Thesis Spotlight: Crypto Gaming (2/X)

By Vishal Lugani, Charlie Liao & Richard Wolpert

In our last post, we argued that the $200 billion gaming industry could be a key growth driver for crypto. At the forefront of this radical transformation will be consumers who stand to benefit the most from innovative monetization and gameplay models. Traditional gaming was inadvertently designed to maximize revenue for publishers at the expense of users (i.e., consumers) who receive little to no economic value despite pouring hours into virtual worlds. New features promise to accrue value to multiple stakeholders.

In this post, we take a closer look at how individual gamers stand to benefit from web3. We cover the following three topics: financial benefits, gameplay benefits, and obstacles to gamer value.

Financial Benefits
This is the most obvious benefit to gamers and is surprisingly often the easiest to pick apart. Stating upfront that we believe economic benefits need to be sustainable, we see a big opportunity here for web3 to improve the value proposition to gamers.

At the height of the recent play to earn craze, financial incentive was a clear cut motivation for players, especially where daily game earnings exceeded minimum wage in regions like the Philippines. However, this model, as was introduced by Axie Infinity, came under question. While the industry works out what a truly sustainable model looks like, there is one incontrovertible financial benefit emerging: asset ownership. Gamers spend a lot of money on in-game goods and they don’t own the underlying ‘financial’ value of those goods. Any cosmetics and in-game items remain completely locked in closed systems with value accruing solely to studios/publishers. And gamers are aware of the (lack of) distribution of profits; for example, gamers boycotted EA’s Battlefield 2042, which EA wrote down as a $100m+ loss. Web3 principles better distribute value, giving a path for players to actually own in full what they buy or earn. We’ve seen early prototypes of this model in different forms — CS:GO skins, real money trading in MMOs. And there’s more room for this to grow.

Web3 is also a much better enabler for skill-based gaming, a model where players earn money through their own competitive ability. This could look like payouts for tournaments, pay-ins for battle royale game modes, or wagers on personal 1v1 outcomes. While possible in fiat, crypto simplifies the infrastructure (faster, more accessible through smaller dollar denominations, globally accessible and not subject to FX complexity).

Take Apex Legends, a popular battle royale game with a focus on highly competitive ranked progression. Players, at all skill levels, often have hundreds of hours in logged playtime.

If Apex Legends were to port over to web3, we might imagine the following:

  • A ranked season where competing players have the option to pay crypto (in any denomination — from $0.01 to $100) into each round to form a victor’s prize pool. With real earnings on the line, the competition intensifies and participation isn’t limited to only the players. Observers are able to place bets on their favorite teams and players, further raising the stakes and creating an environment similar to eSports. Regulatory considerations aside, this would be a means for direct monetization from direct competition.
  • Cosmetics might also take on more value — skins pulled in from NFT drops from other experiences or gifted from IRL Apex events could be used on characters. Promotional NFT skins from sponsors could also make their way over into game play. And for the rarest cosmetics (like Hack Frost), users could sell them off to other players seeking that type of in-game expression.

Financial motivation extends past gameplay and into UGC, where user activity has activated growth in games like Roblox, Fortnite, and Minecraft among other industry giants. These games have largely taken this content either free or with high platform penalties. Roblox, for example, typically pays developers 29 cents for in-experience dollars spent and operates an in-game currency (Robux) that they control the exchange rate of. Great economics for Roblox do not translate into great economics for the developers who build the worlds. The content across these platforms represents millions of hours of labor (and in some cases professional outputs; see: Melon) but creators are not fairly rewarded and often have to rely on highly inconsistent revenue (e.g., donations) to support their work. These models are unbundling now that creator platforms are evolving, thanks to companies like Patreon, and even more relevant, StriderDAO, but centralized rent seeking can still feel burdensome, particularly to less popular creators. With decentralization, UGC platforms can organize in ways more favorable to the builders themselves, helping redistribute value to those who create it.

As with every new platform shift or reconfiguration of the economic value chain, new benefits will emerge.

Gameplay Benefits
Jon Radoff, a long-time gaming executive and founder, classifies gamers into four categories: immersion, co-op, achievement, and competition.

When we layer in web3 into the original list, the following happens:

Immersion enhanced
Immersion players are categorized by their love for great storytelling and roleplay. As players advance through their games, they generate a history of play. Crypto means play history records in an immutable manner on chain. From an immersion point of view, this creates a record from which developers, and perhaps 3rd party creators, can create branching narratives. Recall the way in which all three Mass Effect games fed into each other — choices made in the first game would have implications, 5 years later, in the third. We’d stop short of interoperability on this dimension, but on-chain play history makes for an interesting dataset. This could allow game worlds to become omnichannel too. Real world experiences, whether hosted by the developer or a 3rd party, could recall specific game sequences, set the environment to harken back to a specific part of the game in which a player had a notable experience, or create other novel and targeted experiences that would be meaningful to an immersion driven player.

