Are we building Web3 games?

Introduction

When teams started to build web3 games which utilized the P2E (Play-to-Earn) dynamics, the feedback that everyone received was to compare the quality of web3 games with web2 games that have high-definition graphics and engaging gaming loops. As a knee jerk reaction to this feedback, developers started to bring all elements of the current gaming industry into their games. In this race, we lost the vision and opportunity that web3 offers and how unique a design space these games unlock.

To present the above case, we start with a fundamental question – should we classify the following as blockchain-based games? 

1. Trading card games with NFTs and a wallet integration
2. Multiplayer games with virtual land sales 
3. “Move-to-Earn”, “Read-to-Earn”, and the 100 different possible variations that are just gamified versions of daily activities

These “X-to-Earn” applications are unique in their own way, but they don’t accommodate the ideas of open gaming and instead become new financial vehicles.

It doesn’t reflect well on web3 gaming when we keep seeing repetitive pitches from companies that have acquired existing games which didn’t make it in web2 markets and rebooted them into NFT-based games to bring out their “full potential”.

We have observed that games that could not raise funds without a web3 connection can now do so at extremely high valuations with an NFT and crypto narrative. Blockchain-based games have driven 48% of the total investment volume (~ US$ 1.7bn in Q1 2022), especially for early-round investments from non-traditional gaming investors. 

Some projects sought funding with only concept art and no game design document, development plan, market research, or estimations regarding the addressable market or intended players. The hype and fear of missing out surrounding web3 gaming reminded many industry veterans of the ICO craze of 2017.

Blockchain and web3 are not just incremental improvements. Instead, they unlock fundamentally new ways of doing things that were impossible earlier. To answer the question of whether we are truly building web3 games, we need to identify the novel benefits that web3 infrastructure brings to this design space:

1. Ownable and tradeable digital assets
2. A verifiable source of truth for game data
3. Open and collaborative ecosystems
4. Monetization of gaming skills/time for gamers
5. A circular economy

Ownable and Tradeable Digital Assets

It was intuitive and evident that the foremost application of web3 to gaming is the ownership and tradability of game assets. We have seen the positive network effects of enabling secondary markets with popular gaming titles like EVE online and Dota2. For those uninitiated with the games mentioned above, imagine playing Fortnite, but gamers can earn/buy in-game skins and resell them on a secondary market.

One of the most powerful ideas in the gaming industry is that ceteris paribus, ownership is better than the non-ownership of assets. It’s the notion that players shouldn’t just “sink and spend” time and money into a video game but also get something in return for their efforts while having fun. 

We think this is amazing and, by itself, can disrupt the video gaming landscape. But it’s just the start as it doesn’t embrace the entire ethos of web3. Web3 adoption in gaming can be compared to the “let’s put phone books on the internet” phase of internet adoption.

A Verifiable Source of Truth for Game Data

Anyone who has been exposed to blockchain gaming over the past year has most likely interacted with a sidechain, or subnet that is dedicated to a specific gaming ecosystem. These solutions offer game developers fast, cheap and seamless transactions. Because of these features, we have seen a host of similar services being offered – supernets, application chains, and substrate chains.

But we need to understand a few questions – what can be a correct blockchain implementation to host web3 games? Are games hosted on sidechains such as Ronin decentralized? Are these trust-based systems not exploitable?

We think that sidechains, subnets, and substrate chains with low validator count and high trust assumptions are not better than a popular gaming company. A known gaming company will probably not cheat or scam its users as they have a reputation to protect, which is a valuable non-tangible asset for such an organization.

In our opinion:

1. Truly web3 games could use Volitions (hybrid zk-rollups with a choice between off-chain and on-chain transaction data storage) for storing game logic history coupled with data pruning to avoid massive chunks of unnecessary data. Putting logic data on-chain will allow users to raise/resolve disputes in a PvP game mode, preventing instances of cheating.
2. For data pruning, there could be a challenge period similar to those in optimistic rollups’ work. At the end of this challenge period, the game logic historical data can be pruned with a state snapshot to reduce the constraints of storing too much data.
3. These web3 games can also utilize zk-rollups for asset data (NFTs, token balances) to inherit maximum security of the underlying layer-1 chain.

Open and Collaborative Ecosystems

Everyone has heard ideas and pitches about game assets being interoperable across platforms, but we haven’t come across many truly open ecosystems that allow 3rd-party developers to bring in new NFTs into their games with minimum friction. Most development teams want to be the sole authority for issuing assets, limiting monetization opportunities in their games.

