DeFiance Capital founder: Play-to-Own will become a new paradigm for Web3 games

Original title: "Play-to-Own: A Web3 Gaming Thesis》

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Compilation of the original text: Runsheng, Chain Catcher

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1. Current status of Web 3 games

Video games have changed dramatically since the first brands hit the open market in the 1970s. Over the past decade, gaming experiences and business models have evolved along with technological advancements, from publishing premium single-genre games for consoles and PCs to freemium mobile games. Today, the gaming market is worth more than $300 billion and is expected to grow at an annual rate of 12% from 2022 to 2028.

Our thesis is that the integration of Web3 elements into games could usher in a new era of games called "Play-to-Own". We believe that unlocking in-game economic activity will greatly expand the total accessible market size (“TAM”) of the games industry and enhance value creation.

In 2021, we saw the potential of Web3 gaming through Axie Infinity's claim to fame. By promoting the now widely known Play-to-Earn (P2E) model, Axie has grown from 10,000 DAUs in early 2021 to a peak of 3 million DAUs and generated $1.3 billion in revenue in 2021, according to Nansen. What's even more surprising is that Axie is still in its infancy, and the simple fighting game is only a beta version.

Axie's parabolic growth has shown the gaming industry the untapped potential of Web3 gaming, inspiring a massive influx of gaming talent into the crypto space. Shares of listed game studios have even been reassessed upward due to Web3 hubs and token launches.

Games that integrate NFTs have had greater success in terms of player retention, growth, and revenue than Web2 games. We've already started to see countless projects embedding innovative "P2E" mechanics into their gameplay. In addition to game studios, an entire ecosystem has rapidly emerged around P2E, such as game guilds and their derivatives, DAOs, game discovery platforms, hosting, exchanges, and analytics.

In order to predict the future of Web3 games, we can look back at the history of the business model in the game to know the cumulative change process until the present historical inflection point, and gain insights from it.

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2. Paradigm shift of business models - paid games, free games, P2E, Play-to-Own

Looking back at games over the past 50 years, we can see multiple unique periods in which business models were innovated along with technological advances.

The first commercially successful gaming business model was the pay-to-play model popularized by the arcade game Pong: Players put coins into the arcade and played for a set period of time until they failed a game level. Arcade games are often simple and fun, with a competitive element in the form of high scores that keep players coming back again and again.

Later, with the popularity of personal home computers and console games, paid boxed retail games such as "Diablo" developed rapidly, allowing players to play games in the comfort of their homes. The downside of paying to box a retail game is that the revenue opportunity is one-time. The only way for a game developer to make money is by launching multiple series over a period of several years.

Advances in digital distribution technology have enabled live-service games and game developers to earn recurring revenue, and have led to a subscription-based pay-to-play model. In this model, gamers pay a flat monthly fee to gain regular access to game updates and optimizations. Many successful games have adopted this model, including the revered World of Warcraft, which had more than 11.5 million monthly paying users at its peak.

With the rise of mobile apps, and the consequent preference for casual gaming, the free-to-play/freemium model became popular. In this model, the basic gameplay of the game is completely free, but the game publisher makes money through microtransactions. Examples include Season Passes and Gachas, which allow players to become more competitive than other players by gaining faster upgrades or more powerful weapons.

The benefits of the freemium model are obvious, allowing users to play games easily and providing game developers with a recurring revenue stream. However, as time went on, players were frustrated by developers' increasingly aggressive "cash grabbing" behavior, and the game loop became increasingly influenced by "Pay-to-Win" players, who could spend Money for success in the game.

A common thread running through the development of these business models is that game developers are increasingly inclined to extract more lifetime value from players with minimal effort and cost.

The goal has shifted to profit at the expense of fairness: from a product designed to provide a fun experience to a hyper-optimized business designed to get players to spend as much as possible. This is achieved by increasing the granularity of data collected to understand player behavior and how to monetize users through predatory schemes.

At the same time, these business models suffer from a fundamental problem of misaligned incentives. Decisions for the entire game ecosystem are made by developers, who may not take community input into account, and rarely have any intention or way to compensate players and creators who work hard to contribute to the development of the game.

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3. Play-to-Earn - Incentive gameplay with economic value

Utilizing blockchain technology, token incentives for the real ownership of activities and game assets through NFT, resulting in a P2E business model. P2E players are able to convert the time they spend in-game into tokens and NFTs, which can then be converted into cash to spend in the real world. Often in such games, the "Earn" part of the game is heavily emphasized, enticing players to play for rewards and hopefully converting some into paying players.

In Axie Infinity, players used to be able to earn over $200 a day if they were in a high MMR tier. In developing countries such as the Philippines, this amount can be much higher than the $10 daily minimum wage. However, it is unwise to rely on gaming as a job, as the token price will experience huge fluctuations and will not be able to maintain the price if there is an oversupply. Emerging gaming economies with limited content depth will not be able to support a value extraction focused player base.

Following in Axie's footsteps, we see some P2E games trying to emulate their success. Due to poor economic design and management, most people struggle with hyperinflation of in-game tokens - high percentage of players cashing out leading to a death spiral, as token prices fall, players earn less and stop playing because Its main purpose is to make money.

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4. Play-to-Own - the future of Web3 games

From the case of Axie Infinity, we learn that during the initial bootstrapping phase of a game economy, risk is taken by early believers and players, primarily driven by financial rewards, as they strive to acquire assets and mine resources to sell to later entrants .

However, since incentives cannot subsidize growth forever, game developers must find ways to convert yield seekers into consumers in a sustainable gaming economy.

