The authors of this article are Arthur 0x, David Koh and Bailey from DeFiance Capital team. The article is compiled by DeFi Tao. The original entry stamphere。
Since it first entered the open market in the 1970s, video games have undergone tremendous development. From paid games for hosts and PCs to free mobile games in the past 10 years, the game experience and business model have changed with the progress of technology. Today, the game market is worth more than $300 billion (according toaccentureAnd BitKraftFrom 2022 to 2028, the game market is expected to grow at an annual rate of 12%.
Our view is that integrating Web3 elements into games is likely to usher in a new era of "Play to Own" games. We believe that unlocking economic activities in games will greatly expand the potential market size (TAM) of the game industry and accelerate value creation.
In 2021, we will see the potential of Web3 games through the rise of Axie Infinity. According to Nansen's statistics, Axie triggered the Play to Earn (P2E, making money by playing games) mode that most of us are familiar with. Its daily life increased from 10000 at the beginning of 2021 to a peak of 3 million, and it brought in 1.3 billion dollars in revenue in 2021. What's more surprising is that Axie was still in its infancy; This simple game is just a beta version.
The parabolic growth of Axie sent a signal to the game industry that Web3 games have great potential, and inspired a large number of game talents to enter the cryptocurrency field. Due to the switch to Web3 and the issuance of tokens, the share prices of some listed game studios have even risen.
Compared with Web2 games, NFT integrated games have achieved greater success in terms of player retention, growth and revenue. We have begun to see that many projects have embedded innovative P2E mechanisms in game play. In addition to game studios, P2E ecology has also emerged rapidly, such as game guilds, DAO, tools of these guilds, game discovery platforms, hosting, trading infrastructure and analysis methods.
At present, the hidden danger of P2E mode has been fully recognized, that is, the challenge of managing inflation economy and being unable to attract real participants (most players only want to extract as much economic value from the game as possible). Most of the leading entrepreneurs in the field of Web3 games are seeking to break through this model and make it more sustainable. We look forward to conducting rapid experiments in the next few months. We firmly believe that the next generation of successful Web3 games will succeed without P2E mode.
To predict the future of Web3 games, we can review the history of the game business model, gain insights from it, and the cumulative changes that brought us to this inflection point.
Looking back on the development of games in the past 50 years, we can see that business model innovation and technological progress coexist in many different periods.
The first successful video game business model in business is the paid game model, which is popularized by the arcade game Pong - players put coins in the arcade machine, play for a certain time, or play until they fail in the game level. Arcade games are often simple and interesting games, including competitive elements in the form of scoreboards, so that players can return to the game continuously.
Later, boxed paid retail games such as Diablo also flourished with the popularity of home computers and console games, allowing players to play games at comfortable homes. The disadvantage of paid game boxed retail games is that its profit opportunities are essentially one-time - the only way for game developers to gain more revenue is to regularly release the same game in multiple series, which usually takes several years.
The progress of digital distribution technology makes instant service games possible. At the same time, game developers also hope to obtain regular income, which has given birth to the pay to play model. In this mode, players can pay a fixed monthly fee to access regularly updated and enhanced game content. Many successful games use this mode, including the highly respected World of Warcraft, which has more than 11.5 million paid users per month at its peak.
With the rise of mobile applications and the popularity of casual games, Free to Play has become popular. In this mode, playing games is completely free, but game publishers will make profits through small transactions. Such small transactions include quarterly passes and booty boxes/egg wrenches, allowing players to obtain decorative props or other benefits, so that they can be more competitive with other players through faster upgrades/more powerful weapons.
This mode has obvious advantages. Users have no threshold to play games, and game developers can also have a fixed source of income. However, over time, the developers' intention to make profits became more and more obvious, and players would be disappointed because they felt that the developers' "money grabbing" behavior became more and more strong, and the game playing method was increasingly affected by paying players, who could easily achieve success through payment.
The common goal of this kind of business model development is that game developers are increasingly inclined to obtain more lifelong value from players, while investing the least effort and cost.
Finally, developers turn to profits at the cost of fairness. From products designed to provide interesting experiences to products designed to let players spend as much as possible: learn about players' behavior by increasing the frequency of data collection, and maximize the economic value of users through predatory plans.
In many cases, the items that players can obtain by swiping tasks will be unfairly reduced and replaced by new items that can only be obtained through purchase, while the profits will be owned by developers. The real ownership of assets in the game does not exist, because once players decide not to play a certain game, they will find their efforts worthless.
