- Published on
On Leaving Web3 Gaming
- Authors
- Name
- Shlok Khemani
- @shloked_
This article was also published in TechInAsia
Flashback to 2021: I’m in business school, fresh off a two-month internship at a corporate giant, and horrified by the rigidity and boredom of the job. I couldn’t resign myself to this fate. I had a few months to find something better - a job that was exciting, fulfilling, and paid me at least as much.
Enter crypto. It basically ticked all of these boxes: at the cutting edge of technology, competitive pay, remote jobs, and great vibes. Oh, and you could accidentally become a millionaire! I’d found my fit!
Next - what to focus on within crypto? Axie Infinity, then a $30bn company, had just taken the world by storm. NFTs facilitated the ownership and open-market trading of digital assets, promising to fundamentally alter the landscape of video games. Players could earn money for the "time and effort" invested in playing, and some were even making a sustainable living doing this.
This was undoubtedly the future. Gaming was going to change forever. How could it not? I took the plunge.
Now, two years later, I’m bidding farewell.
Here are some reflections on the space, where I see it going, why I’m leaving, and what’s next.
What doesn’t work
These are some fundamental problems in the current state of Web3 gaming.
SISP
Like any new startup enthusiast, I’ve been watching a bunch of Y Combinator videos. They frequently warn founders about a common pitfall: building a product that's a solution in search of a problem (SISP). When a new technology or company emerges, founders often think, 'Hey, wouldn't it be cool to apply this to my industry?' But they’re not really solving a problem.
Much of Web3 gaming seems to be a solution in search of a problem (SISP). These are some of the "problems" it purports to solve:
- Wanting true ownership of digital assets
- Being able to sell possessions and exit a game if no longer interested in playing
- Transferring achievements from Steam to Epic Games
- Mistrusting Valve's CS:GO marketplace
- Earning money while playing a favorite game
- Owning real estate in a favorite game
But are these actual problems? Do gamers genuinely care about any of these aspects? In my experience, they do not. Most blockchain games don't address a real problem.
Business Model
The prevalent business models in blockchain gaming often don’t make sense from a, well, business point of view.
NFTs replacing IAPs
One traditional way games make money is by selling in-game items to players. For example, if I want to buy a sword in an RPG game, I would pay the developer for it.
However, in a web3 game where the sword is an NFT, I could buy it from another player in an open marketplace. The developer might still earn money from royalties on this transaction.
Let's compare how the developer fares in each of these situations with some quick math:
Assume the lifetime demand for the sword will be 10,000 users.
In-App Purchases (IAPs): At a fixed price of 5 = $50,000.
NFTs: The developer releases 1,000 initial NFTs at 20 on open marketplaces, 9,000 other users buy them.
- Initial Drop: 1000*10 = $10,000
- Transaction Volume = 180,000
- Royalties earned (@10%) = $18,000
- Total Revenue: 18,000 = $28,000
In most cases, the total revenue from NFT sales + royalties will be less than selling the same items as IAPs.
Of course, I’m making simplistic assumptions here. Also, our favorite crypto influencer might make a video on the game and the sword could suddenly sell for 20. Such situations, however, are temporary and dependent on chance.
The situation is further complicated by marketplace wars, where royalties are no longer guaranteed, making this business model even less appealing.
NFT/PFP Drops
Another way Web3 games generate revenue is by selling a collection of NFTs or Profile Pictures (PFPs). This often occurs at an early stage, where the proceeds are used to fund the game and simultaneously build a community.
However, this approach has problems as it tends to be driven by speculation.
First, there's no guarantee that the NFTs will sell out. For instance, earlier this year, Guild of Guardians, one of the top web3 games, collaborated with leading esports teams like Cloud9, Fnatic, and NAVI to sell NFT heroes. While one would expect the sale to be successful, it wasn't, and they barely sold out.
Second, if the NFTs do sell out, the developers must put in substantial effort to maintain the floor price of the NFT. This involves engaging the community, generating hype, partnering with other projects, and hosting social media events—a lot of work that detracts from actually developing the game.
