tl;dr
- Web3 games, powered by blockchain, introduce new business models that promise to share in-game ownership with the players;
- Play-to-earn (P2E), pioneered by Axie Infinity, has emerged as the default model that, despite being very appealing in theory, raises some practical and ethical concerns. As of today, it’s difficult to predict how sustainable it is in the long-run;
- After benchmarking 40+ web3 games, we came up with 5 ingredients of a successful game, which we’ll illustrate through a case study focused on The Sandbox that appears to have all the ingredients for long-term success;
- While it’s too early to be certain of anything yet, we believe that successful web3 games will be the ones that manage to combine AAA-quality graphics with sustainable models, backed by solid tokenomics, synergetic partnerships and creator-focused gameplay. The future for mass adoption of web3 games is not in play-to-earn, but rather in play-and-earn.
Context: web3 gaming revolution.
Blockchain games are changing the world. With the introduction of the play-to-earn (P2E) model, pioneered by Axie Infinity, the gaming industry is on the brink of a revolution — set in motion by web3 technologies, notably the blockchain.
New revenue streams are emerging as a result, with a promise to democratize in-game ownership through native tokens, including NFTs. While this is an exciting paradigm shift, experts and players alike are cautious given that P2E is by definition prone to risk.
As described in our manifesto, we believe the future of gaming is in web3 — but we need the right tool to navigate the playing field wisely. Having benchmarked 40+ existing and upcoming games, we came up with 5 criteria to consider when creating web3 games and assessing their long-term potential.
Disclaimer: This is NOT financial advice.
P2E has emerged as a default business model of blockchain gaming — and it’s pretty exciting for players.
P2E is a model where players are rewarded for participation and playing time with in-game assets. P2E games operate as virtual worlds powered by tokens that fuel its internal economy — hence the complex ‘‘tokenomics” behind it. Each web3 game is then a self-sustaining ecosystem, often with a decentralized marketplace, where players generate value as they participate in battles, build things, trade, grow crops, and so on.
While in-game tokens and marketplaces are not exactly new in gaming, what is truly revolutionary when it comes to blockchain games is that the in-game assets (tokens, NFTs, etc.) have value outside the game — meaning, they can be traded on a decentralized crypto exchange.
The decentralized nature of the assets is a promising leap for the metaverse at large, for the assets powered by blockchain can be traded across the different virtual ecosystems, making them more interconnected and unified as a result.
Positioned as the ultimate antidote to the closed ecosystems of ‘traditional’ gaming studios, web3 games aspire to spread ownership among players, allowing them to create more economic value than they ever could from a web2 game — and actually preserve it as they switch to a new game. This is a groundbreaking promise, bound to transform the gaming industry as we know it.
P2E is an umbrella term that actually encompasses a range of diversified revenue streams.
P2E games make money by issuing and selling tokens and other digital assets, then charging commission on in-game transactions. Here’s a brief overview of how it works.
Startup capital
Some web3 games require the player to pay for starting the game. P2E games are often distinguished from F2P, for free-to-play, which can be misleading. Technically, all blockchain games are P2E, but while some are free to enter (e.g. Splinterlands, Gods Unchained, Thetan Arena), others require an upfront investment, i.e. purchasing an NFT asset (Axie Infinity, Alien Worlds, Sorare).
Native tokens
Native tokens are present in virtually all web3 games and serve various purposes.
The most common one is an equivalent to real-word currency, used for in-game transactions. There is often a token reserved specifically for DAOs / governance too. Token utility can be very elaborate beyond that, with some tokens being used as collateral to earn interest in a range of DeFi dapps, or getting ‘locked up’ for rewards in practice known as ‘staking’.
There are also NFTs, which can be traded inside and outside the game. The lack of fungibility makes them scarce — unlike the ‘currency’ tokens. In some games, NFTs can be designed by players themselves.