At the same time, a fundamental problem is incentive imbalance. The decision of the whole game ecology is made by the developers, who may not consider the idea of the community. The players and creators who have made great efforts to contribute to the success of the game have hardly received any compensation. In some cases, there may be a lack of appropriate methods, but in other cases, the developers will not consider this aspect at all.
Through the use of blockchain technology and NFT, token incentives and real ownership of game assets are introduced into the game, thus giving birth to the "Play to Earn" business model. P2E players can convert their time spent in the game into tokens and NFT, and then convert it into cash for use in the real world. Generally, in such games, the element of "Earn" is to attract players to play the game in order to obtain rewards. It is hoped that some players can become paid players.
In Axie Infinity, players at the high MMR (matching level) level once earned more than $200 a day. In developing countries such as the Philippines, this amount is far higher than the minimum daily wage of $10. However, it is unwise to play games as a job, because token prices fluctuate greatly. If supply exceeds demand, price stability cannot be maintained. An emerging game economy with limited content depth will not be able to support the player base only for value extraction.
In the open economy of P2E game, the healthy development of economy is the most important. We urgently need to ensure the balance of tokens to ensure that the value of core currency and props is stable. Limiting the number of speculations in an emerging economy is also important to limit the degradation of user experience caused by price fluctuations.
In the footsteps of Axie, we see some P2E games trying to emulate their success. Due to poor economic design and management, most games are struggling with the high inflation rate of game currency - a large number of players quit leading to the death spiral. With the decline of token price and the decline of players' income, they stop playing games because the main reason for them to play games is to earn economic benefits.
From Axie, we learned that in the initial guidance stage of the game economy, early believers and participants were mainly driven by economic returns. They would take the risk of acquiring assets, and strive to tap resources and sell them to later participants.
However, as incentives cannot permanently subsidize growth, game developers must find ways to transform revenue seekers into consumers in a sustainable game economy.
Although this can be achieved in the short term by adjusting the circulation and introducing new tokens, organic consumption can only be maintained through a steady stream of new and interesting content and experience. Players should be willing to pay for these contents without expecting any economic return. The most sustainable way to develop the game is to create an immersive world and characters loved by the community.
We believe that the Play to Own model will become the next development direction of the game business model. Playing games is not work, and the ability to make money from games should not be emphasized. This term reflects the needs between players and game owners, as well as the understanding of NFT technology, which is related to improving ownership.
Our definition of P2O is:
"A blockchain game developed based on the Web3 concept - encourages consistency and real stakeholder ownership. Players will get ownership of the game in the form of tokens or internal assets of the game because they participate in the game and contribute."
Unlike pure P2E, P2O will focus on interesting playing methods, sustainable economy, and cultivate players' strong sense of ownership of assets and IP in the game, rather than a short-term mentality of making money. We believe that this model will allow games to gain real benefits from the blockchain, such as unlocking value from internal assets of games, better price discovery and building a strong sense of community ownership.
P2O means that players actively try the game experience in order to obtain the ownership of valuable assets, rather than blindly clicking the mouse in games with poor economic models.
In addition, we believe that P2O games will provide a very low entry threshold for new players, and will provide a sustainable number of incentives as a user acquisition strategy.
For example, the game may be free at the beginning, allowing players to earn a small amount of rewards, and then invest in the game to obtain valuable game assets. Another option is that users can easily rent NFT assets from the market through profit sharing agreements, and can compete at a high level without spending a lot of money in advance.
For stakeholders in Web3 games, Nansen'sChartA good explanation was given:
We regard P2O as a positive sum game:
(Compared with Web2 games and P2E games, P2O is more fair, and players, developers, and communities can benefit from it.)
We predict that the consumption of P2O players will far exceed the income of Web2 games, and Web3 games will also become an indicator to measure the total commodity value (GMV) of all transactions in the virtual economy.
Most importantly, this will create a net value for the ecology shared between developers and communities (from $10 to $20 in the figure above). With perfect economic management and in-depth play content, P2O games will be more sustainable than P2E games, and can create benefits for developers and communities in a longer period of time.
We believe that the imbalance of incentives in the current business model and the value proposition brought by Web3 jointly support this paradigm shift:
#1: Players always want to benefit from the time they spend on the game and be flexible on the network as much as possible
From experience, we know that players will naturally find ways to make money from the time spent in the game and display the best game decorations.
