Delphi Digital: GameFi Will Welcome a "Major Restructuring" in 2023
In the past 24 months, approximately $12 billion has flowed into the GameFi sector. Creating high-quality products and experiences requires patience—yet this is precisely what is lacking in the field.Original author: info_insightful, Delphi Digital
Compiled by: Qianwen, ChainCatcher
This article summarizes the 2023 report by Delphi Digital and Naavik Gamefi. It mainly reflects on the challenges faced by the Gamefi industry, the progress made, and future trends.
Overview
The term Web3 games is constantly evolving and can be described as video games that integrate blockchain mechanisms and economies. Throughout the hype cycle, there has been a greater focus on maximizing player profits rather than pursuing enjoyable gaming experiences and sustainability.
The enormous economic success of Axle Infinity set a precedent in the field, creating significant ripple effects—dozens of P2E model games have sprung up in competition: STEPN, Pegaxy, Townstar, Defi Kingdoms, Crabada, etc. These models require a constant influx of new players to survive.
Despite the ambitious teams, this business model has led to revenues being burdened by the speed of user growth rather than being dependent on the total number of players and spending within the game. When the value/resources extracted by most players exceed the value/resources they add or create, the economy falls into a deadlock.
Today, most bad actors and excessive inflation models have largely disappeared from the market, and 2023 can be seen as a "great reset"—the P2E model is gradually fading during this period, while high-quality builders will emerge. The focus will shift to high-quality games utilizing cryptocurrency technology.
Investment Status
Hype, FOMO, and speculation have led to an influx of talent, institutions, and retail investors. In the first quarter of 2022, investment peaked at over $3.7 billion, with 50% of cryptocurrency investments related to gaming.
Since the beginning of this year, the average value of the top 10 gaming tokens by market cap has dropped by 97%, partly due to declining retail investor interest. This is mainly because the F2P model cannot sustain a viable economy, leading to a loss of active player bases.
These poorly performing games show dismal returns, and users quickly choose to leave. This is frustrating but not surprising, as great games require over three years to craft carefully. Nevertheless, the number of web3 games continues to grow rapidly.
Tightening Investment Environment
The overall funding environment is becoming increasingly tight, with higher thresholds for obtaining funds. Many projects that could previously raise capital may face difficulties in the near future, and traditional consolidation is a sign of a healthy market.
Current State of Web3 Games
Well-performing projects are those that align most closely with last year's narratives, such as Axie, Sorare, STEPN, and Sandbox/Decentral.
Video games primarily aimed at profit will inevitably fail. Games composed of net income earners are unsustainable. The game economy must reward those who create significant value for the ecosystem.
Developers should strive to make games enjoyable, encouraging players to engage with the game and delay their demand for profit.
Virtual Real Estate
The hype around the metaverse has led to a real estate bubble. Compared to Web2, there is still a significant gap between market valuations and active users in the Web3 world. Despite a 71% drop in market valuation for top Web3 projects, their per capita valuation (per user) remains 200 times that of the game Roblox.
Landowners influence the relationship between users and creators, often seeking value without contributing to creation.
This field needs creators to join in order to attract new users. Many first-generation land-based projects will struggle to succeed without significant adjustments. Land-based web3 games should not be limited to UGC (user-generated content).
Current State of Gaming Guilds
The rise of P2E has spawned gaming guilds, aiming to provide players with economic activities to achieve industrialization and generate profits. However, due to the collapse of token prices, many guilds are now adjusting their positioning for survival.
Due to the decline in native guild token prices, P2E game assets lack demand and liquidity, leading to the evaporation of funds for many guilds.
It is estimated that of the approximately 24,000 existing web3 guilds, only 1% can survive without funding. The remaining funds need to be used to develop valuable products and commercial sustainability. User value recognition lies in community size, which can also help build a user base for games.
Current State of Web3 Game Infrastructure
Multi-chain strategies are being rapidly adopted, but wallets remain a key focus in the web3 world. The multi-chain world brings more addressable players and deeper liquidity opportunities, freeing players from logistical constraints.
Publishing Platforms
Web3 games are still underdeveloped, lacking appropriate ecosystem publishers to support game creators and projects. Some companies have raised substantial funds to build and develop their own infrastructure.
For example: Animoca with a market cap of $470 million, Fenix Games with a market cap of $150 million, and Mythical Games with a market cap of $225 million. These publishers are not limited to serving web3 products but hope to leverage technological innovation to provide full-stack solutions for game monetization and management.
Current State of L1 and L2
The initial web3 games appeared on ETH. Other L1 solutions have faced setbacks, such as Solana's outages and the $650 million theft on Robin Bridge, confirming that ETH is currently the most trusted infrastructure for web3 games.