Depending on the ecosystem, the in-game NFTs can take infinite forms:
- Game characters, like pets (ex. Dogami, DNAxCAT), or cute monsters (Axie Infinity), which are bred, used in battles, and decorated with NFTs.
- Cards are ultimate collectibles, these have exploded in the context like fantasy football (Sorare) and competitive battle games (Splinterlands).
- Virtual real estate (land, planets) in games like The Sandbox and Decentraland, where players can acquire plots of land, develop (buildings, flora, fauna, etc) and/or rent them. In Alien Worlds, players can even earn passive income for letting others mine their plots of land.
- Natural resources are often linked to land ownership, like in Star Atlas, where players will build spaceships and weapons with the mined resources.
- Tools and accessories (weapons, skins, etc): Harmonia Goya’s Land features NFTs ranging from animals, to trees and mounts, to clothing and even pens.
Other more ‘classical’ revenue streams:
- Partnerships can provide additional features like new NFT skins for avatars, be used for events like virtual concerts, or improve the gaming infrastructure in other ways.
- ‘Battle pass’, where a player accumulates points to attain reward tiers, ex. The Party Pass in Blankos Block Party that allows players to unlock ‘hype points’ to obtain accessories.
- Advertising, ranging from Admix-style billboards; to kiosks in Decentraland, to art galleries in The Sandbox.
All of this sounds great — and it is — but here’s the catch: P2E is volatile by definition, with ‘best practices’ yet to be crystallized.
Last year, Axie Infinity was the biggest NFT game in the market. It even made headlines for enabling players to earn a life’s fortune in a matter of weeks. The success of the Sky Mavis-crafted game was so large that dedicated ‘scholars’ and guilds have emerged to coach future players and loan them the NFTs to enter.
Following months of incredible growth, the average daily earnings dropped below the minimum wage in the Philippines, where the majority of its players are located. Its in-game currency, Smooth Love Potions (SLP) has seen wild swings over the past year and is tanking at the time of writing.
That doesn’t mean that Sky Mavis got it all wrong, or that P2E is faulty by design; yet it does reveal some of the model’s (and market’s) current shortcomings.
Volatility is an obvious one.There’s an ethical issue too, as players will continue to invest and even take on debt to play, with guilds operating a lending scheme of significant risk. Taxation is likewise a gray zone, with more regulation potentially needed to bring more stability without compromising the key premise of decentralization.
Here are the 5 criteria we propose to assess the long-term potential of web3 games.
#1 Nature of the gaming universe
Factors to consider:
- How rich is the gaming universe? Quality of graphics and animations, as well as the storyline’s level of engagement
- Would this game be fun / enjoyable if the gamer didn’t make money playing? While subjective, it’s important to ask about ‘fun’ — which applies to gameplay or strategizing how to make money.
- Can players participate in the co-creation of the ecosystem (UGC), e.g. through user-generated NFTs? Not an absolute prerequisite but definitely a plus when it comes to user retention.
- How accessible is the game? There are various ways of initiating newcomers into the web3 game mechanics. Defi Kingdoms, for instance, has been applauded for using gamification to simplify difficult crypto concepts.
Why this is important:
Initially, the blockchain gaming ecosystem consisted mostly of MMO, RPG, cards and strategy games, with straightforward gameplay and visuals. However, game developers are now experimenting with more graphic-heavy and complicated game mechanics — the upcoming Star Atlas is a fine example of a game that promises to drop some jaws.
By providing a richer experience, web3 games — whose target audience so far has been predominantly crypto-savvy — will become more appealing to the ‘traditional’ gaming community, which is likely to increase conversion.
While speculation is a legitimate part of the deal, creating meaningful engagement — notably through features that encourage co-creation of in-game assets and worlds — will be key to reaching the mass market. When it comes to blockchain-powered UGC, native web3 studios have a technological edge over their predecessors, which they should leverage to the max.
#2 Business models
Factors to consider:
- Is there a F2P component? Can anyone buy this game now? This directly impacts the mass market potential of the game.
