Blockchain Gaming

Introduction

Video games have captivated users since the dawn of digital technology. In 1972, Atari Inc. released Pong, a simple arcade ping-pong game that helped launch the evolution of gaming. Popular games such as Pacman, Asteroids, and Space Invaders paved the way for future gaming consoles like Nintendo, Gameboy, PlayStation, and Xbox. Gaming has transformed even more in recent years as users can access rich gaming experiences via portable devices, including mobile phones, laptops, and portable consoles.

Gaming even has its roots in the origin story of Ethereum; Vitalik Buterin, one of the founders of Ethereum, spent years playing World of Warcraft only to have his character’s damage component significantly reduced in patch 3.1.0. Buterin is quoted as saying, “I cried myself to sleep, and on that day, I realized what horrors centralized services can bring.” This led Vitalik to learn about Bitcoin and its decentralized properties, serving as a heavy influence for the future creation of Ethereum. Now it may be decentralized blockchain technology that catalyzes the next generation of games via interoperable gaming universes, digital ownership, and financial incentives.

Traditional Gaming Market & Trends

Video games have been around for over half a century, and as expected, the total addressable market has grown significantly. Total global revenue for video games is expected to reach $365.6 billion in 2023 and grow at a compounded annual growth rate (CAGR) of 7.17% through 2027, with total revenue expected to reach $482.3 billion^[1]. On a micro level, the average gamer is expected to generate $137.80 in revenue for gaming companies in 2023. The value of video game franchises can be seen in popular brands such as Pokémon or Call of Duty. Pokémon was initially released in 1996, and almost 30 years later, new additions to the franchise are being released and generating revenues for gaming studios.

Although consoles used to be the primary vehicle for playing video games, mobile games have taken the crown and are the leader in revenue generation. The trend is expected to continue for the next few years, with the proportion of total mobile revenue growing through 2027.

The top mobile game publishers generate billions of dollars in revenue from their customers as the top games all garner close to a quarter of a billion yearly downloads each.

In addition to mobile gaming becoming the gold standard for video games, digital sales have replaced boxed sales as consumers no longer need to buy physical products to access new games. This trend has manifested due to increased processing power and storage capabilities of devices, making downloads less cumbersome and storage cost-effective.

This trend also bodes well for blockchain gaming, as users will not even need to download a game; they can just connect their digital wallet to their preferred dApp and begin playing.

Further, gaming has extended beyond pure leisure and has developed into a fully-fledged for-profit endeavor. In combination with a thirst for digital content, eSports have grown into a massive industry. In 2021, the most popular eSports event had nearly 175 million hours of content watched.

Top players have huge followings on platforms such as Twitch and YouTube, attracting millions of views per video. This reflects the degree to which many eSport competitors are beholden to centralized content platforms for distribution and monetize largely via a traditional ad-based model.

Current market trends are creating the perfect storm for blockchain games to be the next step in video game evolution, in my view. Mobile gaming, digital sales, and content streaming are all beneficial for the mass adoption of blockchain gaming.

Blockchain Gaming

Given the industry trends highlighted above, blockchain-enabled games are the next logical frontier in gaming. These games are set to allow participants to have greater ownership over the trajectory of a game, provide the user with ownership rights over their digital assets, and potentially allow for game developers to implement interoperability between different games, while introducing unique financial incentives to both developers and players.

Most existing blockchain games fall under the umbrella of play-to-earn (P2E), meaning that players are compensated for playing the game via in-game tokens or collectibles, giving gamers a financial incentive to keep playing. P2E games often integrate NFTs which are used as in-game collectibles. The game likely begins with players minting an NFT collection, and the funds raised are used to seed the in-game economy.

There is a mixture of both pay-to-play and free-to-play games across P2E (GameFi). In the former, players will pay for an NFT or token before being able to play a game, whereas, in the latter, game developers choose to give out initial game items for free before they are openly traded on the secondary market. Where blockchain games differ from their predecessors is in in their utilization of distributed ledger technology and monetization mechanics. Digital collectibles and in-game currencies introduce unique advantages to gaming such as interoperability, ownership, and novel financial incentives for both developers and players.

Potential Advantages of Blockchain Games

Interoperability

A unique aspect of blockchain games is the ability for them to have interoperable features with other games. Current video games mainly operate in closed-loop systems, meaning any digital collectible or achievement stays within that game’s ecosystem and never leaves. For example, in Fortnite, players spend lots of money on buying new “skins,” which are just unique outfits for their in-game avatar. Players can swap in and out of all their owned skins but cannot use that skin in another video game.