As a result, all attention is now focused on ETH L2 scaling solutions. Some noteworthy projects include:
ImmutableX: Allows gas-free minting and trading, with fast transactions attracting high-quality games like Gods Unchained, Illuvium, and over 50 other games, with an additional 1,000+ games in testing.
Polygon: Continuously builds its ecosystem through partnerships, aiming to create zk-rollup infrastructure to improve the scaling deficiencies of current monolithic chain designs, which were evident during the launch of the chain game Sunflower Land, where high transaction loads led to poor performance.
Arbitrum: Home to the Treasure DAO ecosystem.
Nova: An L2 focused on gaming and social aspects to enhance network scalability.
The Beacon_GG: Raised $680,000 in its one-week open version, highlighting the natural demand for high-quality gaming experiences.
As market participants progress, competition among games will shift to L2s.
L2 competitors include:
Solana: Holding its ground with works like "Star Atlas" and "Aurory," while working to improve user experience and mobile distribution in web3.
Avalanche: The "Multiverse Rewards Fund" with a market cap of $290 million, aimed at attracting gaming, DeFi, and NFT projects.
The Rise of Modular Blockchains
Modular blockchains separate the core functions of blockchain, avoiding the traditional trilemma, which means lower fees and better gaming experiences.
Chains specific to applications: Polygon Supernet, Avalanche Subnet (DefiKingdoms, Crabada, Shrapnel)
This flexibility is suitable for games, allowing teams more control over user experience without having to build from scratch.
Platform Rules and Regulations
The widespread adoption of Web3 games will be influenced by existing industry giants, who currently control the major infrastructures in the web2 world. For example:
- Valve has completely banned the use of cryptocurrencies and NFTs on the Steam platform.
- Game maker Mojiang has prohibited the use of NFTs in Minecraft with Microsoft.
- Apple mandates that all transactions must go through their system, ensuring they receive a 30% cut from all app purchases and restricting other Web3 tools.
However, some platforms support Web3 games, such as Blankos and GalaGames' game Grit.
Current market compliance remains unclear, leading to difficulties for projects in building plans and creating barriers to innovation, hiring, and investment.
Several significant compliance events occurred in 2022 that may influence future directions:
- The SEC investigates whether NFTs and $APE can be classified as securities.
- BlockFi was fined $100 million for lending services.
The SEC may continue to conduct extensive investigations in the crypto space, particularly focusing on large, profitable companies.
Free minting: This is a powerful customer acquisition strategy that prevents assets from being classified as securities (and avoids Apple's 30% fee).
Current consumer market sentiment is low, with low expectations, and this strategy can help NFT projects launch.
Predictions for 2023
More Collaborations: The current space is too small, and companies should not overly compete. More protocols are opening their infrastructures for everyone to use, such as Sequence and HyperPlay.
More Games: An increasing number of excellent games will enter the market, such as Ember Sword, Illuvium, Guild Of Guardian, and DigiDaigaku.
Overheating in Early Stages: The tokenization of game items can lead to management complexities, resulting in economic fragility. Interacting with these still underdeveloped games often causes overheating in the early stages of game development and economics.
Some Potential Solutions:
Limit the transfer of consumables in the early stages of the game, allowing resources related to the account to be claimed only after a certain period. Set goals early to ensure that assets do not indefinitely generate returns on investment.
Limit the economic relevance or lifespan of assets in the game, possibly using battle pass systems or quarterly economic resets, practices adopted by games like Diablo 2, Path of Exile, Escape from Tarkov, and Fortnite.
New Models: Chain games are still in their infancy, with high technical execution risks and strong technicality, attracting a large pool of talent. Their unique concept lies in establishing self-sustaining worlds that exist entirely on-chain, where users can exist eternally in this virtual world.
Theoretically, if these models can operate and sustain themselves, players will be willing to invest significant time, money, and energy in these worlds. Some projects to watch include: @darkforesteth, @0xPARC, @topologygg, @latticexyz, @matchbox_dao, @influenceth.
PlayFi and eSports Monetization: The PlayFi model refers to a core game loop that is unaffected by capital. Monetization occurs through a series of meta-games surrounding the game, such as gambling, ticketing, and prize pools.
Conclusion
Despite the frequent occurrence of hacking incidents, fraud, and Ponzi schemes in the field, and the free-fall decline of tokens, the influx of talent and capital is encouraging. Over the past 24 months, approximately $12 billion has flowed into the field.
Many first-generation teams and projects in this field will face survival threats in the coming year. 2023 may not be the year when cryptocurrency games truly enter the mainstream. The previous hype cycle will influence consumer spending desires in the short term.
There are still significant barriers in terms of distribution restrictions, regulatory uncertainties, and user experience friction (such as user interactions with wallets). Cryptocurrency has unlocked digital ownership, secondary market liquidity, and shared ownership, providing developers with more fundraising options.
Creating high-quality products and experiences requires patience—but this is precisely what is lacking in such a rapidly evolving field.
