The creator economy in Web3 games: Challenges of user-generated content from games to platforms

Original Title: 《The Creator Economy In Gaming》

Authors: Joel John, Siddharth

Translation: Deep Tide TechFlow

Today we are going to discuss gaming. For several reasons, gaming is one of the few true use cases that has the potential to scale to a billion users in the consumer-facing digital asset ecosystem.

• First, gamers are already accustomed to digital assets; they often pay for transactions in games (i.e., items).

• Second, this is a high-frequency trading use case that our current financial infrastructure does not serve well in the global market.

• Finally, gaming helps us shift our attention and provides key features like community.

Expensive JPEGs and Nonexistent Users

Funding for blockchain-related games surged from $83 million in 2020 to over $2.4 billion in 2021. The success of Axie Infinity drove this 30-fold increase during the dawn of a new category. The amount of money flowing into this ecosystem could be much higher, as founders and venture capital firms are eager to build everything from developer tools to wallets for the gaming ecosystem.

However, two years later, there isn't much hype (we know that AAA games like Fortnite take years to build).

There are a few reasons for this:

• First, traditional gamers play games for entertainment and distraction. Currently, Web3 games are too focused on the financial aspects, which diminishes the gaming experience. You can't create a Web3-native version of GTA 5 or Red Dead Redemption in 18 months. For studios with existing user bases, forcibly applying on-chain primitives makes no sense. Their users loudly oppose these ideas, leading to potential chaos and bad PR.

• On the other hand, the bear market has hit Web3-native games like Axie Infinity, which saw a surge of new users in Q3 2021. The decline in token prices means that ordinary users are less concerned about the economic incentives of Web3-related games. Consumers began to view these products as more transactional and less fun. These games could not sustain themselves as a means of making a living or a great way to pass the time. Daily users and revenue for these games rapidly decreased.

Established game studios with decades of experience in game development have not fared much better with their Web3 projects. Ubisoft only made $400 by integrating NFTs into one of their flagship games, Ghost Recon. The backlash was so severe that they stopped any NFT-related updates in less than five months.

The reason is simple. When we impose Web3 as a narrative layer on games, we add layer upon layer of complexity to a product that is already usable. Users only care when there is an exponential advantage to be gained. For years, players have seen studios develop more and more ways to extract money from them.

In its current form, NFTs are just another way for studios to plunder user assets. There was a time when gamers could trade physical copies of their favorite games with friends. This disappeared when game releases turned digital, and platforms like Steam and Origin became centralized marketplaces for games.

Game developers realized they could sell expansions of the original game as downloadable content (DLC) instead of releasing complete games. As studios craved more profits, microtransactions were introduced. And perhaps the most controversial monetization practice in games over the past decade has been loot boxes, which are essentially lotteries sold to minors hoping to get random upgrades for their game characters.

Over the past 15 years, there have been both successes and controversies surrounding game monetization. In the past, you could buy a game and own it completely without needing small transactions or expansions. However, the economic viability of game publishers has not been ideal, especially for multiplayer games. There are ongoing costs associated with maintaining servers, managing users, releasing features, and establishing mechanisms to keep the game relevant.

If all these costs are bundled together, the game will perish because very few users can afford it. This is also part of the reason why new era games like Fortnite are transitioning to subscription models. Additionally, ecosystems like Microsoft's Xbox and Sony's PlayStation have their own bundled platform subscription packages.

You can think of gaming platforms as digital towns where users gather, interact, play, and frequently transact. Unlike the linear experience of gaming through storylines in the early 2000s, these digital products are now packaged as social consumer goods.

Every time a new financial primitive is introduced in a game, it faces strong opposition because it empowers developers over users. Imagine going to a restaurant and having to pay every time you take a bite of your meal. This is how tools like microtransactions function in their current form. Especially in Web3-native games, the "entry requirement" is often to purchase a JPEG, which could be a month's salary.

To ensure that gamers and developers maintaining these digital realms achieve fair outcomes, we need to look for financial primitives that serve both sides. Games have been seen as "home" by those who spend the most time on them. However, few primitives allow creators and gamers to own or directly profit from their work in games.

It seems a bit far-fetched to think that creators will make a living from gaming experiences. Many can remind us that most gaming enthusiasts spend time managing communities for non-transactional benefits, like the relationships they build.