- Revenue streams: does the game combine multiple revenue streams? Rule of thumb: the more the merrier, for that minimizes the risk for the model as a whole.
- Tokens: does the game have really smart tokenomics that are interoperable in the real world and in other games? How has the value of tokens evolved so far? Are there gorgeous NFTs that are collectibles and usable in the game, or are they derivative jpgs? How much utility do they have? All of this will affect user retention and token appreciation over time.
- Partnerships: high-profile partnerships maximize visibility and brand appeal, and can boost the native tokens valuation.
- Merchandise (physical / digital): does the studio collaborate with amazing brands and design, particularly on their merchandise?
- Advertising: if present, is it integrated tastefully into the game, or likely to cause annoyance for players?
- Marketplace: is there a marketplace to purchase assets from within or outside of the game?
- Value retention of digital assets purchased / earned based on game mechanics: how much does a player stand to lose?
Why this is important:
There are plenty of barriers to entry in web3 games: acquiring crypto, creating a wallet, paying gas fees, etc. — not to mention the general information asymmetries when it comes to blockchain. While this doesn’t mean that “free-to-play” is always the way to go, the higher the entry cost for players, the more difficult it will be to democratize web3 gaming. Pricey buy-in’s should be justifiable.
Sustainability of web3 games will then be based on: a) their accessibility and appeal, which will determine how fast the game can grow its player base; b) meaningful utility for in-game assets both within and outside the game; c) solid partnerships. Multiple revenue streams will make projects more stable, acting as a safety net in case one of the streams defaults.
# 3 Team quality
Factors to consider:
- Is the team public (doxxed)? Not always a given in the crypto space.
- How big is the team? The size of the team needs to be proportional to the scope of its ambition and roadmap (see more in #4).
- Do the key members have a relevant background? We want to see top talent from several fields of expertise: product development, gaming (particularly from top-tier studios), finance and crypto / tokenomics experts, marketing and community-building.
Why this is important:
Here, the goal is to analyze how well-equipped the team is to deliver on the big vision. It’s a similar logic that applies to evaluating any core startup team — seeing what backgrounds the founders have and how complementary those are. Web3 dimension adds a few extra requirements though — the expert knowledge of tokenomics — so a chief economist can be a huge asset. Having a key member of the team with previous experience in gaming is a big plus too, particularly for studios aiming to win over a larger target audience.
#4 Financing and roadmap
Factors to consider:
- Volume of funding to date: did they raise significant $$$ / crypto in venture funding (or otherwise) to make the dream come true?
- Quality of venture investors: are they backed by Sequoia, a16z, etc.? Or Joe Schmoe angel investor or parent?
- Financial stability: related to the business model — is the game profitable with multiple revenue streams and minimal risk? Or does it have no money coming in and no venture-backing?
- Ambitious + realistic roadmap: are they visionary and ambitious, or is the roadmap non-existent? How detailed is their action plan?
- Frequency of shipping updates: does the project communicate regularly and transparently about all of the above?
Why this is important:
Ambitious projects with detailed roadmaps are reassuring. However, they need equally solid financials to back them up. Studios with solid financials will want to promote those publicly — if they have them. Beware: many projects may have big names listed on their websites, but have established no concrete partnership of future relevance. They may have simply used those platforms to complete their projects, and then spun that around as a marketing tactic.
Having said the above, when it comes to the funding approach, it’s not always the same when it comes to web3 projects — some avoid traditional VC structures by principle, choosing instead to rely on alternative and/or more community-driven methods.
#5 Community
Factors to consider:
- Social media following and engagement: are there seizable, active, organically grown Telegram / Discord / Twitter communities? Are they sketchy? Do they exist? What’s their Town Hall attendance like?
- Project DAO: if there is a DAO, is it an active, smart DAO? If so, does it allow for progress on its roadmap? Or will it be slowed down and distracted?
