A perfect storm
By: Matteo Vallone
Tags: Nft, Venture Capital, Web3

A perfect storm

One of the posters of the ReBirth NFT collection from upcoming game Start Atlas.

If you create games, you should care about Web 3. Now.

Ten years ago, most people from the games industry were skeptical about mobile games and in-app purchases. “Desktop and console AAA games will always be superior,” they said. Today, they are the biggest category in the games market.

Now, we’re seeing a similar skepticism in the games industry surrounding Web 3. But like ten years ago, three things are changing at the same time: user behavior, business models, and the tech itself. These three forces are converging and forming a perfect storm that is only just starting. Yes, it’s currently generating noise and some hype. Probably part of it is a bubble that will burst. But when the storm clears, it will leave a completely new and more fertile landscape for the gaming industry.

5 reasons why you should care

There are several ways in which Web 3 is redefining the ways we will design, develop, and play games. To see them, we need to remove any cognitive bias coming from previous games industry experience and not get trapped.

I myself — as having spent several years at Google Play and investing in games at Initial Capital and now Cherry Ventures — have also fallen into some of the same mental traps until last year when some key ideas emerged that made me look at Web 3 in a different way.

1) Rather than measuring how much a player is worth for the game, we should measure how much a game is worth for a player.

In the current ecosystem, retention and lifetime value (LTV) are the key value drivers for developers as they measure the stickiness of the game and its ability to monetize users over a long time. A developer will do anything possible to keep the interest of players alive as the more time they spend in the game, the more money they can generate.

This long-term incentive represented the most profound disruption to the previous dominant model of paid games where the interest for the developer virtually ended when the player purchased the whole experience. But, even with free-to-play, eventually, after 5, 10, 20 years, most if not all the games will become obsolete and the developer will not have enough of an incentive to keep them alive.

With fungible and non-fungible tokens (NFTs), the value of game assets can exist and evolve in perpetuity regardless of whether these are used or traded within the game that originated them. Yet, more than retention and LTV, what will matter in this new framework will be the usage of game assets and their market cap.

Game assets can even be created by different people and before games are built around them. For example, Loot is a collection of NFTs each representing a randomized list of items that could be used in a game (like a sword, a shield, etc). Game developers can decide to build games that support players using these. At the time of writing, it’s the ninth all time NFT project ranked by traded volume (55k ETH) and it’s just a week old.

It’s not just about the financial value, though. A gamer’s identity in the metaverse will be captured in his or her blockchain wallet and a game will need to convey a sense of belonging that motivates people to own (a piece of) it. In a similar vein, people buy Tesla or Beyond Meat shares not just because they believe they can profit from them, but also because they identify themselves with those companies and their missions.

Gamers will want to own what they are more excited and passionate about.

2) Play-to-earn games can, for the first time, compete for users’ productive time — not just their free time.

The fact that players will be able to accrue value and earn money is somewhat counterintuitive to the concept of games we had so far. Games are a form of escapism. We use our free time to wonder, compete, have fun, and form new relationships or strengthen existing ones. Introducing a financial aspect to them seems to defeat the purpose. Until you realize that more people will be able to spend more time on the games that they enjoy because they can generate an income from it, rather than having to employ their time in a more traditional job or looking for it.

So far, game studios and media platforms have been competing for the same portion of time, but now the boundaries with which that is defined are going to blur. Game studios will compete with gig economy companies like Uber as much as they compete with Netflix today. This will have a profound impact on the way we design and market games and it will massively expand the size of the opportunity for the whole industry.

3) With more choice we are moving from play-TO-earn to play-AND-earn.

Play-to-earn mechanics are seen by many as a cover up for the lack of quality and fun in a game. “People play it only because they can make money out of it,” some may say. Maybe this is partially true today for many of the projects that are currently live, but as more games become available, the player will have the choice to shift to the best experience while still generating a yield.

Projects like Guild of Guardians (from whom I first heard the term play and earn), The Sandbox,Star Atlas, Illuvium, Parallel, Ember Sword, and others show that there are strong teams that are already at work to bring AAA new experiences to life soon.