Internal game trading institutions like Grand Exchange in Jianghu have taught a generation of players the economic aspects of games. In the popular MMO (large multiplayer online game) or MOBA (multiplayer online competitive game), gold and proxy operations are also common. Players have an internal psychological model for valuable things in the game (including rare trophies and hidden content). When they exit the game, they always consider exchanging these valuable items for cash.
The restrictive economy of the current game will promote more players who recognize the value of virtual props to enter the Web3 game. The token of resources and assets in the game reduces the friction of exchange value, thus releasing more economic activities.
With the increase of online time, these digital aborigines also increasingly like digital elasticity; However, it is difficult to prove that it is reasonable to invest a lot of money in the game, because the value stream entering the game is one-way.
With NFT that can be resold, the flow of value can be two-way. The change of players' mentality from pure consumption to asset ownership will significantly improve the TAM (potential market scale) of the game, because when the asset value can be increased and sold to obtain some residual value, players can prove their consumption is reasonable psychologically.
A huge obstacle to decentralized applications has always been that people will be worried when it comes to self custody of funds and sending online transactions through wallets such as Metamask. However, we believe that this is not a problem for those who are used to managing game accounts that contain high-value items and currencies.
#2: Because the incentives between developers and players are inconsistent, players are disappointed with the game developers.
Now most games are investment products driven by ROI (return on investment), rather than focusing on fun and playability. The goal of the game company is to invest the least resources in the players and obtain the most benefits at the same time. Investors' pressure, expensive management fees and strict delivery schedules will also lead to imperfect products being sold to players.
In recent years, many game companies have made great efforts in the trailer, but failed to provide a satisfactory game experience in the end, so cases of betraying the trust of players are not uncommon.
There are many other examples of this: expensive paid content, the hard won props of players disappear after the game is updated, small transactions are prohibited, intrusive advertising, low-quality battle channels, lack of support for the decorations of last season
As developers' "money grabbing" behavior becomes more and more obvious and their promises are broken, the player community feels more and more disrespectful and tired of the game studio.
#3: Game developers and publishers may abuse UGC creators for their own benefit without consulting the community.
At present, UGC (user generated content) creators pay high costs for their works. In some cases, they may not be compensated at all. Game publishers can easily change the rules and royalty payments, as in Steam's example.
An interesting example worth studying is "DOTA", which is the UGC game mode of Blizzard's "Warcraft 3", attracting a large number of players to enter this game. It is unclear how much money its creators have made from this success. In the end, the active developers among them transferred to Valve to work for DOTA2.
In Web3 games, the royalties executed through smart contracts give professional UGC creators the confidence to build their own businesses on top of the game. This will provide the society with higher quality work and a high-quality UGC market.
In addition, when contemporary currency incentives are used to promote UGC's efforts, more creators can make a living and benefit from their creative talents. At the same time, this will also remove the speed limit for content generation in the game. Any change in royalty sharing can be voted by stakeholders, resulting in a healthier discussion.
#1: The liquidity of the secondary market increased, and the trading volume and income increased.
The open and distrusted economy built on the blockchain provides a vibrant secondary market for game assets. The price of game items is determined by market forces and natural supply and demand, without the intervention of game developers.
Game developers can adopt another profit strategy, which is based on transaction costs and secondary market transaction royalties supported by smart contracts. Assets can be liquidated freely, and players can get some economic value from their time, energy and money invested in the game.
We believe that, in the long run, this will lead to a significant increase in TAM in the game industry.
#2: Web3 games connect incentives among players, investors and developers. Therefore, there is a strong player authorization and community management mechanism in the game, because everyone is committed to the success of the game.
At present, the game community cannot develop with the success of the game, nor can it share any form of income.
Players usually have no say in the direction of game development, because most games are tested behind closed doors. The game revenue has never been shared with players and early believers, although they are a major reason for the success of the game.
NFT and token driven games provide a solution, that is, players can have economic exposure to game tokens early and after the game is released.
In the early development stage, game developers can identify themselves and let these passionate holders participate in the game development process. These early believers who have enough reputation or skin in the game can also ask their views on the development of the game.
With the launch of the game, the governance token allows the community to participate in the governance and management of the game. Open communication channels can build trust and understanding, and promote players to participate more deeply, because players can let developers hear their voices.
#3: New forms of user acquisition are achieved through asset interoperability, game history, and the use of tokens.
