Vader Research: 5 Predictions for the Development Trends of Web3 Games

Written by: Vader Research

Translation: Q, Translation Guild

The independent research institution Vader Research briefly introduces five research papers in this article, which argue that: excellent Web3 games will come from Web2 gaming companies, the market size of game NFTs will exceed 100 billion USD, Ponzi schemes are dragging down the Web3 gaming industry, and in the future, every Web3 game will have its own central bank and will employ over 100 million players.

The Web3 gaming sector needs new independent research institutions. For a long time, some crypto venture capital firms have designed and promoted token economic Ponzi schemes, sacrificing the long-term reputation of cryptocurrencies for short-term gains.

Vader Research is a paper-driven research institution dedicated to the long-term development of Web3 gaming. We focus on fundamental research, and every decision we make is data-driven. We provide a variety of consulting services for leading games, platforms, gaming guilds, and institutional investors.

In this article, we will share 5 core papers on Web3 gaming.

Paper One: Optimistic about Web3 Games Developed by Web2 Game Developers

Game development is a tough business—thousands of games die every year. It is an industry that requires significant popularity to sustain itself, cannot scale up, and has long been criticized for its inability to attract venture capital. The analytical approach to mobile gaming has changed the industry somewhat, as proprietary technologies developed during the design of popular games can now be used to create new popular games.

The current target of the Web3 gaming craze is not traditional players seeking fun, but crypto speculators and yield farmers seeking Ponzi returns. From day one, we have expressed concerns about the sustainability of the Axie Infinity "play-to-earn" model. P2E is a gamified pyramid scheme wrapped in complex token economics, and all P2E games will eventually collapse, just like every under-collateralized algorithmic stablecoin will.

Every game economy has inflows and outflows—any game that wants to sustain itself must have inflows exceed outflows. The inflows of a sustainable game economy should come from players who do not expect any economic returns and spend money in various pools (cosmetics, skipping wait times) purely for entertainment purposes.

The problem with the P2E model is that players want to double their money spent in the pools in just 30 days. This inflow of funds is what we call inflationary pools. They provide a short-term cash flow boost to the game economy but lay the groundwork for greater long-term economic risks.

Therefore, the real solution is to develop a fun game with addictive core mechanics, cool visual elements, captivating storylines, and vibrant social elements that can persuade traditional gamers to spend money on virtual items without any economic expectations attached. Gamers typically spend money on virtual items for the emotional experience.

Designing such an addictive and fun game is very challenging and requires years of experience to master. We believe that with the help of experienced consultants, traditional game developers can grasp cryptocurrency more easily than crypto-native founders can master game design.

Traditional gamers do not care about NFTs, decentralization, or ownership. They want to play fun games and have tangible emotional experiences throughout the gaming process. What Web3 game companies need are traditional players who can be attracted by good games and smooth onboarding experiences.

Thus, we are optimistic about Web3 games developed by experienced Web2 game developers.

Paper Two: Game NFTs Will Become a Financial Market Exceeding 100 Billion USD

Due to the ownership concept of blockchain, most Web3 games will have open economic systems, allowing in-game assets to be traded on secondary markets without permission. The virtual goods trading in traditional games is a $50 billion industry—this figure mainly comes from primary market sales, as secondary trading of game items is usually prohibited. In 2015, the black market for secondary trading of game items was estimated to reach $5 billion.

As the gaming industry integrates into Web3, more Web3 games will be developed, creating millions of unique game NFTs. So far, there have been over 12 million unique Axie NFTs. We believe that the growth of Web3 games will increasingly accumulate the secondary financial market for game NFTs, potentially exceeding the scale of certain primary financial markets.

Like all complex financial markets (stocks, bonds, commodities), the game NFT financial market will reach a certain scale, attracting complex solution providers such as asset management firms, hedge funds, activist investors, quantitative traders, passive indices, derivatives brokers, guild brokers, structured NFT lessors, and M&A advisors.

We believe that the traditional gaming industry will merge into the Web3 gaming sector, accelerating growth across the entire industry. The open economic attributes of Web3 games will attract speculators and financial capital, increasing the market size of game NFTs to over 100 billion USD.

Paper Three: Every Web3 Game Will Have a Central Bank Governor

Every Web3 game is an independent nation with an open economy. Players are citizens, speculators are foreign investors, yield farmers are migrant workers, and game developers are the government and central bank.

Real-world economies must balance growth and sustainability—governments focus on short-term growth to win elections, while central banks aim for long-term sustainable economies. To achieve both goals, economies focus on improving productivity and efficiency (better technology, lower costs, higher returns).

The priorities of virtual economies are different—attracting players, retaining players, and monetizing players to maximize the long-term brand value of the game. Economic sustainability is equally important as its impact on player behavior. Virtual economists do not need to solve issues like poverty or unemployment. In other words, a sustainable virtual economy is often crucial for long-term player retention. Inefficiency is a characteristic in the virtual world, not a flaw.