4) Instead of buying players, companies should let early adopters buy into their games.

Game assets can be sold to users before the game is even launched. This tactic has been employed in some cases by traditional games as well, but the liquidity these assets have in the Web 3 world makes it much more compelling for users to scout and embrace new games on the blockchain.

As an example, Start Atlas has been selling a series of “meta posters” of concept art pieces as NFTs which players can collect before the launch of the game next year. These will unlock other NFTs that will be functional in game items. Parallel has released their first set of (gorgeous) cards and they have been hugely popular. At the time of writing this collection is the 14th top ranking in Opensea, with a 36k ETH trading volume and 7k owners. All of this before the game mechanics were fully revealed and users would know exactly what those cards would do.

These early adopters are more vested than ever in the success of the game and will serve as a very active community. The time they spend advocating for the game, providing feedback, and testing is rewarded emotionally and financially by the potential success of the project.

Moreover, these tactics not only have the benefit of onboarding an engaged community, but also represent a way to fund the company in its early days and partially validate product market fit before building the entire game.

5) It started with Web 3 games gamifying DeFi. Now games are being DeFied

Traditional games mostly work with users spending money to play or to acquire and own assets. It’s a relatively simple economy: as if the only thing people could do in real life was buying and selling goods and services. Our financial systems are much more complex than that and so will be the games we play. For example, the blockchain architecture makes it easy for players to borrow and lend games assets as well. And this can happen inside or outside of the game.

Yield Guild Games and BlackPool show how an ecosystem of borrowers and lenders can be built on top of Web 3 games. With YGG players who can’t afford to buy Axies can borrow them through a “scholarship program” and earn SLP (Axie Infinity’s game token), which they share with YGG and can then be converted in other crypto currencies or fiat.

Traditionally, you could cluster users in tiers and build a pyramid with a relatively small group of whales on the top. With Web 3 games it’s going to look more like a circular economy as assets flow more easily between players and more complex and deeper dynamics can be established between them.

Breaking the barriers

In the last ten years, as we witnessed the massive expansion of the games market, mostly driven by free-to-play mobile games, we have started believing that games will eventually eat the world. First, they would take over social networks, then media platforms and then who knows what. The result would be a metaverse composed of all games’ and media ecosystems so entangled in each other and with the real world that it would be difficult to tell them apart. But this prediction was only tracking consumer behavior.

Fortnite and Roblox are obvious steps in that direction and show a glimpse of what a metaverse could look like, but they are still relatively closed ecosystems with their own APIs, SDKs, and business relationships. Assets from these platforms are only available within those boundaries. Life outside still goes on in the same way.

The main resistance to change so far has been the lack of incentive for game developers to open their games: they have been focusing on keeping their users and assets within their own ecosystem as that is the only way they can monetize them and grow their equity value. In this context, players are also incentivized to remain within a specific game, otherwise they lose the value they created by spending time in it. Once they leave though (for example, because they get tired) their incentive to come back diminishes as they pick up new games.

With the evolution of blockchain infrastructures and of player-owned economies, we will finally have the right tech and business model to break these barriers between games. Both have been around for a while, but they are now mature enough to underpin the exponential innovation that we have just been imaging until now.

It’s a new game for the games industry (the pun was not intended but also not avoided) and the rule book is being written now. For this reason, we should be even more careful to avoid judging this new phase of gaming with the mental framework of the previous one. Similarly we shouldn’t evaluate it only based on what it has produced so far.

It’s the cognitive bias captured in Amara’s law:

We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.

We should remember instead that we are just at the beginning of something completely new. It’s messy, noisy, and hyped. It generates FOMO, confusion, and doubt. But it’s also exciting, liberating and intoxicating. It’s innovation and it’s happening now.

Soon, we will have a generation of users for which the first game they ever played is one they owned on the blockchain. That is going to be the next inflection point.

When that happened with free-to-play mobile games we never went back.