The most prevalent problems with regards to interoperability are:

1. Technical Challenges
   1. Asset compatibility between different gaming engines – an asset from a Unity-based game may not be viewable and interactable in an Unreal Engine game.
   2. Game graphics vary from hyper-realistic to 8-bit images – an 8-bit character will be difficult to recreate in a AAA quality game, but the reverse would be easy.
   3. Not all assets should be interoperable – a sword from a medieval fantasy game may not fit the aesthetic and narration of a racing game.
2. Legal and Security
   1. When Fortnite gets the IP rights to add Batman to its open-world game, it is only granted for specific usage in that single game.
   2. These contracts are challenging enough to navigate across platforms (PC, console, mobile), and the idea of expanding usage rights across hundreds of games is an enormous burden. 
   3. Looking at the current state of web3, the creator also might need to ensure that no one is cheating/scamming users from their original assets by making them sign false transactions and draining their accounts.
   4. These arrangements would also need to benefit the creators – the game developer, a studio licensing their IP, or an indie artist.

To make the above a reality:

1. We would need common standards for NFTs that enable updatable, combinable, and interoperable in-game assets. 
2. We would also need significant 2D/3D image processing capabilities to recreate similar-looking assets in the new environment. Coupling this with file (NFT asset) converters from one game engine to another can help reduce time.     
3. Interoperability can be solved by a product that lets games partner with each other and allows them to build a framework for altering the attributes (dimensions, metadata, game function) of game-1 NFTs to the desired qualities and constraints of game-2. 

*In a later blog post, we will dive into designing such a platform.

Monetization of Gaming Skills/Time for Gamers

Most gamers have at some point heard a variation of “Why waste time playing video games? You could be doing something productive with your day!”. 

Similar criticism has been faced by amateurs of physical sports as well. But this criticism has diluted over time as everyone realised the potential upside and career opportunities in sports. Physical sports as a career has gotten wide acceptance in modern society after looking at the success stories of professional players earning millions of dollars yearly.

We believe that the correct representation of the gaming industry’s success stories (developers, gamers, designers, and streamers) will help clear the stigma around the space. But web3 gaming offers a much larger opportunity than traditional gaming for gamers to develop a full-time career.

In the predominant web2 gaming model, the chances of a gamer being able to monetize their gaming skills/time spent are meagre. The only gamers who can effectively monetize their capabilities are:

1. e-sports professionals – the 1% of the 1% that have made their way up the tournament ladder to compete at international levels,
2. online gamblers – ideally, we wouldn’t want to consider this as gaming income, but the numbers are too big (US$ 75bn industry) to ignore this category, and
3. streamers – professional players and people who can engage with their audience effectively via commentary, experimentation with new games, and community building around a particular game.

What web3 enables is the opportunity for gamers to monetize their time and skills. Even if web3 games can help 20-30% of users to monetize, it will be a gigantic leap over the traditional gaming industry. This is where we believe web3 can unlock the true potential of P2E. 

Even in web3, not every single participant can and will be earning a living income, but at the same time, games need not be zero-sum games (repackaged version of web2 real money games) or be designed as pay-to-win systems.

P2E games can allow a larger fraction of their players to monetize the in-game assets and tokens they’ve unlocked. Simultaneously, they can offer free-to-play modes to bridge the existing web2 gamers to the P2E game model. 

Pay-to-win can be avoided by defining asset levels and allowing the purchase of a particular asset only after players have completed certain stages. This would help in preventing the mercenary capital from entering the system. Games can also take the Fortnite approach by making in-game asset purchases purely an aesthetic feature with no added advantage in the gameplay. 

Economics

Most gaming projects we’ve looked at are designed with an unsound economic strategy, minimal token liquidity, pay-to-win inflationary mechanisms, and reactionary policies that break the player’s trust due to constant rule changes. Every web3 game economy can be designed uniquely, as there is no one standard model for the distribution and scarcity of resources. 

A nearly perfect game economy will be highly circular, meaning a player will be making tens of different micro-transactions every day/game session, and NFTs and tokens will be changing hands continuously. This will generate recurring revenue for the team and token holders through NFT sales, royalty fees and microtransactions.

