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The Future of Blockchain Gaming
Play-to-Earn Gaming is Dead. Long live Play-to-Earn?
In 2021 we saw the rise of "Play-To-Earn" (P2E) games. Lead by the explosive growth of Axie Infinity, P2E promised a way to play video games and earn money at a scale that had never been witnessed before.
This has led to an avalanche of new projects in the gaming space at every area of the stack, including: new games for players to earn in, gaming guilds that help players onboard into ecosystems, tooling to help manage and scale participation, and blockchain infrastructure to launch digital economies on.
Despite the attention and hype, a critical problem has arisen in the space: P2E has a massive sustainability problem, and in-game game economies are imploding left and right.
Does that mean play-to-earn is dead? Not necessarily. But before we explore solutions, we need to understand the problem.
The Theory of Play-To-Earn
In traditional gaming, players put time, effort and energy into a game but never see any real economic benefit. Most of the money spent in a game goes directly to the companies involved in creating and publishing, not to the players themselves. The only way players can make money is by winning e-sports tournaments or streaming.
Enter "Play-to-Earn" blockchain gaming, where the perspective is different. The idea is simple: what if the game studio only took a small percentage of the action and distributed the rest to the in-game participants?
In this way, an entire digital economy could develop on top of a game. One that, in theory, could be much bigger than any normal game has ever been.
Gaming companies would win by taking a small percentage of a much bigger pie, and players would win from actually being able to make money participating in a game.
It all sounds great on paper, but does it work in practice?
The Reality of Play-To-Earn
In order to play most blockchain games you have to buy digital assets first.
For example, in Axie Infinity you need to buy three “axies” (the doofy NFT creatures) in order to actually play the game.
If you win your in-game battles you earn the in-game token. Historically, you’ve been able to generate a few dollars to tens of dollars a day in earnings depending on your skill.
While that amount of money is not necessarily interesting to western audiences, it certainly is very appealing to people in developing nations.
The cost of the axies can be significant though, which generally makes the game inaccessible.
Of course, the free market has a solution to the problem: “Scholarship” programs have developed that allow players (“scholars”) to get access to axies at no cost to themselves. They then split the rewards they earn from playing the game with the scholarship sponsor.
This allows scholars easy access to the game with no up front investment, and without going into debt and taking on the risks of a traditional loan.
Sponsors win not only by helping someone earn an income, but also by potentially earning a good return on investment.
Scholars win by playing a video game and earning money while being at no monetary risk to themselves.
The games themselves win as this growth loop allows them to attract people to play their game without a lot of marketing and acquisition spend.
All of this sounds great, right? So what’s the problem?
The Problem with Play-To-Earn
The problems of P2E can be seen pretty easily in most gaming token price charts. For example, here is “Smooth Love Potion” (SLP), the in-game token from Axie Infinity.
While the SLP price spiked to a high of almost $0.40, it has since lost 93% of its value and currently sits below $0.03.
This same pattern can be seen in nearly all other P2E game tokens, including: Pegaxy, Thetan Arena, DeFi Kingdoms, and many more.
The pattern of boom and bust is easy to explain: the token prices appreciate when the game is growing and people are ever increasingly putting in money to buy assets and play.
As players earn and extract money out of the gaming economy it puts significant downward pressure on prices, as most people are just cashing out their winnings and not reinvesting back into the game.
If more money is being extracted than what is being put in, then naturally the economy will eventually fall apart. Money doesn’t grow on trees after all, not even digital ones.
And if nearly the entire audience who is playing the game is only there to make money, as soon as the earning possibilities go away so too does the audience, and then the game rapidly falls apart.
Play-To-Earn then turns into Play-To-Zero.
Large gaming guilds take advantage of this by following a simple formula Bryce lays out in this tweet (pictured above).
Guilds and investors get in a game early (usually before the public launch) to buy up digital assets that they then resell to the public at higher launch prices. As the assets dramatically fall in price the public buyers become the bag holders and the early entrants walk away with profits. Rinse, and repeat.
This ponzinomics is completely unsustainable and will eventually lead to the downfall of the entire industry if left unaddressed.
So, is play-to-earn dead then? Not necessarily. The underlying theory is still powerful, but the current implementations are not sound.
Ultimately you have to ask: how can the money that flows in and out of a game economy be balanced so that it doesn’t turn into a race to zero?
The future likely lies in one of the following implementations.
1. Free to Play to Earn (“Play & Earn”)
Free to Play gaming is a massive industry, with $100+ billion dollar a year revenues capturing over half the active gaming population.
In these systems it is often the case that only 1-2% of the users ever pay, and a tiny fraction of the playerbase accounts for over 50% of the revenues generated.
It’s possible for P2E gaming to be an evolution of free to play, where the game is ultimately an income redistribution mechanism from the whales of the game to the rest of the playerbase.
The key ingredient here is that games have to be engaging enough that some players are willing to pump in significant amounts of money to invest in the game’s economy because they want to participate in the ecosystem, not because they are primarily there to earn.