The licensing free and open environment allows game developers to integrate third-party NFT assets (even assets from other games) by using special custom skins in their own games. Developers can look for communities that look the most popular or best suited to their target roles to promote their games.
With the maturity of tools for determining legal wallet activities, players' online history or meta universe files can be accessed and located by other games to obtain users and air drop. This has created a win-win situation. Game developers have a new form of user acquisition, while strengthening the IP, utility and network effects of integrated NFT assets.
The ownership of tokens and NFT is conducive to organic marketing, because the community has become an effective communicator of the game with the least marketing budget.
#4: With the advent of Web3, the financing capacity of game studios has been improved.
In the early days, the liquidity provided by token investment (rather than equity) helped the blockchain game project to raise funds from institutional investors, because people believed that the exit risk was small. According to a copy of Dappradar and BGAreportIn 2021, the blockchain game industry raised a total of $4 billion. By contrast, in 2020, traditional game startupsTotal financing$4.7 billion.
Selling the future in game assets as NFT can help us raise a lot of funds, thus reducing the financial risk of the game project and making the development work no longer constrained by tight budgets. The ability to resell freely in the secondary market makes it easier to buy.
In addition to pure asset speculation, we also see that players are willing to donate money to realize their wishes. As the market matures, players will choose to invest in projects that have a sense of responsibility for the development process and community building.
In order to fully embrace the advantages of Web3, we believe that developers should implement the following core elements:
#1: Construction of complex world and development of IP
In short, when there are a lot of activities to do in the game world, players will spend more time in the game, which is directly related to their consumption in the game.
The game world is designed to be combined with various ideas, making the game a hotbed for UGC and involving the community to create stories and characters. When the community participates in world construction, it will form a strong emotional attachment to games and IP. Developing a cross media content strategy to reach audiences through a variety of media is critical to achieving this goal.
In addition, developers should conduct social coordination around common technical standards and actively support the adoption of these standards to improve the portability of assets in various virtual game worlds. As more and more third-party games and content creators integrate original NFT assets, the value of IP also grows with the growth of attention and recognition.
#2: Immersive social and MMO experience
It emphasizes high customization, identity building and social interaction. As people pay more attention to the characters and properties in the game, the motivation for consumption and display is also growing. This encourages consumption in the virtual economy.
The rewarding multiplayer game experience in PvE (players vs. games) and PvP (players vs. players) increases the interactivity and social elements of the game. The reputation on the ranking list and the war between guilds also cater to the competitive nature of players and encourage consumption to stay ahead.
To meet the psychological needs of players and bring them into the "magic circle" (virtual world) is the place where the game successfully makes players forget the open economy of asset finance.
#3: Deep economy meta game
Skills and efforts should be rewarded more than passive play or pure consumption, because these players may be more valuable users, and they will invest in the economy again. The game needs stable content patches and real-time operation activities to encourage the active secondary trading market - trading materials and valuable items, so as to increase the game's royalty income.
Token inflation is a tool to acquire and retain users in the economic guidance phase. Developers will need to monitor key economic indicators to adjust supply and demand, and actively manage the health of the economy at any time. The goal is to strive for the stability of the base currency by keeping inflation in line with the growth of the player community. Only when we have confidence in the long-term stability of the economy can we establish in game businesses and operations.
If speculation is not restricted in the initial stage, an open economy will be a double-edged sword. Economic designers should try to protect the emerging economy from extreme fluctuations and asset abuse. This can be achieved in the form of direct and indirect taxes on transactions and assets.
In a word, the goals of the game and the players need to be consistent - the success and benefits of the game should be based on the value players get from entertainment and economic returns.
#4: Progressive democratization of games
In order to prolong the life cycle of the game, developers should make joint decisions based on the investment of the community and the opinions of reputable stakeholders. Games owned by a well managed community can improve user stickiness and retention by presenting community views.
If the economy of the game is too large and the country may participate in the review, it is also important to plan in advance. A decentralized technology stack is essential to ensure the longevity of the game while maintaining its uncensored nature. This may apply to more mature games.
Open source game code is also important to ensure that the community can split games. If developers are considered poor game managers, open source can maintain the continuity of this virtual economy. We imagine that different development teams may be employed to create content and maintain the real-time operation of the game. Players can vote at the end of each season to see whether they are able to develop the game and retain players.
The success of the game is the function of product, distribution and economic balance, which is driven by a competent team. Our evaluation process of the game is as follows:
#1: Team pedigree. We like to see a good combination of game development and encryption talents with a strong vision for the game.