Barriers to Entry

Fair criticism of web3 games is that the cost of entering the games is extremely high if the game has achieved even a moderate success (a few hundred thousand users). We had seen many times that when these games (Axie, Crabada) came into the spotlight, the prices of their NFTs exploded. ROI aside, players entering a game with an upfront spend of thousands of dollars will always prioritize getting their cost back and not on having fun. As an industry, we must work on significantly decreasing and pinning the entry cost. 

To do so:

1. Developers can make a free-to-play tier that doesn’t participate in the earnings mechanism but still allows traditional gamers to try out the game. This model can be perfect for casuals entering and testing games. Game developers can structure the free-to-play version so that top players and a few randomly chosen players can be rewarded with rare NFTs and thus onboard traditional gamers gradually to web3 gaming. 
2. Games can also build starter packs priced in US$/stablecoins that can remain constant over a longer period. Subsequent NFT sales, loot boxes, and gacha items can be priced in the game tokens. This will allow games to become non-restrictive to later users, monetize their content, and reward their earliest supporters.

Token Economics

Some of the pointers that game designers can consider while building game tokenomics include:

1. Emissions and Sinks 
   1. Emissions are paths to create or earn in-game currencies, and sinks are paths to utilize, consume, or burn in-game currencies. 
   2. Players should be able to earn in-game currencies and rewards through objectives completion like daily missions, quests, etc. 
   3. Governance tokens or high value NFT assets should be given out as a rare occurrence (for the global leaderboard, PvP tournaments, and completion of certain quests) to keep players motivated.
   4. Purchasable assets are a critical revenue generator of the web2 game economy. Purchasing governance/utility tokens or grinding for in-game currency will only happen if there is demand for in-game items. (e.g. Fortnite skins)

5. The baseline for every game designer should be to “ensure emissions do not exceed sinks for an extended period”. This is to prevent a situation where players end up with vast reserves of in-game resources, reducing in-game purchases.
   We mention extended periods because bootstrapping the initial user base will require emissions to exceed sinks.
6. Multi vs Single Currency Approach: Digital currencies have been a medium of exchange in gaming economies. It is one of the reasons why web3 and its ideas fit very well with gamers.
   1. Multi (mostly 2) Token Models: The two token model was pioneered by Axie Infinity with their AXS “governance” token and their SLP “in-game” token. AXS is the fixed supply token that accrues value over time, and SLP is an infinite supply token that can be minted and burnt to balance the game economics.

Crypto native audiences often speculate on all possibilities – token speculation, prediction markets, and high use of leveraged products. Having one token where people can speculate and another token where people can play the game lets these two uses play out separately so that a surge in speculation doesn’t cause a surge in the barrier to entering a game. Therefore, with this model, developers can split the speculation and game economy.

2. One Token Model: Using just one token has not been experimented with much, but it offers some promise in resolving the issues of the two-token model. One token model doesn’t necessarily mean there’s only one currency in the game. The game can have many currencies but only one token as the bridge between the game and crypto trading pairs. We’ve come across amazing games with 100+ fungible assets in-game but just one token to interact with the rest of the blockchain ecosystem.

Over the long term, we believe that two types of games – net positive and zero-sum will become the standards. A cash grab game (just selling users NFTs and tokens with minimal utility and demand) will drain and drive away users as fast as they onboard them.

• For zero-sum games, the business model is simple. Implement rake (like poker), and if you have cash flow, that should help support operations, research, innovation, user acquisition, and more.
• An interesting problem statement is to create net positive value games as these are difficult to design and have the highest upside long-term and possible adoption from the broader gaming community.

In my opinion, RPGs (role-playing games) are the best candidates to design a positive cyclical economy in the near term as developers can imbibe necessities like food, shelter (and rest), and clothing (via maintenance mechanics like STEPN) to create a natural demand for resources in the game.

• For example, primary and secondary items crafted in the game, such as crops, wood, and soft currencies, shouldn’t be tradable within the game ecosystem. But as a player proceeds through the game, they need to spend these tokens to craft better assets and earn other sellable tokens.
• This helps achieve two goals simultaneously – a) The game becomes more engaging, and players start participating more frequently to unlock rare items and exclusive currencies, and b) it allows developers to design many token sinks within the game. 

For non-RPG games like First Person Shooter (FPS) and racing games, these gaming loops may not be as clear as in the case of RPGs, but they can still be introduced. In cases where these loops are not evident, developers should start by implementing crypto as incremental innovation, i.e.,

• introduce the ideas of NFT assets which can be resold for fiat without fungible tokens,
• introduce in-game currencies (non-transferable) that are accounted for on the blockchain, and 
• create a mechanism for users to claim fixed supply tokens depending upon their in-game assets; if and when the game economy sinks have been functioning as planned.