Many blockchain game developers are creating interoperable universes so that the digital collectibles a player earns can be utilized across multiple games. Treasure DAO is a decentralized gaming ecosystem being built on Arbitrum. They currently support over ten different games in which their native token, $MAGIC, serves as the in-game currency. They have their own NFT marketplace, Trove, where players can trade their in-game collectibles from different games, all paid for with the MAGIC token. To date, Trove has facilitated over $271 million in total marketplace volume, and Treasure games make up 95% of all gaming and NFT transactions on Arbitrum[2]. Treasure allows developers to make various aspects of their games interoperable, and they can be mixed and matched to suit the needs of different games.

Interoperability will make for a much more comprehensive gaming experience; as soon as a player gets bored of playing one game, they can pack up their things and move on to the next one without abandoning all the progress and collectibles they spent time earning in the first game. Additionally, developers are enticed to build within an interoperable ecosystem as they automatically reap the rewards of an established customer base and can consult the developer community within the ecosystem. User growth across the Treasure ecosystem visualizes the attraction of interoperability amongst gamers. as total new users has been rapidly rising over the last few months.

Interoperability has the potential to be the next big innovation in gaming, offering players a continually novel experience hopping between different games.

Ownership

One of the benefits of blockchain games is that players own all their assets, and blockchain technology ensures the verification and transparency of who owns what. Players are free to sell their game assets on the open market and redeem them for other crypto tokens and/or USD. Many games issue their own governance tokens, which give players the ability to shape the decisions of the game. If there is a dynamic that a majority of players think would be better to change, they can vote to do so and are not limited to the decisions of the game studio. This allows for a community-centric gaming experience that is sometimes limited in traditional games. Often in conventional games, some weapons or items are deemed too powerful, and it is a long process to get the attention of the gaming studio to push out an update and “nerf” it. The below snippet shows some of the weapon modifications in Call of Duty:Warzone 2’s latest update.

Changes like the above cause many players to change their entire gameplay strategy if their favorite weapon is weakened or a new weapon becomes the “meta” (the current most powerful weapon). With community governance for blockchain games, players will be able to submit proposals on any in-game changes, and they will only be implemented if the majority of the community agrees. This takes game control out of centralized studios’ hands and puts it into the hands of real players.

Financial Incentives

As mentioned above, the first step for blockchain games to launch is often minting an NFT collection or launching a new token. Most of the time, this requires initial capital being exchanged from players to the game developers, although sometimes it’s free. From there, players earn additional NFTs or tokens from playing the game, offering them a financial incentive in exchange for their time and attention. Developers, on the other hand, earn royalties on the trading of the game’s NFTs or will have a token allocation for themselves. This relationship helps to create a mutually beneficial dynamic between developers and players. Players want their game assets to appreciate, and developers want increased game activity. If in-game assets appreciate and users are actively exchanging digital collectibles, both players and developers are benefitting financially. Further, developers are enticed to create the best product possible to attract the most players, creating a positive flywheel for both game quality and financial incentives.

In addition to developers having their income tied to the adoption of their game, they also cut out traditional gaming studios, which are usually entitled to a portion of revenues. Open blockchain games should attract increased developer talent, as a higher portion of revenues will go into their pockets. Similar to how interoperability and ownership should enhance the gaming experience, I believe the more acute alignment of developer and player incentives should mutually benefit both game developers and players.

Potential Disadvantages of Blockchain Games

Increased Risks

Part of the appeal of gaming for many people is the mindless fun that it offers. It is an escape where someone can enjoy playing in a fantasy world or use it to get their competitive juices flowing. Part of why that works for regular video games is that nothing monetary is staked (for non-professional gamers) when playing. If someone loses an online match, there are no real-world repercussions other than one’s ego. With blockchain gaming, this dynamic dissipates as financial incentives are introduced into the picture. If a player spends their hard-earned money on a new digital collectible and somehow loses possession via poor gaming performance, there could be adverse effects in the real world.     

Other risk factors include the potential for a hack or exploit of the blockchain game in which players are helpless to their coins being stolen. Last year, one of the biggest blockchain games, Axie Infinity, suffered an exploit in which the hacker got away with $620 million. Any risk of losing money will deter many players away from blockchain gaming. Additionally, children make up a large demographic of video game players, and they are unlikely to adopt games that require money to begin playing.

High Barriers to Entry

A disadvantage in the current blockchain gaming environment is a steep learning curve for new users. Most games require players to know how to turn fiat money into crypto, move that money from a centralized exchange to a hot wallet, and interact with smart contracts and dApps. That is a lot of work for casual gamers just looking for some leisure after a long workday. Another headwind that isn’t specific to blockchain games, but applicable to dApps as a whole, are complicated UXs. Part of the challenge is related to coding requirements. Traditional games are mainly coded in C++, which has been around since the 1980’s, and has been well-tested and documented. A lot of blockchain development requires knowledge of Solidity or other less known programming languages. As more developer talent adopts Solidity, it can be expected that the general UX across all of crypto will improve.

