community, entertainment, or leisure, but also the ability to access life-changing funds or livelihoods. This changes the dynamics of traditional gaming and the way users interact with games.

Capital Markets as Sculptors

According to a report from the Blockchain Game Alliance (BGA), about $4 billion was invested in Web3 gaming infrastructure in 2021, and approximately $2.5 billion entered the field in Q1 2022. When we talk about this industry, what we often overlook is that founders are motivated to transition from old ad-driven models to token-based models because they can access ready capital and higher valuations.

In terms of scale, in 2021, American gamers spent up to $30 billion on hardware, streaming donations, subscriptions, and game purchases. According to a report by Ernst & Young (EY), Indian players spent about $1.5 billion on online gaming in 2021. Thus, we find ourselves in an environment where the investment flowing into the gaming ecosystem each quarter is almost equal to the monthly gaming revenue. This is unhealthy in the long run.

Above: Monthly total revenue changes for video games in the U.S., in billions of dollars.

Depending on the resources you use—today's largest Web3 games have about 1 million users. According to data from Dune Analytics, there are a total of 4 million DeFi users at the time of writing. As a benchmark for NFT adoption, OpenSea had about 500,000 active traders per month at its peak. In other words, we are still exploring how the user base for blockchain-based applications can reach the 100 million mark.

The advantage of large game studios is that they have the potential to become the first retail-focused applications with tens of millions of users. By default, "free-to-play" games require a massive user base to sustain (Note: Free-to-play games often provide players with complete game content and monetize through selling virtual game items like skins and emotes). If these studios can convert a portion of their user base into Web3 native users, they could achieve extremely high valuations. They are motivated to focus on how to generate revenue and what can help them deliver maximum value to shareholders.

Games as Platforms

Another reason Web3 games may continue to persist is that they unlock entirely different themes of economic behavior—traders, speculators, and guilds can help create a self-sustaining ecosystem beneficial to both Web3 game publishers and players. The ideal game should evolve into a platform rather than just selling items once. Independent third-party users will be able to create services, develop experiences, and sell them. Do you think this is far-fetched? Look at the interactions on Twitter below:

Tim Sweeney, founder and CEO of Epic Games, the publisher of Fortnite, replied: "Fortnite is primarily a game. But with each update and every creative map, it is getting closer to becoming a platform. 2021 will be a very interesting year."

Tim Sweeney is the CEO of Epic Games, the company behind Fortnite. I recently found that when I opened the game, it felt like an NFT-driven world where independent artists sell clothing items, game maps, and optimizations of the game itself. The pathway to this goal already exists. Games like Grand Theft Auto V, Battlefield 2042, and Age of Empires have custom servers or mod-based game plugins. The changes in these games currently do not allow creators to earn revenue. Ideally, Web3-based games should reward both studios (like Epic) and their mod creators.

An example of user-generated content in Fortnite

Why will games become platforms? First, this reduces the effort studios need to maintain user engagement. Players can find new experiences developed by other players and retain their vested interests. Second, the promotion of large games means that independent and creative developers can earn revenue without worrying about finding a user base. Third, this paves the way for more revenue from in-game subscriptions and purchases. Games becoming platforms means we will see more user-generated content emerge. This, in turn, will lead players (and viewers) to invest more time.

Financial Vernacular of Web3

Web3 native games sit at the intersection of financial infrastructure and gaming experience. If independent communities can use tools like DAOs (Decentralized Autonomous Organizations) and multi-sigs, or collect in-game assets as payments, this will open up new channels for users that were previously inaccessible. These communities will also use unconventional incentives. For example, users will no longer pay with cash but reward each other using in-game assets.

Essentially, DAOs related to Web3 games can strip away the "boring" aspects of DAOs and showcase the importance of other alternative collaborative tools to ordinary people. DeFi has rebuilt financial markets. Web3 games essentially gamify financial markets, allowing 8-year-olds to trade with seasoned Wall Street traders. It’s both elegant and risky.

The idea of using the same NFT across multiple games has certain flaws. I don’t believe that interoperability of game assets will be achieved as quickly as we hope. Today’s studios have no incentive to achieve interoperability of in-game reputations and assets. A closed ecosystem means that users entering the game will remain in it for the long term because they cannot transfer all their assets elsewhere.