Third, releasing multiple collections is necessary to make this a sustainable revenue source, but it creates challenges. Existing holders often view new collections as a form of "dilution." This means the developers must either reserve a quota for existing holders (sometimes for free) or risk their ire, as seen in the Azuki drama.
Clearly, neither of these options is beneficial for the business.
Releasing a Token
Like NFTs, integrating crypto tokens into games seemed like a logical step. Since games already have virtual currency, it made sense to bring it onto the blockchain.
However, the problems are similar to those encountered with NFT drops. A game that incorporates a token essentially has two products: the game itself and the token. These two elements may not always align.
Furthermore, regulatory scrutiny around crypto tokens, especially in the U.S. (the largest market for gaming), poses a significant risk. It can lead to the downfall of companies. For a team focused on creating a fun entertainment product, dealing with these legal complexities might not be worth the effort.
Status Games
This applies to Web3 as a whole as opposed to gaming specifically.
Many teams here are playing status games. There's a disproportionately large emphasis on actions like obtaining a retweet from a big account, being mentioned by a popular influencer, or speaking in the right Twitter Space. If you’ve been around, you get the gist.
The thing is, very few of these (if any) help the business long term. Sure, in a bull market, they may trigger a frenzy of speculation that leads to your tokens going 10x. But on a long enough time frame, this will die. It also takes away time and resources from what truly leads to the long-term success of a project: building a good product that people want.
There are only a handful of real successes in the space so far, such as teams like Sorare and NFL Rivals. You won't see them engaging in these superficial status games.
What might work
Despite my skepticism, I still have a strong belief in the future of web3 games.
At the risk of sounding like a broken record, I will repeat this: successful Web3 games will fundamentally be excellent entertainment products. However, this alone will not be enough. To entice players to shift from their existing web2 alternatives, the offerings must be compelling. This can occur when games provide a completely novel experience or address issues that would be impossible to solve without blockchain technology.
Some of these themes and teams I’m bullish on:
New Experiences
Change is an inconvenience for people. However, if the promise on the other side of that change is extremely compelling, people are willing to overcome the inconvenience. The best examples of this are people camping overnight outside Apple stores for a new iPhone release (the fact this doesn’t happen anymore shows the stagnation in smartphone technology), or those who queued outside Gamestop for the PS5 launch.
Similarly, if a Web3 game provides a new and compelling player experience, one that simply doesn’t exist in Web2, they will overcome their hatred for NFTs or the UX issues to play the game.
Teams I’m bullish on:
Wildcard Alliance
A brilliant team that is creating a new game genre that lies at the intersection of arena battler and real-time strategy. Imagine playing Clash Royale but in a 3D virtual stadium. New Experience. Additionally, the game uses Web3 for spectator ticketing and viewership.
Shrapnel
Shrapnel is, at its core, a high-quality extraction shooter game (I got to test it at this year’s GDC). What sets them apart is the incorporation of a user-generated content layer, made possible through a blockchain-based economy.
Wagering
Love it or hate it, wagering (also known as real money gaming or gambling) is a significant source of revenue in the gaming industry. In my home country of India, 77% of the gaming industry's revenue comes from this sector, a staggering number.
Wagering in Web2 has two major problems, however. Cryptocurrency provides tangible solutions to these issues.
Payments
Web2 wagering depends on traditional payment methods, restricting products to users with bank accounts. Even when a user has a bank account, banks frequently block payments to betting sites, resulting in lost revenue for gaming companies. Moreover, Web2 payment methods are siloed, often varying from region to region. Adding an additional country to one's offerings may require overcoming substantial technological and regulatory hurdles.
Web3, on the other hand, facilitates instant, global, permissionless payments with a much simpler user experience (UX). This enables adding players from a new country with reduced incremental resources, allowing teams to concentrate on creating the best experience possible. Consequently, players can participate in global products more easily.
Transparency
Web2 wagering suffers from a lack of transparency. Currently, players must rely on developers' integrity regarding honoring take rates (i.e., is every player actually getting paid?) and maintaining fair game logic (e.g., are the rules of this poker game neutral and fair?).
