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The Metagame — Part 2: Crucible
Most web3 games are going to fail
In their status quo, most web3 games will fail. All will buidl hard in 2022, with some making zero-to-one innovations and others focusing on perfecting a mistake and perishing as a result.
Web3 games, henceforth a catch-all term encompassing all forms of blockchain/ crypto/ NFT/ P2E/ P&E games, are undergoing a crucible moment. The space is one of the most misunderstood sectors I have ever seen, with frustration, anger, and confusion rampant across the grassroots (end users), sandwiched classes (game developers and artists), and the highest echelons (publishers and management teams).
Web3 gaming maximalists espouse blockchain ideals including community ownership, token incentives, composability etc as the cornerstones of building successful Web3 games. I think one has to be very careful in making these assertions as it depends on how you define success for web3 games, which in turn depends on how you define a web3 game, its value proposition, its product-market fit, and therefore what that underlying market needs. Approach this conundrum from the wrong end of the stick and you end up with a solution looking for a problem, which is a trend I see in an alarming number of purported web3 games.
Forming a thesis around Web3 gaming by employing a top-down approach driven by the utopian possibilities of blockchain technology, without considering the actual behavior of end-users, is hence resulting in innovations being force-fed to solve self-identified problems in contrived and non-efficient ways, and more importantly solving problems which existing users don’t actually care about in the first place.
Look to Ubisoft for example: Had end users valued the immutability-implied-ownership aspect inherent within NFTs returning economic value to users instead of centralized overlords, its NFT launch would have been a watershed moment for web3 games fueling its rise to escape velocity as other AAA publishers followed suit, but it is now nothing more than a dusty warning sign that reads “tread lightly, ye who enters”.
There is one other important nuance here: It’s not so much about gamers not caring, but gamers not understanding what is being force-fed to them, which is an important consideration to think about when building web3 games. Some of the leading tech companies today spent millions incentivizing user behavior changes in order to manifest their own blue ocean opportunities (e.g. Airbnb, Uber, Doordash etc.), which bears important insight into the inertia of changing human behavior that should guide web3 studios’ decisions. For another example, look at how the Google search results for Free-to-play games have evolved over the past 5 years:
Messaging, positioning, and timing are all important. Tackle the problem bottoms up and seek to be empathetic when addressing some of the most passionate, loyal and diehard users who are also at times the most cynical, entitled, and fiery ones. Case in point: EA’s official comment on Reddit addressing users’ concerns over lootbox mechanics “won” a Guinness World Record for the most downvotes in all of Reddit history.
The underlying assumption I have been making in the above assertion, is that web3 games need to address the broader traditional gaming user base and not just crypto-natives. My view is that web3 games will not succeed without web2 gamers, and ultimately the former will compete with web2 games for end users’ time and wallet share.
This is an important point, because this also implies your web3 game needs to hold its own against the entertainment value of web2 games, which leads me to another conclusion.
In the near-term (time horizon matters), blockchain will not necessarily drive a revolution in gaming but instead more of an evolution — the former is a step-function change while the latter is an marginally incremental one, and yet none of these will come into play until a web3 game can stand on equal footing against traditional web2 games in terms of entertainment value and successfully compete and cannibalize web2 games’ market share. Web3 games need to be gameplay-first, web3/crypto/blockchain-second, and most important of all, categorically fun.
I keep emphasizing the inherent assumptions I am making above because this is a key reason for the confusion over web3 games. Without breaking problems down via First Principles, we risk misunderstanding the subject matter and driving at the wrong outcomes with the best intentions.
As an example to illustrate the above thesis I look towards Axie Infinity. A lot has been written about Axie Infinity (one of the most thorough and objective ones hyperlinked here) so I will not go through it again in detail, but there are some insights we can extract from the largest at-scale web3 game today in deconstructing the earlier train of thought.
Using Axie Infinity as a proxy, web3 games are predominantly played by users in less-developed countries (“LDCs”) earning supplementary income for daily use. These are the P2E users as we know today who essentially view web3 games as a form of work, and they comprise ~90–95% of total DAUs for Axie. The other users are the guilds/ guild managers who acquire Axies and loan them out to P2E users who in turn farm $SLP for them.
I call these guys the Play-for-Returns users, or P4R in short. You can run the math using the publicly available data on Axie holders vs Axies per user; math below runs top-down assumptions sensitizing % split between scholars/ managers and triangulating vs bottoms up spending per manager. That’s a tremendous whale to non-whale skew, but the broader point here is that the majority of users are P2E users. Data is somewhat dated but a cursory check shows the ratio has not materially changed.
Additionally, this is what the current ecosystem looks like for Axie. Note that there is one source of capital inflow (ETH deposit from P4R users) and multiple capital outflows (red dotted boxes).