This is why Grand Theft Auto V has not seen significant upgrades for a long time. Developers understand that users who have spent hundreds of hours playing the game will not jump to other places, even if they are only gradually upgrading. The above image is proof of this trend. Despite Rockstar Games (an American game publisher) not releasing new games, audiences continue to flock to streams related to the game.

So how will user transition happen? In my view, interoperability is not the way forward. Liquidity is. Remember I mentioned earlier that games have the motivation to introduce financialization to attract traders? Games can benefit by charging a percentage fee on transactions, just like OpenSea charges fees on NFT transactions on its platform. If game assets use token standards (like ERC-1155), then the market for these assets is just a matter of time.

Gamers will trade these assets rather than trying to transfer them. Since the data regarding the scarcity and utility of these assets is not clear at first, price discovery will lag. For example, when a game introduces new characters and weapons, players will need to evaluate the cost and attributes of weapons through a learning curve and experiment with different character-weapon combinations to play the game. In a market model, these types of weapons will become very rare and expensive, rather than having their costs arbitrarily set by game developers. Imagine that the efficient market hypothesis will apply to the digital economy in games.

Community & Identity

So far, we have analyzed the reasons for the existence of Web3 games from capital market and business perspectives. We believe there is another reason: people. I have always said that the reason the P2E (play-to-earn) model has gained popularity is that it offers higher returns. However, the idea of merely using money as motivation may be flawed. The digital-first labor forms, like those brought by the P2E model, also foster a sense of community, dignity, and choices that traditional jobs do not allow.

The idea that making money through games can solve all the problems of today’s labor market is utopian, and I do not support this view. But to be fair, digital-first labor forms, such as "grinding tasks" in games, pave the way for people to master key skills like communication, collaboration, and coordination. In an increasingly digital workforce, traditional education forms are likely to fail to equip students with these skills.

Guilds like IndiGG allow players to find like-minded individuals and connect them with potential income-generating opportunities. This is exemplified in their collaboration with Skyweaver. The game itself is free, but players participating through the guild can earn currency from a $100,000 prize pool. This may not seem like much to the average knowledge worker reading this article, but if you come from a small town with no direct economic opportunities, it could change your life.

Players often find it difficult to find suitable guilds. Even when it comes to gaming, economic exploitation of labor is possible. It takes 7 to 12 days for a person to join a guild. According to research by Utsav Singla and Srijan Jain, founders of Respct.co, only 1 in 1,000 applicants is accepted. The learning curve for new users is very steep, including how to set up a wallet, how to join Discord, filter suitable games, and ultimately how to join a guild. Respct.co has built a platform that allows players to receive support throughout the entire cycle, from discovering games (just like you do on Steam) to receiving payments into their bank accounts.

We have yet to realize that digital workplaces like gaming are the richest data sources when hiring employees. For example, the average retirement age for esports players is around 26. But over the years, they have invested a significant amount of time in the gaming ecosystem, and their footprints are often verifiable. Their gaming hours, partners, and levels unlocked in games can be digitally verified and stored. As long as privacy issues are properly addressed, this will be very useful in recruitment.

Web3 native games will ultimately give rise to a rich layer of on-chain identity. Unlike LinkedIn, many claims in Web3 can be immediately verified. In the future, employers will reference these datasets as a substitute for college diplomas. If you are hiring a community manager—what is more valuable? A degree or the work experience of coordinating a gaming community for thousands of hours? I think I know what to choose.

In Conclusion

Viewing Web3 games solely from the perspective of game graphics and user experience is like looking through a keyhole. Your view of possibilities is very limited. Instead, we must observe the macroeconomic factors that bring people to these games: the shrinking labor market, the growing aspirations of young people in emerging countries, the rise of parallel financial infrastructures, and the challenges of existing game profitability.

The massive funding attracted by Web3 games means that founders will continue to develop these games, even though the vast majority will slowly die out, just like most venture-backed startups. They will create an alternative way for us to view games. They are not just avenues for leisure but economic ecosystems capable of sustaining entirely different user configurations. This may involve traders, streamers, researchers, and service providers. In my view, Web3 games are the Trojan horse that will bring the most users into the crypto space. They focus on tech-savvy young users who can adapt to digital-first asset ownership.

The challenge for studios and developers creating games is to balance economic activity with fun. If games become too complex, users will shy away from them. If games lack ownership and asset liquidity, users will continue to play traditional AAA games. Balancing both is a necessary condition for bringing 100 million users to Web3 through gaming.