Today's Web3 games focus on better financial infrastructure and asset verification. If we want these primitives to be relevant, we must look to empower users and creators through this infrastructure. This is where UGC comes into play.

Understanding User-Generated Content (UGC)

Most traditional studios have limited production speeds. This is by design, as high-quality content creation, whether writing a book or producing a film, is very time-consuming. The drive to seek inspiration and turn ideas into consumable content takes time. When content is finally produced, there is an additional risk that it may only appeal to a small portion of users globally.

This is why most blockbuster films focus on universally applicable emotions, such as love and family, or the rags-to-riches story of the protagonist. They optimize for mass appeal. By studying any traditional publisher, you will find that their audience often shares common ideological leanings.

The internet has largely disrupted this relationship. No longer is content created by centralized publishers; everyone is creating and consuming content. It makes sense to transfer the expensive cost of creating content to users eager to build an audience, as the internet has drastically lowered dissemination costs.

Unlike traditional media, social networks have reduced the cost of creating content to zero while also making it possible to capture more and more user attention. Shifting the cost of content creation to users while increasing the time ordinary users spend on these platforms has made the new era of social networks incredibly profitable.

Compared to traditional media, they gain user attention with minimal operational costs. When you spend time scrolling through TikTok, ByteDance does not incur any additional resources to create the content feed. Their costs are limited to content moderation and server maintenance. Facebook has spent over $500 million hiring experts to help manage content. It is estimated that there are essentially 15,000 to 30,000 moderators filtering content on social networks daily.

In gaming, UGC stands out through streaming, where players watch other gamers play. Gamers often enjoy watching others play, especially if there is an entertaining commentary to accompany it.

Twitch is the streaming platform for gaming-related content today, with all viewers collectively spending 2,500 years watching Twitch content annually.

But the fun of watching others can only last so long. Therefore, some games allow creators to build assets and sell them to others. This includes everything from developing simple racing games to games that require complex strategies to win. Suddenly, what players can do is no longer limited to what developers provide. Instead, users can create infinite variations of different games based on this foundation.

Think of it as the difference between publishing a book and publishing a Microsoft Word document to see what unique stories your creators come up with. Game studios own the intellectual property around characters and the code of the world the gamers inhabit. They are also responsible for guiding the initial user base around the game.

Games like CSGO and Age of Empires allow players to create unique levels and challenges within the game. Fortnite has a creative mode that enables users to build their own worlds and characters. The arcade mode of Far Cry 5 consists of custom game levels created by community members. Unlike mods, UGC in games typically requires lower expertise and is often supported by the game's design mechanics. Users have been discussing them since as early as 2012.

From Games to Platforms

UGC is a powerful lever for new games, with two core functions:

• First, they extend the time users can engage with the game. Linear games with progressive storylines are fun until the story ends, after which players have little reason to continue playing. However, online modes can extend the lifespan and profitability of a game. This is why Rockstar's GTA 5 is the most profitable entertainment product of all time, with global sales reaching $6 billion.

• Second, it allows the most active contributors in the game to continue investing. Building unique levels and worlds in a digital realm creates an emotional attachment to the game. When games become a channel for creative expression, the feedback players receive from other players is a validation of their efforts. Essentially, UGC helps a portion of the game's user base transition from passive participants to active creators.

Most games are validated by engaging storylines (e.g., Assassin's Creed or Call of Duty) and ultimately transitioning to UGC as part of a broader content product. Recently, games like Fortnite have developed a model where users are less involved in battle royales and more engaged in the active, chaotic, and random participation of a large number of users in custom content.

The randomness brought by multiplayer games becomes a hook to attract users, as the gameplay is unpredictable. Each game session offers something different. This fosters an effective feedback loop where users are incentivized to use the product simply because they do not know what to expect.

Minecraft and Roblox are exceptions to this norm, as they have become platforms. A game that has become a platform typically has relatively few IPs and can have a fluid storyline depending on who builds on it. In these games, users spend more time on user-generated game experiences than on the storylines or levels developed by the studios behind the games. Fortnite is in a unique transitional phase toward becoming a platform, with reports suggesting that users now spend about half their time in the game interacting with UGC.