The current existential crisis for Axie Infinity lies in the lack of capital inflows to support the capital outflows from both P2E and P4F users cashing out $SLP for monetary rewards, with the only incremental inflows coming from marginal new P4R users building new guilds and giving out scholarships. Naavik’s report has an interesting analogy that this is akin to an amusement park where the P4F are the owners of the park whilst the P2E users are the attendants and ride operators, except nobody is coming in to take the rides and pay for the tickets. This model has given rise to an interesting phenomenon where Axie’s revenues are a first derivative function of new user growth, whilst current users do not actually directly contribute to revenues for Sky Mavis. Having spoken with both Jiho and Zyori, I am very fond of the team at Sky Mavis and what they have done with Axie Infinity, and believe they are working in the right direction to solve this problem in the right way. What is the correct way?
Play-4-Fun users as cornerstones of web3 token economies
All balanced and sustainable web3 economic systems will require the participation of a substantial community of users willing to spend money in-game without expectation of any financial recourse. These users will play the game because they enjoy the game and spend an inordinate amount of time immersing themselves in that environment and be willingly monetized by microtransactions to buy skins/ emotes/ battle passes etc. for whatever personal reasons that rationalize their purchasing behavior (utility, status, etc.). Web2 gamers have been doing this for years.
In this scenario, the ecosystem then looks something like this:
This is obviously a conceptual framework meant to illustrate the importance of having additional sources of capital inflows to balance the outflows and not an exhaustive example by any means. I am certain the guys at Delphi and Sky Mavis have a far more developed and robust framework given their work together. The important point here is that you need P4F users to enter the scene and balance your in-game economies, and other deflationary mechanisms/ sink may help but this is to me, by far, the most important element of a balanced token ecosystem.
Web3 game studios optimizing for web3 tech ideals will will build their games with a “blockchain-first, gameplay-second” approach and overindex on core blockchain tenets of asset ownership, community governance, financialization of games etc. I really want to say that solving for these ideals will attract crypto-native speculators + P2E users who view the web3 games as nothing more than a source of income, but I’m not sure that statement even holds for the P2E users, and I’m not sure the former group is the type of user anyone should be optimizing for, at least not in the long-run.
Saying web3 gamers are playing because of the ideals of blockchain is the crypto twitter mematic equivalent of saying people in crypto are “here for the tech”. Yes, there will be users who are playing web3 games because of their altruistic zeal as blockchain evangelists, but it stands to reason that they will be the exception rather than the norm.
To be very clear, I actually do think that the potential of blockchain technology is tremendous insofar as it augments our gaming experiences rather than revolutionize it, but not everything needs to be solved by blockchain, its not some miracle panacea for web2 video games.
Another way of thinking about it is of blockchain tech as the icing on the cake for games, while the cake is gameplay itself. You want to incentivize long-term engagement and retention with the game whilst asset ownership as an added bonus, not the other way round which invites speculative NFT traders that will drive unsustainable boom and busts in your ecosystems and destroy the gaming experience for the rest of the actual gamers.
What I am actually very excited about is for the potential of community owned games converging with the user-generated-content (“UGC”) economy to bring new dawns for future games, but again, the cake has to come first.
Conclusion
Describing what web3 games will look like as a single, atomic, reality is too blunt an instrument. I think about the identity of web3 games evolving over a time horizon, hence the earlier comment regarding a “crucible moment”:
Crucible moments are times in our lives when we experience circumstances that forever transform us. They challenge one to question their beliefs and values, and leave one with a completely new identity — hence the term crucible: a place of testing.
In the near term, we’ll probably see web3 games continue to fiddle around with what works and what doesn’t, and we see influx of speculative capital prop up new games while they figure out how to bring their minimum viable product forward. Those which remain in status quo and continue to think about web3 games as defi products first and video games second probably die off, those who focus on making a great video game realize its a gargantuan task and even more die off, while the remaining brave souls hunker down and successfully buidl the next generation of games.
In my view, the most successful Web3 games in the steady state should look no different from Web2 games with the exception of an additional blockchain layer running invisibly in the background, and there will no longer be a distinction between web2.0 and web3.0 games. I think it’s too early to say that all games will be blockchain powered, but I do think the nature of blockchain technology will lend itself to certain genres of games which will thrive in that environment (e.g. MMORPGs), and we see web3 games simply as another sub-genre of a broader category of video games.
Relatively contrarian view compared to what I see online but hopefully resonates with other advocates of blockchain gaming that want to see this space succeed. In my very first blogpost I welcomed others to disagree with me as iron tends to sharpen iron, it is the same here with the blockchain gaming space too.
From time to time I also tweet incoherently about thoughts distilled from my random streams of consciousness. If you are keen, connect with me here https://twitter.com/fareastwitcher