Why this is important:
Games with solid communities will have an edge over others. Ideologically, web3 is all about communities — and social media is where these communities gather. A strong social media presence is an indicator of one’s potential to sustain hype and amplify the project’s outreach.
Telegram / Discord / Twitter (aka Crypto/NFT Twitter) have emerged as epicenters of web3 life. Other social media channels like TikTok, Instagram, Twitch, and YouTube remain telling of the project’s connection with the community. DAOs will play a pivotal role in fulfilling the web3 promise of a truly decentralized, thriving community — which is why those doing it must get it right.
The Sandbox case study
To illustrate how it all comes together, let’s apply this to a game we think has all the ingredients to succeed in the long run: The Sandbox.
The Sandbox, a subsidiary of Animoca Brands, is a user-generated gaming platform where players can build, own and monetize virtual assets on the Ethereum blockchain.
It features 3 main components: VoxEdit (a creative editor to design NFTs), Marketplace (where players trade NFTs among themselves), and Game Maker (which allows any player to make their own 3D games).
As of January 2022, the game reported having 18,000 land owners on its platform, with 1,6 million users that have connected their wallets, which represents a 1000% growth compared to the previous year! These impressive metrics make perfect sense given the solid foundation on which the game is built.
#1 Nature of the gaming universe
☑ Immediately recognizable visual universe, appealing to the mass audience. It’s an intuitive platform to use, enabling anyone to create NFTs and immersive 3D experiences without prior technical knowledge — which makes it scalable.
☑ Customizable gameplay that opens up a space for user creativity and fuels engagement — which makes the platform expand exponentially, as it’s not just the devs but the entire gaming community that co-creates its ecosystem.
#2 Business model
☑ It is free-to-play and hence widely accessible.
☑ Unique tokenomics of native tokens sustaining its ecosystem. LAND represents virtual plots of land, while SAND is used to purchase assets and can be used to buy CATALYSTs and GEMs, which in turn are used to create ASSET tokens (i.e. user-generated NFTs).
☑ Ever-growing network of partnerships with major IPs and brands including Snoop Dogg, deadmau5, Warner Music, Gucci, Ubisoft; all of whom diversify the in-game experience, increasing its mass appeal and favoring media exposure.
☑ Multiple revenue streams, where a broad target audience consisting of both individual players and brands (who bring their communities too!) helps to sustain demand.
#3 Team
☑ The team is fully doxxed, multidisciplinary, and complete enough to deliver on the vision.
☑ Founding team, consisting of Sébastien Borget and Arthur Madrid, brings in strong expertise in social networks and game dev.
#4 Financing and roadmap
☑ As a subsidiary of a leading blockchain-native gaming studio, which has raised $93 million in the last Series B funding round led by SoftBank Vision Fund 2, the project’s financial future seems as secure as it can be.
☑ Comprehensive roadmap, detailing various past milestones (like the number of downloads, partnerships, and events) as well as future projections per quarter.
#5 Community
☑ Vibrant and big communities on Twitter (851k followers) and Discord (280k+ followers).
☑ The Sandbox’s Foundation has allocated 300 million SAND to the Game Maker Fund in order to finance and incentivize their projects, which sends a powerful message that The Sandbox is there to truly empower its community and share ownership.
☑ The Sandbox DAO is being introduced in Q2 2022, which will allow players to participate in major decisions on the Game Platform.
Conclusion
These are the criteria we’ve developed internally to understand what constitutes a ‘virtuous’ web3 gameplay. While it’s not an exact science — and much expert knowledge in tokenomics is needed to fully grasp it — some ingredients of long term success seem clear.
The champions of the web3 revolution will manage to provide: a) a high quality, fun gaming experience; b) solid business models that favor token appreciation over time; c) an opportunity for players to shape the platform creatively. For web3 studios with a mass-market ambition, the mentality should probably shift from play-to-earn to play-and-earn.
P.S. We’re looking forward to feedback on this methodology to improve! Feel free to reach out at anna@powder.gg if you have any.