Co-op enhanced
Co-op players are defined by their desire to work with other players and achieve collective goals and outcomes. This is generally constrained in many digital environments by trust: gaming is anonymous and new accounts can be spun up at a whim. And outside games, players often make online friends through Discord; but there is no surefire way to verify anyone’s identity (for better or worse). Identities are built and lost within communities, there is no record of one’s reputation in one Discord vs another. And even if Discord were to solve trust on platform, there’s the additional issue of marrying that identity to real achievements within a game. Web3 identity frameworks can help demystify this experience for communities. Many gaming guilds do this today in a hacky way.

Further, whereas traditional gaming co-op is just between players, web3 ideology paves the way for community-led game development. Surely there’s a lot to figure out there. But many web3 games are building themselves with community orientation in mind through DAOs, legitimately taking player feedback into consideration. In some cases, they may even formally involve community members in development. Historically, we’ve seen publishers and studios that engage and take direction from their community develop real staying power in the industry. Now there might be a more seamless way for that to happen.

Achievement enhanced
Achievement players strive to earn in-game accomplishments and attain mastery over their games. It’s the digital equivalent of filling up a trophy case. With web3, player activity is permanently and visibly available on-chain. Gamers have bragged about their wins for decades; developers have made some steps towards verification, allowing account profiles to accumulate rare cosmetic rewards, for example. However, these features have been basic and exploitable/hackable. Worse, when the services offering these “trophy cases” fade away, users have nothing to show for their effort.

As peoples’ digital activity merges further with their physical activity, particularly in gaming, accomplishments become valuable components of a user’s identity. Web3 design principles and technology should provide fraud-resistant reputation infrastructure. Demonstrated and on-chain achievements open up a host of opportunities for players, including: (1) discovery by clans or guilds, (2) opportunities to train up newer players, (3) ranking of specific achievements well understood (e.g., kill % in first party shooters), and (4) customizable or composable achievements — 100 games completed at 100%. But most importantly. Now your clout is immutable ;).

Competition enhanced
Competitive players find thrill in online arenas and play to win against others. In the near term, competition in web3 is enhanced by the financial incentive that we discussed already: crypto allows for easy financial infrastructure to facilitate tournament winnings. This may look like a battle royale where players pay in crypto, from anywhere, into the same prize pool. Or maybe players battle collectable monsters with one another and splits and coordination can be handled on-chain. Financial rewards can heighten the existing competitive nature of game play.

Radoff Player Motivations enhanced by Crypto Gaming

Opportunities for investment
The industry is due for disruption, but evolution will take time. We have long-term orientation and a problem solver’s mindset in our investing. Here are some ways in which the status quo creates obstacles to gamers recognizing the benefits above:

Firstly, it takes time to build a good game, web 3 or otherwise. We are investing in infrastructure that speeds up and automates cumbersome parts of game development.

Next, the direct financialization of game play comes with its requisite share of scams. Early iterations of crypto gaming were rife with rug pulls, bot spam, and outright fraud & and thievery. That is why we believe trust and safety within the crypto gaming world will be important for the success of web3 gaming. As developers start to share profits with their players, the roles and responsibilities of each stakeholder in the current ecosystem may change. Players and community could be involved in some form of development. Or developers may seek to further lean on the community to uphold fairplay. Fortunately:

  • Many new wallets are more UX friendly or have strong philosophies on user protection (e.g., regarding custody). Companies like Disco would help establish decentralized identity for players in a way that lets players control what goes in and out. Platforms like Stardust are building the backbone for UX friendly and safe gaming vault infrastructure. Others, like LootRush, help players play games by handling all the crypto complexity on their behalf. With LootRush, users can simply rent NFT assets directly and play from there, avoiding touchpoints with exchanges, bridges and other high friction tasks.
  • At the level above sit companies like Guilds, letting users safely earn crypto by playing web2 games first.
  • And we’ve mentioned companies like StriderDAO that engage community in game development.

More so, crypto gaming is coming at a time when there are meaningful form factor shifts taking place. In the past, the smartphone brought about the wave of mobile gaming. Improved broadband access, processing power, and display quality allowed for high fidelity desktop and console gaming. The pending launch of AR devices and continued improvement of VR headsets will pave the way for increasingly immersive gaming. While the new form factors are not directly tied to crypto, they could potentially provide a virtuous cycle whereby new economic models brought about from crypto correspond with new platform shifts brought about by new form factors.

As always, regulatory risk does hang over this category. This will be an iterative process. The good news is that if developers are good actors and can attract consumers at scale, there should be a path to certainty and clarity over time. We look forward to more fun games that focus less on asset appreciation and more on improving player motivation.

The next few posts will focus on how crypto benefits developers and how, whether interoperability is feasible, and our matrix for what signals we are monitoring to see crypto gaming’s adoption.



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