2. Games as Banks
Can more money flow out of a game than what was put into it? Yes, if the game is a bank.
Imagine a scenario where money flows into a game and there’s some financial engineering in the background (probably through DeFi) that allows money to multiply while it’s in the ecosystem.
You could then have more money flow out than what was originally put in, and could use banking profits to power the earn mechanism of the game.
3. Games as Schools
Games tend to be far more engaging than traditional schooling. “Learn to earn” models could be developed that incentivize learning journeys that lead to long term job placements and productive work.
Schools and recruiting firms are sustainable businesses, and could in theory power a learn to earn gaming economy.
4. Games as Economic Infrastructure
“Banking the Unbanked” is a narrative we’ve heard in crypto for a long time. The idea that crypto will provide robust financial infrastructure in places that don’t have it is one of the big dreams for web3.
Unfortunately, it is largely an unrealized dream. But blockchain gaming could be an incredible onramp in driving crypto adoption. There exists then a potentially sustainable path forward in using blockchain gaming as a customer acquisition model for a broader set of financial and life development services.
5. Games as Nations
Traditionally, the power to create money has been reserved for governments.
But if “games become nations,” what that practically means is that the in-game currency (like SLP in Axie) could be used as legal tender outside of the game to pay for things like rent, groceries, and other non-metaverse expenses, without the need for a currency exchange.
Under this condition, you could have very significant positive money outflows from the game; the world effectively becomes a huge monetary sink.
While games as nations may sound far-fetched, we’ve previously seen our own Starship Guild scholars utilize SLP in their local regions to pay for goods and services directly. Some politicians in the Philippines have even given out Axie scholarships to build support for their campaigns.
How will geo-politics change when game ecosystems become more valuable and powerful than many countries? An interesting question, but a topic for another time.
Make no mistake though, blockchain games (even Axie) are still pretty far away from being true nations.
Banks, schools, nations… executing these big ideas is a monumental task. It’s already hard enough building an interesting game. Creating an engaging game with a sustainable economy? Insanely difficult.
From our own experience interviewing game studios most of them are not thinking about these core issues in a meaningful way. At best they are thinking about “Free to Play to Earn.”
But the payoffs in each of these categories are tremendous. Two-thirds of the world lives for under $10 a day. Economically activating people in the developing world by creating infrastructure for them to prosper has enormous upside. The potential to build modern schools, banks, and even nations through blockchain gaming is very real, and very powerful.
Fulfilling that upside though will likely not be accomplished by the games themselves, but by the organizations that integrate with them.
Guilds are particularly well positioned to solve core problems in micro-finance, including credit worthiness, access, and education.
For example, at Starship Guild we already understand a scholar's work ethic, peer reviews, leader reports and pay. This data can help us come up with a better credit score that traditional banks would generally not consider. We can combine this data with an extension of our existing education system to help scholars better understand how to use financial services to do everything from buying school uniforms for their children to taking a small business loan.
We’ve already seen scholarship models scale to tens of thousands of players through gaming guilds. But the real value in guilds are in the players and community, not the scholarships.
The future lies in organizations that understand how to “train and sustain;” building viable systems that educate, employ, and evolve people to better their own lives and empower their local communities.
Play to Own
There have been many loud voices in crypto prematurely promoting scholars to own gaming assets directly instead of utilizing a guild. This was an obvious mistake; in a world where P2E is filled with toxic assets racing to zero it is incredibly irresponsible to advocate for individuals to be “owners” (read: bag holders).
But this will change when sustainable models develop around P2E. Ownership will be an important step for many players to improve their earning power. Many gaming guilds will likely shift from focusing on running scholarship programs to creating user journeys for their players that will lead to ownership.
The sophisticated guilds will find ways to keep players engaged with their community even after they become owners, and open up opportunities that build on that relationship that are win-win.
We’ve focused in this piece entirely on play to earn blockchain gaming. Just as in traditional gaming there are many types of games driven by a variety of economic models, there are and will be other flavors of blockchain gaming that have little to do with engaging players in developing nations or participants being overtly concerned with the economic payoffs.
And that’s great. There are lots of reasons to play games, and blockchain technology gives an incredible amount of potential to build all sorts of experiences. We expect to cover these games in depth in future posts, especially as we consider investments into this side of the ecosystem.
A generation ago casual gaming became an enormous industry by expanding the number of people playing, not just going after the traditional “hardcore” gamers.
Play to earn has the potential to expand the player-base in uniquely interesting ways; to bring in entirely new demographics, while also fundamentally shifting the kind of impact gaming can make on the world.
New models for schools, banks, and even nations could develop that would economically activate billions of people in the world, and give them the tools, education and infrastructure to thrive.
While these big dreams require big execution, the potential is there.
To those on the frontier with us building the impossible, we admire you, and offer support through our moonshot fund.
The road ahead has plenty of challenges, but the payoff will change the world.