Some blockchain games like League of Kingdoms have begun improving on the UX problem, shifting to a more seamless experience where a user can download the game on their mobile device and play without worrying about the above steps. Although, if they want to sell their earned collectibles on the secondary market, they will have to be familiar with how to use blockchains and wallets. Simplicity and a familiar experience will likely be key determinants in driving mass adoption of blockchain games and the current complexity serves as a headwind for the industry.

Pay-to-Win

As discussed, the majority of blockchain games fall under the P2E category. Unfortunately, there are some inherent flaws found in a lot of P2E games where a player with deep pockets can leverage their increased buying power to gain an unfair advantage in the game. For example, a whale can buy all the rarest items with cash, making them the most powerful player in the game. With the in-game advantages, it’s often easier for them to quickly accumulate a large stack of the in-game currency. Then, as a game attracts more players, the in-game token usually appreciates, and when the whale is ready, they can dump all the tokens on the market. The whale books a profit, and a death spiral begins for the game’s tokens and collectibles as users look to limit their losses.

Pay-to-win dynamics are much less common in traditional games, as the game-play is much more developed. Sure, a player can make in-game purchases to help boost their advantages, but skill and strategy are much more important when compared to blockchain games. Also, the incentive to spend large sums of money on in-game advantages is much smaller when the expected return on that investment is $0 in closed-loop games. In blockchain games, increased investment can often lead to increased returns, encouraging players to utilize the pay-to-win dynamic.

Graphics / Game Quality

One of the biggest disadvantages of crypto games at the moment is that the actual in-game experience is not up to the quality standards of traditional gaming. This is likely due to the UX problems mentioned previously and that it’s more rewarding for top developer talent to stick with traditional gaming studios.

Additionally, the graphics and gameplay of blockchain games are far behind that of next-gen gaming consoles like PlayStation 5 and Xbox Series X, which offer 4K ultra-HD graphics and cutting-edge hardware, allowing for seamless and smooth gameplay. Many blockchain games are more similar to computer games from ten years ago, where the experience is limited to a lot of mouse clicking. Below you can see the stark contrast in graphics between Call of Duty: Warzone 2 on the left, and Defi Kingdoms on the right.

Lastly, the library of games and genres available for traditional players is vastly greater than that of blockchain games. Until the quality gap with traditional games narrows, many players will be hesitant to abandon their next-gen consoles or heavy-duty gaming PCs, just as developers will be hesitant to leave large gaming studios.

Blockchain Gaming Adoption

The adoption of blockchain games is still in its infancy, as many games are trying to overcome the hurdles discussed in the previous section. For example, the popular traditional videogame, Fortnite, has over 25 million daily active users^[3]. Axie Infinity, the most popular blockchain game at one point, had about 750,000 daily unique active wallets interacting with the dApp at its peak, roughly 3% the daily users of Fortnite^[4].

Despite most standalone games lagging in adoption compared to traditional games, platforms that are focused on the interoperability of games and assets have seen a lot of interest from big-name partners. Similar to Treasure DAO, The Sandbox is a metaverse universe where customers can buy “land” in the digital universe and use it to develop games or experiences. The Sandbox has seen brands like Atari, Ubisoft, Faze Clan, Warner Music Group, and Adidas, among many others, invest in land plots for future development.

Figure: Map of The Sandbox Plots

Investment in Sandbox plots from a wide variety of companies displays the broad interest in digital games and experiences, which is also evident in venture capital investment data. Crypto gaming companies have seen increased investment from venture capital firms throughout 2022. Blockchain gaming companies raised just under $5 billion across 160 deals in 2022. One of the largest gaming deals was a $2 billion deal raised by Epic Games to develop metaverse and gaming opportunities. Epic Games is the company behind one of the most popular current video games, Fortnite. The deal displays the recognition from traditional gaming studios that blockchain gaming is a part of their future. Other traditional big-name companies that have made strides to get involved in crypto include Unity Games, Electronic Arts, Microsoft, Facebook (which changed its name to Meta in honor of the metaverse), and Amazon.

Conclusion

Video games have maintained their staying power across multiple decades by continually evolving with improved technology and shifting consumer habits. The current shift is towards mobile gaming, digital sales, and video game streaming. I believe blockchain games are well-positioned to take advantage of the current trends, while adding benefits like asset ownership, interoperability, and financial incentives. Blockchain games may struggle to attract players in the short term due to a steep learning curve and game quality issues, but the overarching innovations they will bring to gaming are likely to outweigh the short term headwinds; this is evident in funding data, as investment from big-name gaming studios and venture capitalists display the strong belief in the sector’s future.

[1]Statista

[2]Treasure DAO

[3]Demandsage

[4]dAppRadar