June 2022

Future of Web3 Gaming

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 input, developers began to incorporate every aspect of the contemporary gaming business into their games. In this race, we lost sight of the vision and opportunities that web3 presents, as well as the unique creative space that these games provide.

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

Trading card games with NFTs and a wallet integration
Multiplayer games with virtual land sales
“Move-to-Earn”, “Read-to-Earn”, and the 100 different possible variations 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:

Ownable and tradeable digital assets
A verifiable source of truth for game data
Open and collaborative ecosystems
Monetization of gaming skills/time for gamers

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.

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:

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.
For data pruning, there could be a challenging period similar to those in optimistic rollups’ work. At the end of this challenging period, the game logic historical data can be pruned with a state snapshot to reduce the constraints of storing too much data.
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

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 regard to interoperability are:

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.
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.

To make the above a reality:

We would need common standards for NFTs that enable updatable, combinable, and interoperable in-game assets.
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.
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.

Monetization of Gaming Skills/Time for Gamers

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 meager. 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.

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.

Conclusion

Looking at Web3 games solely from the perspective of graphics and user experience gives a very narrow picture. You are not able to imagine the endless possibilities that it has to offer. Hence one must also keep in mind the macroeconomic factors that will drive people to these games. A contracting labor market, increasing aspirations of young individuals in emerging nations, the rise of parallel financial infrastructures, and challenges in monetizing existing games. We believe web3 games will evolve with time and will be one of the fastest-growing industries in this decade.

Another important aspect of Web3 gaming is the need for a circular economy and sustainable tokenomics. Read in detail in a recent blog post by Neel Daftary, Research Lead at Woodstock, titled “Are we developing Web3 games? ”

WOODSTOCK IN THE NEWS

Woodstock partnered with MetaDecrypt for a 2-day Web 3.0 Summit @ Museum of the Future, Dubai.

Prashanth Swaminathan, Partner and Head of Institutional Business, Woodstock Fund, along with Pranav Sharma, conducted a session on “Macro Climate and its impact on Digital Asset Markets”

Team Woodstock was at Consensus and NFT NYC 2022 – Pranav Sharma, General Partner, Adam Mastrelli – Partner(US), Angelika Hajela – Talent Director, and Abhinav Pathak – Research Lead

MARKET NEWS

After the initial UST de-pegging and consequential collapse of the entire Terra ecosystem, the dominos just keep falling. This week, crypto hedge fund Three Arrows Capital (3AC) fell to a $400M liquidation due to various reasons and is now facing potential insolvency.
Crypto lender Celsius also paused all customer withdrawals, swaps, and transfers this past Sunday, in an effort to “stabilize liquidity” and “preserve and protect assets” after Lido’s stETH began experiencing irregularities. This led to a massive sell-off and panic in the markets while the company scrambled to find legal advisors.
The CEO of Kraken, Jesse Powell, also popped off on Twitter this week, reflecting on Silicon Valley’s diversity and inclusion standards, and how he will never force his employees to adhere to a specific mindset, but instead think freely. This led to public backlash, which Powell responded to by creating a ‘culture document’ that his employees could either “agree and commit, disagree and commit, or take the cash”.
Two big DAO governance items dominated this week. The first was a contentious Maker DAO proposal to centralize the protocol’s governance in a “core unit.” It failed to pass. The proposal saw an unprecedented ~30% of MKR tokens participating.
The second big governance proposal is a Lido initiative to self-limit the amount of ETH deposits into the liquid staking protocol. The context of this proposal lies in the potential risks that a concentration of ETH in Lido might pose to the underlying Ethereum protocol.