How the "killer" application of Web3.0 Games was born
Because the essence of web3 is financial activities, it is much more influenced by capital factors than web2.Author: GGD Research Team, Galaxy GameDAO
Before we promote a concept to solidify everyone's faith in web3, let's first ask a classic question to people in the crypto space: Why haven't killer applications emerged?
To avoid ambiguity, we can try to define a killer application: an application that can sustain over 10 million MAU for a year.
Because only such a user base can prove that web3.0 is mainstream and the future; otherwise, web3 will forever remain a small circle of self-entertainment.
In the world of Web2, there are numerous applications with MAU exceeding 100 million, while in the world of Web3, there are only:
1. Exchanges (where centralized exchanges, which dominate trading volume and user numbers, are standard web2 products, merely profiting from web3 users)
2. Wallets
3. That's it
Even the first point does not seem to represent the next generation of the internet with infinite future prospects. The excuse that web3 is still in its barbaric growth phase and lacks infrastructure is untenable. From the invention of blockchain technology by Satoshi Nakamoto in 2008 to now, it has been a full 14 years; Vitalik Buterin founded Ethereum and introduced the concept of smart contracts 14 years ago, 8 years; Juan Benet designed IPFS 14 years ago, 8 years; The DAO project crowdfunded 16 years ago, 6 years; the first real NFT work, CryptoPunks, was born in 2017, 5 years…
Let's compare this with the history of Web2.
The iPhone 1 was launched in 2007, and within the short span of 2008-2010, pure mobile products like WhatsApp, Uber, and Instagram emerged like mushrooms after rain, with major companies subsequently launching mobile products; the iPhone 4 was launched in 2010 and entered the Chinese market, Tencent launched WeChat in 2011, and Sina Weibo fully transitioned to mobile in 2012; China's 4G base stations were basically completed in 2014, and between 2015-2016, Didi and Douyin were established…
I believe that those born in the 80s and 90s clearly remember the prosperity of the mobile application market back then. In contrast, in Web3, hundreds of projects go live every day, only to disappear within a year. Besides exchanges (again emphasizing that this is predominantly a web2 application) and wallets, can you name 2-3 products you use regularly?
Why is this the case? Because web2 is too convenient, far superior to existing web3 products, and it is much easier to reach users. This entrenched traditional power structure means that emerging forces cannot shake the fundamental situation, which also existed in the web2 era, such as the highly developed offline services in developed countries like the United States and Japan, where web2 development lags far behind China. Moreover, web3 is generally far behind web2 in terms of product form and service breadth.
This is why all to-c consumer Web3 applications choose to do ponzi schemes; without leveraging the initial wealth effect created by ponzi schemes, web3 applications have no way to accumulate users and achieve a cold start. However, once they choose to use ponzi schemes for cold starts, the harm to user expansion in web3 is immense. Because ponzi schemes will inevitably collapse, whether it's Axie, Stepn, or Farmer World, their NFTs or game tokens have seen declines similar to Luna (surprised? Unexpected? The floor price of an Axie has dropped from a peak of $1500 to now $3, and a pair of BNB Stepn shoes has fallen from a peak of 30 BNB to now 0.2 BNB, with declines around 99.5%, while Farmer World has gone directly to zero).
The essence of ponzi schemes and the harsh reality of the drastic declines in ponzi projects will lead to one result: no one will survive long in a gamefi project, because the best strategy against ponzi schemes is to make money and escape early; reinvestment is merely to make more money before escaping, and there will be no "faith" in the project. In other words, while gamefi projects may generate a large number of DAUs in the early stages, DAUs will ultimately decline, and the sustained expansion momentum of DAUs seen in web2 cannot be replicated.
This not only harms the "faith in web3" users in the long term but also has a profound impact on the backers of the projects, because only projects supported by "powerful" backers are qualified to significantly expand DAUs, and repeated collapses will only tarnish the credibility of the backers.
At this stage, readers might wonder, since web3 has so many shortcomings, is it a false proposition? Will web2 continue to dominate this information age?
No! Why? Because blockchain technology greatly reduces transaction costs in the digital content market, allowing for low-cost direct trading of digital content produced on the internet. According to Coase's theorem, a market for digital content production will inevitably emerge. What does this mean?
Let's take a simple example: if we are optimistic about the sales of the game project "COD16," why can't we directly purchase shares of "COD16" but only buy shares of Blizzard? After all, Blizzard's other projects may incur losses, or their sales may not be as good as "COD16," so my investment won't be fully tied to "COD16's" profits. This is due to the existence of market transaction costs under Coase's theorem; for example, the cost of separately disclosing financial reports for "WOW," "COD14," "COD15," and "COD16" is far greater than simply disclosing Blizzard's financial report. The costs of financial reports and the salaries of regulatory personnel all contribute to the fact that "the operation of market mechanisms has costs, and the use of institutions has costs." Under these institutional costs, trading Blizzard's stock is the arrangement with the lowest transaction costs.
The emergence of smart contracts based on blockchain changes all of this, as smart contracts enable "programmable institutional supply." According to classical Marxist political economy, this is a "change in production relations." What does this mean? The aforementioned Blizzard stock trading market is a typical institutional supply; under this system, there are Goldman Sachs' IBD producing prospectuses, Ernst & Young preparing financial statements, Latham & Watkins issuing legal opinions and investment sequence documents, and the SEC regulating these intermediaries with detailed and truthful documents. In this series of institutional arrangements, stockholders can freely buy and sell Blizzard's stock through Robinhood, and this institutional supply has been established through hundreds of years of evolution and practice in the form of laws or customs.