There exists a challenge in the Web3 game economy that we have never fully faced—its permissionless secondary market is an open virtual economy with multiple user groups (gamers, speculators, yield farmers). Large-scale multiplayer online games in Web2, such as Runescape, EVE, and World of Warcraft, face similar challenges to some extent, but none of them have a permissionless, frictionless secondary market.

For virtual economists in Web3 games, balancing growth, retention, and monetization while maintaining a sustainable open game economy will always be a challenge, as free market arbitrageurs will not give up searching for inefficient markets. Game economy management is also an important channel for acquiring users through token and NFT incentives.

Therefore, every Web3 game will have a central bank governor, either internally or externally.

Paper Four: Ponzi Schemes Will Slow Down the Progress of Web3 Games

Projects like Stepn, Luna, Thetan Arena, DeFi Kingdoms, and Pegaxy disguise their Ponzi scheme nature with complex token economics, causing the process of attracting real players to Web3 games to regress by several years.

Some influencers and venture capital firms market them as safe or non-Ponzi projects, at the cost of the long-term adoption of cryptocurrencies. While some users are aware of their Ponzi nature and enjoy the thrill of gambling, most users are uninformed retail investors who will ultimately lose their savings.

The negative news and bad reputation from these projects collapsing often lead traditional players and game developers to believe that Web3 games and NFTs are merely unregulated Ponzi schemes. What Web3 games need are traditional players attracted by fun Web3 games, which can only come from experienced game developers.

Good games do not need to rely on a 5000% APY Ponzi scheme to build and grow their player base. These incentives attract investment bots or yield farmers, who will immediately flee when another similar project offers enticing returns. Games dominated by bot users early on may deter traditional players. These projects require a continuous influx of new capital to sustain their economies, ultimately falling into an inevitable death spiral.

Ponzi economics, if used properly, can be an efficient tool for cold starts and increasing network effects, provided it is not abused. A rule of thumb to determine whether a game belongs to an unsustainable Ponzi economy is to look at its return on investment (ROI). If your investment payback period is less than 120 days, it is a typical Ponzi scheme—the shorter the payback period, the more unsustainable the economy.

We have built detailed financial models for Axie Infinity, Pegaxy, Thetan Arena, Crabada, and many other Web3 games, applying various simulations and stress tests to predict their economic prospects. We also warned about the unsustainability of Axie Infinity's economy back in August 2021.

We believe that Ponzi schemes will slow down the adoption of Web3 games. Therefore, we only collaborate with teams that want to build long-term game brands and do not recommend designing unsustainable Ponzi economies.

"Shipbuilding is best left to those who have no intention of meddling with the design and marketing of the Titanic."

Paper Five: By 2030, the Web3 Gaming Sector Will Employ Over 100 Million Funded Players

Axie Infinity has helped over 3 million players earn money by playing video games. Although its economy is not sustainable, the game developers share profits with players and hope to attract more whales to spend, making it a win-win case. As we see more sustainable Web3 games, we believe that by 2030, the community of players grinding games and funded players will grow to over 100 million.

The open economy of Web3 games allows players to exchange time for money, where big spenders/whales are willing to pay others to perform specific tasks. As long as non-spenders make spenders feel good, they will continue to spend, and the game economy can sustain itself. This paper is primarily inspired by Castronova's "Employed Players" white paper, which is a must-read for those who want to understand this topic.

"For big spenders, the presence of others is valuable for several reasons: the thrill of being richer and more powerful than others, yes, but also the simple joy of companionship. Whatever the reason, big spenders are willing to pay a company enough to enable it to open its doors to anyone." (Castronova)

The automation of low-skill jobs will lead to more unemployment among low-skill workers, resulting in greater income inequality. The result may be that the rich spend more time on entertainment, as boredom will become their biggest problem. Consequently, they may spend more time and money on games.

On the other hand, the poor will struggle to find low-skill job opportunities. For the poor, gaming will be a great side job option, as it requires no competitiveness. This income may not be enough to cover all living expenses, but it will represent a meaningful side income. Competitive players may make a living by playing video games, but non-competitive players are likely unable to fully cover their living costs and will treat the money earned from video games as supplementary income.

"In psychology and sociology, leaving the second class means the first class cannot exist. Therefore, the comparative role of all non-spending players is merely to become the second class. Their task is precisely to sit in the second class, so that first-class passengers can feel happy about boarding early, getting better food, and having more space." (Castronova)

"In games where people are hired to play, everyone will still become a hero. But some of them will spend a lot of real money and become a great hero, while others will earn a small amount of real money and become a pretty good hero." (Castronova)

In a dystopian future, it will gradually converge into a universal basic income, as governments and private advertising networks will release paid tasks daily in exchange for specific behaviors. Therefore, we believe that by 2030, Web3 games will employ over 100 million funded players.