Macroeconomic Management

Web2 game economies are comparatively easier to design (in comparison to web3 game economies) but building a compelling game economy without impacting retention and engagement is the ingredient separating the top games from the sub-par ones.

We believe that P2E games need to resemble and tackle the problems faced by real-world economies. These extra steps arise as web3 games allow users the freedom to enter and exit the game by selling their assets and tokens, unlike traditional games where time and money invested can provide a lot of fun but is a sunk cost in purely economic terms. This is by no means an easy feat as we have seen entire nation-states struggle with these problems, let alone a small team of game developers.

P2E games are sandboxes or compressed versions of human communities or nation-states. Therefore, for these economies to function and grow, there need to be parallels to a nation’s monetary and fiscal policy.

1. Monetary policies are tools a central bank uses to facilitate sustainable economic growth by controlling the money supply. If inflationary pressures build up due to the increased money supply, the central banks tighten monetary policy to dampen demand. We can see some of these tools deployed by the US Federal Reserve to contain inflation in 2022.
   • Monetary policy in a P2E game is the tweaks in token emissions and sink mechanisms by developers to control the liquid supply of the token.
   • Newer P2E games have added asset borrowing and lending models within the game itself rather than relying on guilds to do the same. (Read more: Tavern – Crabada). By altering the interest rates, game developers can artificially control the supply of certain game currencies.
2. Fiscal policies dictate government spending and tax policies to influence macroeconomic conditions such as demand for goods and services, employment, inflation, and economic growth. Fiscal policy is expansionary during economic downturns and contractionary during upturns.
   • Fiscal policy in a P2E game is the token rewards, crafting/breeding costs,  etc. These policies can be adjusted at an asset to asset level to incentivize certain network behaviour.

As firm believers in decentralization, we have also pondered another question – should game developers and designers act as central banks and governments? 

The entire crypto and web3 movement stemmed from the ideas discussed in the Bitcoin whitepaper, where a new monetary system independent of government and central bank intervention is described. Should the projects (DeFi, NFTs and even games) built on top of this technology share the ethos of eliminating human intervention?

“Code is Law” – Lawrence Lessig

Since we already know the reactive policies/actions implemented in inflationary/deflationary market conditions, we should be able to implement these in the code itself rather than relying on developers to update policies after the governance process. 

In case of high inflation in the game economy, daily emissions can be dropped by a fixed percentage every epoch and costs of crafting materials or their burning can be increased to curb the supply expansion. In contrast, rewards and in-game activity should be incentivized in deflationary conditions via higher payouts for quests. 

In mature stages of the game lifecycle, game producers can have a maximum reward token emission planned, which is disbursed only if user activity and player growth metrics are achieved. These reward pools can be replenished from the fees and tokens collected from primary and secondary NFT sales and in-game token sinks. This is not to say that the system needs to be completely algorithmic or perfectly designed from the get-go, but instead, web3 game devs should aim to reduce dependence on core teams or lengthy governance votes.

Conclusion

But looking at web3 gaming (also known as GameFi) which resembles a combination of both DeFi and gaming, we can pick up a few lessons from DeFi’s growth in the last few years. We are not limited by the primitives and standards set up by the traditional industry. Just as DeFi had to innovate on novel and non-traditional products, such as AMMs, perpetual futures, power perpetual, etc., web3 games may have to brainstorm on something unique.

We are hopeful that we will be seeing entirely web3 native innovations in the gaming industry, which will define the next 10-15 years of how this industry evolves.    

Disclaimer: Most of the ideas shared above are opinions and how we would like to see the industry proceed. We may see some of these ideas get executed, and a large majority of them get explored. It is also equally likely that we are completely wrong, and we just see a mirrored version of traditional gaming take a foothold in web3. 

References & Links

1. Blockchain-based Games Raised $2.5 Billion in Q1 2022: DappRadar Report
2. What it means to transition from web2 to web3 games
3. Constructing the ideal P2E economy
4. One vs. Two Token Models in Crypto Gaming – by Nat Eliason
5. Decentralized Servers for an MMO: r/gamedev
6. The Strongest Crypto Gaming Thesis – gubsheep.eth
7. The Rise of Social Gaming and Its Monumental Impact – TaskUs

Author – Neel Daftary, Research Lead, Woodstock