Over time, transitioning to a platform is the holy grail for most games and opens up monetization avenues in unique ways. For example, Fortnite has collaborated with over 100 brands in recent years. Moreover, focusing on becoming a UGC platform enables games to pass some revenue from users to creators.

In 2021, Roblox had over 1.7 million independent users creating content on the platform. Among them, over 8,600 earned more than $1,000. Additionally, around 74 developers each netted over a million dollars. However, this is not just about money. It is about the variety and quantity of games that can attract users, which have transitioned to platforms. In 2021, the median user on Roblox visited 40 different experiences.

They have evolved from standalone media consumption goods (like TV shows) to platforms where users create most of the user experiences.

Challenges of User-Generated Content

For games looking to evolve into trading platforms, UGC is a powerful lever. But it may not always work out as intended. Even large gaming markets like Steam struggle to maintain long-term creator spending. In 2015, long before NFTs or royalties emerged, Steam had a creator studio section that paid over $50 million to creators making mods, skins, and more for a handful of games.

At that time, only 25% of royalties were paid to creators. The program had to shut down four months later due to "unexpected user behavior."

Roblox and Fortnite are powerful platforms for creating entirely new forms of work. A decade or two ago, passionate gamers had few channels to convert their time and skills into income. Today, developers on Roblox earn an average of $0.29 for every dollar spent. If this seems low, consider that creators on Fortnite earn only about 5% of the revenue they generate for the platform.

This is not to say that the game studios behind these works are stealing from creators. There are expenses associated with maintaining games, paying ongoing development costs, and platform fees from Xbox, Apple, or Google. In most cases, users are happy to see any money come from their efforts. From their perspective, the annoyance comes from the threshold limits required for payment. For example, Fortnite requires a minimum threshold of $100 due to financial transaction costs. Embedding Web3-native wallets and using tools like Stripe to pay in USDC could lower the payment threshold to a fraction of what it is now.

On the other hand, there is the challenge of enforcing copyright mechanisms today. It is difficult to automatically verify and review which user created an experience first. Human intervention helps, but it can take weeks. There is also the risk of copyright infringement through music or art in games.

Recently, Roblox paid $200 million in settlement fees for music copyright infringement. Since then, they have partnered with several major studios to allow embedding known tracks in experiences without infringing.

You might wonder why we care so much about copyright and payments in a strange game. This is because these virtual worlds are the workplaces of creators in the future. In 2021 alone, Roblox paid over $500 million to creators on the platform. This is a stark contrast to the $1.6 billion paid to creators on OnlyFans in the same year. But it indicates that developing, nurturing, and maintaining game experiences could be a form of employment in the future.

If that is the case, then payment rails and copyright management must be accomplished through better tools that do not require human intervention. Ironically, many of the primitives we discuss today in the blockchain ecosystem are well-suited for this.

The Over-Financialization of Games

A few weeks ago, I asked Siddharth Menon from Tegro what the most "interesting" game in Web3 is. He replied that users come to Web3 games not just for fun. Half of the entertainment in these communities is financial.

"For me, the fun of game mechanics is a solved problem. It is not a new problem, and it has evolved over many years. However, Web3 games pose a new question. Games with an open economic layer that balances financial incentives and solve the game of both will be the winners. Games need to be designed not just for players but also for investors and traders." ------ Siddharth Menon

This is why Web3 games are controversial in the eyes of traditional gamers. The industry is built for speculators rather than today's gamers.

It is your responsibility to guide users, collect their banking information, conduct necessary anti-money laundering/KYC checks, and handle payments. If this is done on-chain through stablecoins, then this responsibility will fall to external parties (like exchanges), each of which is subject to strict regulation.

This is especially important in UGC, as suddenly you have opened the door to two things. On one hand, as a platform, you can reward those users who actively contribute in the early stages with in-game assets. On the other hand, you can create a market for these assets, allowing users to monetize their hard-earned in-game assets.

These economies do not require studios to burn cash to incentivize creators. Amy Wu elegantly explained this phenomenon in a recent talk.