However, the emergence of smart contracts changes everything; these institutional supplies can all be provided through smart contract programming, and even various governance models different from classic stocks have emerged. For example, curve.fi grants voting power to token holders based on the duration of their token lock-up, which effectively addresses the classic governance "voting agency problem" faced in every MBA class. This problem arises when shareholders tend to vote for options that favor short-term benefits during shareholder meetings, leading to decisions that favor short-term stock price increases, such as the frequent approval and execution of proposals to "issue corporate bonds to repurchase common stock" in popular U.S. stocks.
But will the governance model of curve.fi be accepted by U.S. stocks and regulators? From the current perspective, in the short term, it will not be, because this "institutional supply" is a social arrangement, and the path from Senate legislation to SEC enforcement is too long. Social institutional changes are always slow and conservative.
Through smart contracts, we provide "programmable institutions" for governance tokens (ERC20), and with a deployment gas cost of less than $500, curve.fi is automatically managing nearly $15 billion in assets; through smart contracts, we provide "programmable institutions" for digital artworks (ERC721), establishing the property rights of NFTs (this is the first step of Coase's theorem), which is why the NFT market began to develop.
At this point, I believe readers have a general understanding of what "programmable institutional supply" means and clearly recognize that blockchain can significantly reduce transaction costs in financial markets. Combining what I mentioned about Coase's theorem, after the emergence of smart contracts leads to a massive reduction in the costs of "operating financial market mechanisms," the public discovers that they can not only trade governance tokens of projects (equivalent to company stocks) but can also directly trade parts of a company (or DAO, which is more appropriate), and even the content generated by the company can be traded. This is why a JPG that is worthless in web2 can sell for $1 million after becoming an NFT in web3; it is the institutional arrangement provided by ERC721 that enables such transactions.
This is the function provided by blockchain and smart contracts: "liberating production relations." This is clearly stated in Coase's theorem: when transaction costs approach zero, enterprises will perish, and individuals will tend to trade directly, achieving a new Pareto optimal allocation in the market.
This is also intuitively easy to understand. Player Alice chooses to trade items in the game or the stock of the game company; Alice is sufficiently aware of the time and cost required for this item, while the game company is too complex for Alice, who may not even have the ability to understand financial reports. If there is an institutional arrangement that allows Alice to quickly trade items, she will inevitably choose to trade the game item directly rather than trading stocks.
From this theoretical perspective, we can understand that web2 is a substitute for offline activities, such as moving takeout and shopping to online economic activities, while web3 is not a substitute for web2's business but a substitute for investment, replacing users' activities of investing in stocks with investing in NFTs or tokens on the blockchain. This is also why web3 is a collection of various "fi," such as defi, gamefi, musicfi…
Web2's revenue comes from users' real consumption, while web3's revenue comes from transaction commissions from users. Precisely because web3 is essentially a financial activity, it is much more affected by the capital market than web2.
From this premise, we can explain what web3 is and how to help web3 expand DAU.
Quality must reach web2 levels; web3 is an investment substitute for web2, so web3 products that reach web2 quality levels are worth investing in.
Since web3 is an investment substitute, and those with investment needs are always a minority in society, expanding DAU will inevitably require products to have web2 characteristics.
Web3 is not a business substitute; therefore, to attract real consumption, web2 products must possess characteristics that attract consumption. Thus, to generate revenue streams, again, products must have web2 characteristics.
Deep social relationships develop among product users; since web3 is an investment product, the stronger the social relationships among users, the greater the platform's stickiness and the stronger the "consensus" formed around the investment product.
Next, let's analyze SLG games from Web2 and compare them with existing SLG games in Web3.
As shown in the figure, the SLG category occupies a core position in game revenue in developed countries. The United States, China, and Japan are the three largest markets contributing to SLG mobile game revenue. In the first quarter of 2022, SLG mobile games in the U.S. generated revenue of $650 million, even surpassing the combined revenue of China and Japan, showcasing its astonishing revenue-generating capability in the U.S. However, major mobile game companies spent as much as $500 million in the SLG user acquisition market. If the production relationships can change through web3, such as directly subsidizing users with tokens for user acquisition, this direct issuance model would be a revolutionary downward strike against web2. Web2 giants do not produce games but may be reformed by web3's new production model, which allows them to take a significant share of the mobile gaming industry's profits through user data.
Web3 has long awaited a project that can expand DAU to 2-3 million, comparable to web2 DAUs, meaning a project that can broaden its user base. Among game categories, the first to break through is likely to be SLG, as SLG users are highly correlated with age and wealth. The user profile of SLG players is typically young to middle-aged, affluent, and socially active males, which aligns with the user profile of blockchain games. Axie, due to its focus on promoting in Southeast Asian countries, has not developed a large number of users from developed countries, thus relying on renting NFTs through gold farming guilds, which does not actually acquire a significant number of affluent male users and real game users. In contrast, Stepn has successfully attracted a large number of affluent male users.
For example, a Web3 game that has undergone initial testing—Galaxy Blitz—brings gameplay similar to Clash of Clans to the blockchain, setting the game background in the galaxy.
The battle scene is shown in the image below:
As we can see, Galaxy Blitz, as a newcomer in Web3.0, has already achieved the quality of traditional Web2.0 games in its early version, contrasting sharply with the "Gamefi" that purely aimed at gold farming at the end of 2021.
At the same time, it can be observed that SLG blockchain games represented by Galaxy Blitz are beginning to focus on playability and addictiveness, gradually guiding players into the world of Web3.0, paving the way for the widespread application and feasibility of blockchain, thus realizing the arrival of the Web3.0 era. This is a common dream for every Web3.0 pioneer.
According to official media news from Galaxy Blitz, the second round of internal testing will begin at the end of October.