Both of these issues can be resolved by utilizing smart contracts for the game logic and payment flows.
Teams I’m bullish on:
BTX Battle Xtreme (Glip)
My former employers are building an anime-style mobile shooter game with wagering at its core. First, the game itself is better than most of what you see in Web3 (especially on mobile). Second, they are tapping into the wagering player base in India (and eventually outside) with all of the wagering logic on chain. These builders are the perfect mix of hardcore gamers, crypto natives, and great product people.
Shuffle.com
Shuffle is an online casino offering games such as online Blackjack, Dice, and slot games. All buy-ins and payouts are handled in cryptocurrency. Shuffle employs the "Provably Fair" algorithm to ensure fairness and transparency in its games. Using the inherent randomness of the blockchain could also be a viable solution to address these issues.
Web2 + Web3 Monetisation
I previously mentioned how existing Web3 monetization models are flawed. Smart teams understand that these cannot be relied upon as the sole revenue source for their products.
Naturally, it's logical to layer web3 monetization on top of existing web2 models. This involves initially employing proven methods such as in-app purchases (IAPs), advertisements, and subscriptions. Then, they can experiment with Web3 strategies to achieve additional objectives - including added revenue, higher lifetime values (LTVs) for power users, community building, and so on. A fitting analogy for this approach is Starbucks' venture into Web3 with its loyalty programs.
Teams I’m bullish on: Paradise Tycoon, Jungle Games, Viker
IPs
Intellectual properties (IPs) have a significant role in games, which is why companies like Disney and Netflix, holders of extensive IPs, are placing a strong emphasis on gaming.
Web3 games and products that obtain popular IPs and incorporate them into quality offerings have a considerable edge. This is because users will surmount the barriers of Web3 to interact with and play as their favorite characters. This appeal to fan interests is also one of the reasons projects like NBA Top Shot sparked widespread fascination with NFTs.
Teams I’m bullish on:
Sorare
Sorare has secured the IPs for big leagues like the English Premier League and are working with football clubs like Liverpool and Ajax.
Sorare looked at the free-to-play football fantasy game, Fantasy Premier League, which has 11 million+ players with remarkable retention, and built a Web3 monetization layer on top of it. They then partnered with the Premier League itself. I also believe they have the unique distinction of being the only web3 gaming product that raised money from Benchmark.
NFL Rivals (Mythical Games)
Mythical Games partnered with the NFT to build a web3 mobile game that pretty quickly hit the top of the app stores. The power of IPs!
Metagames
As it stands, the biggest use case of Web3 is speculation, and this is harmful to game economies with assets on open markets. Speculators, indifferent to the game itself, manipulate these assets for financial gain, leaving genuine gamers frustrated.
But what if a project were to embrace this speculation and integrate it into its design? By separating the core gameplay from the metagame (the speculation game), they can create space for both players and speculators.
Though challenging to implement, I see potential in efforts by teams like Nor who are exploring ways to make this concept a reality.
Why I’m leaving
Like many others, I entered web3 gaming because of my interest in crypto and not gaming. I had never been much of a gamer and didn’t understand the industry.
This general lack of understanding is problematic, as successful Web3 games will focus more on the game itself than on Web3. Integrating Web3 elements into a game has become fairly democratized; in fact, we likely have more high-quality infrastructure providers than games. There is very little crypto expertise involved. Therefore, to build a great and profitable game in the long term, you need to create outstanding experiences. Those with a background and understanding of gaming are more likely to succeed.
I don’t see myself making a career in gaming.
What’s next
As my first full-time professional experience, the past two years have been very interesting. The good: I got to travel the world, work with amazing people (some of whom will be friends for life), and witnessed a nascent technology go from boom to bust to the slow march toward long-term success. The bad: I probably should have recognized earlier that I don’t belong here.
I plan to take a break for a few months to get back into coding, dive deep into how AI is changing the world (expect more writing here), and explore genuine problems being addressed by blockchain technology.