In maintaining a great game, the repetitiveness of content is one of the biggest challenges. UGCs, combined with token incentives and liquid markets, are a powerful lever to attract creators who otherwise would not pay attention to Web3 games. Progress in generative content and creator incentives, including tokens, is still in its early stages and is promising. ------ Amy Wu

Ideally, users who spend time playing games or creating game experiences will trade their earned assets with those who do not have time to play. I am skeptical of this paper, so we reached out to Roby John from Super Gaming (one of India's largest game studios) to review it.

Trading between users is not new; the practice of user mining gold and trading entire accounts has existed for over 20 years. I noticed this when I helped clan leaders trade and transition certain items owned by their top clan players to other lower-level players in their clan in the games I developed.

For years, I did not understand this, but then at some point in 2017, I realized it and built it as a feature of MaskGun itself. Today, blockchain-driven ownership can make this easier without the need for customer support or tool intervention.

Of course, this also takes away the excitement I had as a customer support person trading virtual AK-47s and SCAR-Hs between clans before Clan Wars.

In reality, there are two levers at play here. First, the profit motive will incentivize the vast majority of the user base to create experiences or grind in the game. Studios miss out on direct revenue when they do this. Traditionally, when users purchase assets directly from studios, developers earn revenue. But this is balanced by reduced CAC and increased retention rates.

Second, due to trading among gamers, studios may earn more in royalties than they originally did. For example, Yuga Labs and Nike each earned over $100 million in royalties through digital asset trading among their user bases.

What we see in games like Axie Infinity are pioneers willing to try another model. For large studios like Epic and Ubisoft, the risk of annoying their existing users with a different model is too great. This is also where the window of opportunity for new entrants to disrupt incumbents lies.

Royalties are not some "breakthrough" feature recently discovered by games; today's tech stack easily allows more developers to reduce fees when users trade in-app assets. But the uniqueness lies in how these on-chain primitives are very close to a complex ecosystem of financial primitives.

Let me explain what I mean by "close." Today, most new Web3 games and NFTs find that their early user base is among the native cryptocurrency crowd. These users are accustomed to parking billions in DeFi and spending just as much on NFTs.

Li Jin, a pioneer of the creator economy from Variant Fund, articulated this aspect when discussing this issue with her.

Using Web3 primitives in games gives creators confidence in owning the fruits of their labor. It also accelerates their means and speed of wealth creation. In the future, creators will use game assets with DeFi primitives to accelerate development: tokenizing revenue streams, using custom art as collateral for lending, and possibly even raising investment.* ------ Li Jin

Many are not using new Web3 primitives merely for fun. If there is a profit motive, they will bridge assets across chains, participate in strange secret rituals, and join what you are building. But along with their capital comes the expertise on how to use permissionless assets to increase profits.

We have noticed users collateralizing in-game NFTs, issuing derivatives to speculate on their prices, and establishing DAOs to bulk purchase in-game assets at discounted rates. Traditionally, these are things game developers could not get from gamers.

They may not want the prices of the in-game assets they offer to crash due to liquidations on NFT lending platforms. But this is the benefit and risk that comes with building permissionless and composable tools on the blockchain. You never know how good (or bad) things can get.

We reached out to Gabby Dizon from YGG, one of the largest gaming guilds in the world, to evaluate these ideas:

Building user-generated content on permissionless assets is a significant improvement over existing UGC models. It not only allows player communities to create new content but also compounds network effects in ways that original game developers never thought possible. It is also about transferring value and ownership more fairly to creators who make UGC.

Essentially, you are exchanging the certainty of user behavior in a constrained environment for the randomness of users deciding what happens to your product. Sounds like an interesting version of a DAO.

Guiding the Development of the UGC Economy

Web3-native games transitioning to UGC platforms typically follow a similar path:

• All games start by launching a product that is sufficient to attract at least a few thousand users daily.

• Once there are enough users playing the game, the next step is to introduce scarce assets that can only be obtained by playing the game for a sufficient amount of time. These assets typically give holders a slight advantage in earning points or winning matches.

• Traders and gamers who are generally unwilling to spend days playing the game acquire these assets at prices determined by the free market.

• At this point, the game will be incentivized to launch its in-game marketplace to prevent scammers and provide users with a safe trading environment.

• Assuming the market has sufficient liquidity and naturally occurring trading frequency, developers may introduce native assets like Robux or Fortnite's V-bucks. The economic benefits behind these assets will vary by game, but the currency can, in turn, be used to incentivize users to generate content in the game.