The successful release of a game requires attracting and retaining talents, effectively allocating resources, and coordinating the efforts of functional teams such as art, music, and technology (usually more than 100 people). Given such a complex situation, it is not surprising to see that the release of games is often delayed.
In addition, understanding the distribution channels (publishers and marketing partners) and promotion methods is the key to successful distribution. Even after the game is released, it is crucial to maintain the rhythm of real-time services - generate new content for players, and release game patches to extend the life cycle of the game.
For Web3 games, due to different business models, encryption native experience also plays a role. The team should have a deep understanding of how to start and promote the value accumulation of tokens and NFT; Manage financial treasury and incentive plan; Web3 games can use the mechanism provided by smart contracts (such as staging) to start and accelerate development. Community building should be our second nature - maintaining clear communication and responsibility to build a trusted and passionate community of players, contributors and game owners.
In essence, the team creates a foundation layer for the prosperity of the ecosystem and is the administrator of a grand vision. Having experienced people who have actually released games and have a real passion for Web3 will be the key to success.
#2: Products and distribution. A fun game that can attract a large number of players willing to spend money.
One question we often ask ourselves is, can we spend time and money on this concept without considering the potential returns?
Before the official release, the game should be tested and iterated until the players have enough confidence in the game playing method. In this regard, an open iterative approach to developing games with the community can help. Different playing methods should be adapted to different stakeholder groups, each of whom is optimized according to their own victory definition.
It is important to understand the target player base and how to obtain them through the most effective distribution channels. Marketing partners, launch activities and community building need to be planned in advance to ensure successful launch.
Improve the learning process and retention rate of games or mobile applications to achieve higher conversion rates. In addition, developers need to isolate blockchain experience where necessary. Tokens and game assets need to be accessible in the game client.
#3: Economic sustainability. Manage inflation and suppress economic fluctuations.
We believe that a healthy economy is crucial to the life cycle of this game. As the blockchain unlocks the virtual game economy, it is necessary to model in the game and build an adjustable macro lever to balance token inflation and player growth.
Controlling and transforming speculators and value extractors into consumers in the economy will be an important task. In the long run, the only way to create an effective model and reduce the impact of inflation incentives is to have high-quality content that can inherently motivate players to consume.
Significant changes in game play and the economy should be balanced and communicated with community stakeholders. Developers should make efforts to design reasonable tokens to ensure that all interchangeable and non interchangeable tokens in the ecosystem have clear utility and value accumulation.
We believe that the underlying blockchain technology is technically ready for the game to target mainstream users. What needs to be innovated now is the user experience (asset trusteeship, gas payment, bridging needs, etc.). Developers should try to distinguish between assets on the chain and assets off the chain, extract complexity, and slowly introduce elements on the chain to more advanced users.
Because of its deep economic and social play cycle, the game type most suitable for using Web3 elements is MMORPG (large multiplayer online role playing game), such as World of Warcraft and 4 X (explore, expand, develop and conquer) strategy games, such as Tribal Conflict. The use of blockchain technology will also lead to 0 to 1 innovation in game design and create new types, because it is possible to store assets and game logic on the chain.
Studying the current game design field, we are excited about the "top-down" and "bottom-up" approaches to building Web3 games - and recognize the different challenges faced by each approach. The following are typical profiles of the two methods:
(Compiled by DeFi)
We tend to invest in games and auxiliary infrastructure (such as guilds and game discovery platforms), and avoid some teams developing leisure games and GameFi with short life cycles (we define them as zero sum games, and the only goal is to obtain the maximum economic return - they are essentially gamification on the same Ponzi income farming mechanism).
Our investment approach is to actively support projects committed to long-term development that provide interesting content and experiences and focus on a sustainable game economy - implementing all value propositions as Web3 games. The most successful game will eventually become the core part of the meta universe, where the game will have a huge impact on the digital reality of the huge player base.
From the talent level we have seen entering this field, we have reason to believe that the next generation of authorized games will be based on Web3 - which has reversed people's negative feelings about P2E games using NFT.
We believe that games built on the open peer-to-peer network will release greater economic value and significantly expand the potential market size of the game industry - it is estimated that the economic output will reach trillion dollars in the next 10 years.
We are eager to invest to realize such a future: the real value flows into and out of the virtual world, and the experience will be as real as the real world. DeFi will become a financial tool serving these chain economies.
If what you are building is highly consistent with what we have written, we would love to know more!