But why bother with these things? Why "reward" users with on-chain tools they can trade or loan? When asset ownership is transferred to users, a product unlocks two aspects. First, developers do not restrictively decide what can be done but allow users to imagine what they can do with it. Its scope can range from creating lending markets for assets to using them to build a small in-game DAO.

Second, it helps find the fair value of assets in the game before any UGC is launched. Because if you do this before an active market exists, then the platform is likely to have many garbage experiences to scam airdrops. This is the challenge most DeFi and NFT-native products face today. Founders often do not know the true scale of their user base because they expect most users of these products to be there for airdrops.

Sandbox and Decentraland are pioneers of UGC in cryptocurrency. They incentivize creators with native tokens and provide the infrastructure to bring traders and creators together. But they overlook the fact that unless you have a sufficiently large user base interested in the fun of using the product, the ecosystem will not sustain itself. Traders typically buy plots or develop experiences in anticipation of future profits.

But like ghost towns in China, unless there are real people looking forward to spending time in these virtual worlds, the prices of these assets will quickly collapse.

Strong UGC is likely to be built by focusing on the motivations of gamers. If Web3-native games can be compensated economically, then their fun will diminish. Most users we see in the P2E economy come for the extra income it generates. Such users may have an evolutionary arc. As they spend enough time, they will earn enough money to purchase and trade assets in the game.

With sufficient profits, gamers can rent assets to other players, similar to a guild model. At their peak (in terms of the commercial value of the game) ------ players will have enough skills to craft unique game experiences, guide communities around them, and earn passive income.

This evolution of gamers, from linear correlated income to time spent, and then to actively creating and managing in-game experiences, is what most Web3-native studios today are missing.

We often think that the primitives in DeFi, DAOs, and NFTs have no value for ordinary people. The way to make it meaningful is to embed them in games and gather a sufficiently large user base around them.

For example, if in-game creators can demonstrate enough commitment, they might raise funds from their peers by establishing a DAO. In exchange, contributors could receive a share of the revenue generated through the experience. Just as we see developers in traditional fields acquiring and developing properties, we may see studios specializing in building experiences in Web3-native virtual worlds like Sandbox.

This may seem far-fetched today, but consider that in 2021, over 70 developers earned over a million dollars on Roblox. Additionally, seven developers earned over $10 million.

As the ecosystem around Web3-native UGC develops, we will witness the on-chain positioning of the most active wallets. This will be beneficial for games trying to scale to offer discount attributes and similar incentives to creators building good experiences across different games.

The Creative Gap

Most of the Web3 games we have today are highly transactional economies. To make this trend permeate to ordinary people, we need to transition to being channels for creative expression. Most social networks of today made this transition over a decade ago, making creative output what makes the platform an interesting place.

When creators move from building an audience to earning significant money, they will care less about capital and more about influence. For them, creative expression will be the top priority. This may seem far-fetched, but consider that just last year, a user earned $5 million from Fortnite's creator support program. Equally perplexing is that he earned over $100 million from this game.

Think about how Generation Z and Millennials are profiting from traditional assets like real estate. We may have come too early for the space age. Our rights to "ownership" and the accompanying dignity often lie within digital tools. Comparing a house in New York to real estate in Decentraland is unfair. However, early adopters of these digital realms will reap just as much, if not more, in the next decade.

Moreover, unlike past tech booms, the internet will (ideally) allow everyone to access these opportunities fairly. We have heard similar arguments about ICOs and NFT minting, many of which ultimately became scamming tools. The difference is that in games, you cannot simply benefit from being early; creators must build what users want, or it will ultimately turn into a digital ghost town.

The challenge most games exploring this theme face is how to balance community and profit motives. As we have seen time and again in protocols and DeFi primitives, the profit motive of "asset owners" can lead to some poor product decisions. This situation can alienate users for a long time. This is part of the reason for introducing UGC components in games, which will be gradual. Without a sticky community, you cannot guide a sustainable market.

There is much work to be done. Regulators will have to recognize games as work channels rather than mere entertainment. Who knows, we might see creator unions in games in the future. Investors may want to start viewing experience development in games through the same lens as SaaS products. Ultimately, most importantly, creators will have a learning curve to understand what they can do with this newfound "ownership."