While this can be done in the short term by tweaking the faucets and introducing new token sinks, organic consumption can only be sustained by a steady stream of new and exciting content and experiences that players are willing to pay for without expecting to get any financial return. The most sustainable way to grow your game is to create immersive worlds and characters that the community loves.

We believe that Play-to-Own will be the next development direction of the game business model. Gaming is not a job, and the ability to make money from gaming should not be emphasized. The term reflects the need to align gamers and owners, and an understanding of NFT technology, which is all about enhancing ownership.

We define Play-to-Own as:

"A blockchain game developed on the Web3 philosophy of incentive alignment and true stakeholder ownership. Players can earn ownership of the game for their play and contributions, rewarded in the form of tokens or in-game assets."

Unlike pure P2E, Play-to-Own will focus on interesting gameplay, a sustainable economy, and fostering a strong sense of belonging to in-game assets and IP, rather than the temporary money-making mentality of gamers. We believe this model will allow games to reap real benefits from the blockchain, such as unlocking value from game assets, better price discovery, and building a strong sense of community ownership.

The term implies that players are actively experimenting with the gaming experience in order to gain ownership of valuable assets, rather than blindly clicking through the game, which is typical of poorly designed game monetization models.

Additionally, we believe Play-to-Own games lower the barrier to entry for new players to play and will offer sustainable rewards as a user acquisition strategy.

For example, a game might start out free, allowing players to earn small rewards that are reinvested into the game for valuable game assets. Alternatively, users can easily rent NFT assets from the market through a profit-sharing agreement and compete at a high level without having to pay large amounts of money upfront.

Ultimately, we view Play-to-Own as a positive-sum game - a simplified mental model:

Most importantly, this will create net value (+$10 in this case, from $10 to $20) for the ecosystem shared between developers and the community. With sound economic management and in-depth gameplay, Play-to-Own will be more sustainable than P2E, generating revenue for developers and the community over a longer period of time.

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We believe that the incentive misalignment of current business models and the value proposition offered by Web3 together support this paradigm shift from first principles:

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1. Incentive dislocation in Web2 games (driving factors)

Push 1: Players will always want to earn money for the time they spend in-game, with as much online flexibility as possible.

We know from experience that gamers naturally look for ways to monetize the time they spend in-game and present their best game look.

In-game trading companies like Grand Exchange in Runescape taught a generation of gamers about in-game economics. In popular MMOs or MOBAs, gold farming and account multiplication operations are also common. Players have built-in mental models of valuable items in the game, and will always consider exchanging these valuable items for money when exiting the game.

The restrictive economy of current games will drive more players who understand the value of virtual items into Web3 games, and the tokenization of in-game resources and assets reduces the friction of exchanging value, thereby unlocking more economic activity.

These digital natives also increasingly prefer digital flexibility as they spend more time online; however, it can be hard to justify investing heavily in games because the value flow into games is one-way.

For NFTs that can be resold, the flow of value can go both ways. A gamer's mindset shift from pure consumption to asset ownership should significantly increase a game's TAM, as players are able to psychologically justify their consumption when asset values ​​can be grown and sold to recover some residual value.

A huge barrier to using decentralized applications has always been concerns about self-custody of funds and sending on-chain transactions through wallets like Metamask. However, we believe this will not be a problem for players who are used to managing game accounts with high value items and in-game currency.

Push 2: Frustrating game developers due to misalignment of incentives between game developers and players.

Most games these days are return-on-investment (ROI)-oriented investment products rather than focusing on fun and playability. The goal of the game company is to spend the least resources on players and earn the most money. Investor pressure, expensive overhead, and tight delivery schedules can also result in unfinished products being sold to players.

In recent years, there have been many cases where players’ trust has been betrayed by failing to provide a satisfactory gaming experience after a series of hyped trailers.

The list goes on and on: expensive premium content, unfair game patches that cripple players' hard-earned items, prohibitive microtransactions, intrusive ads, low-quality battle passes, when last season's cosmetics get corrupted lack of support...

As the cash grab becomes more blatant and promises are broken, the player community feels increasingly disrespected and weary of the game studio.

Push 3: Game developers and publishers can and have abused UGC creators for their own profit without consulting the community.

Currently, creators of user-generated content (UGC) are paid a high cost for their work and, in some cases, may not be compensated at all. As the Steam case shows, game publishers can easily change rules and royalty payments.

An interesting example is DOTA, which is the UGC game mode of Blizzard's "Warcraft 3", which has attracted a large influx of players into the game. It's unclear how much the creators in question will be able to profit from. Eventually, active developers moved to Valve to work on DOTA2.

Additionally, when token incentives are used to fuel UGC efforts, more creators can earn a living and benefit from their creative talents. At the same time, this also unlocks the limit on the speed of content generation in the game. Any changes to the distribution of royalties can be submitted to stakeholders for a vote, resulting in a healthier discussion.

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2. The value proposition of Web3 games (pull factors)

Pull 1: Increased secondary market liquidity, increased transaction volume and revenue.

An open and trustless economy built on the blockchain provides a vibrant secondary market for game assets. The price of items is determined by market forces and natural supply and demand, unless the game developer intervenes.

Game developers can employ alternative monetization strategies based on transaction fees and secondary market transaction royalties enabled by smart contracts. Assets can be liquidated freely, and players get back some financial value from the time, effort, and money they put into the game.

We believe this will lead to a significant increase in TAM in the gaming industry in the long run.

Pull 2: Web3 games coordinate the interests of players, investors and developers. When everyone is committed to the success of the game, there are strong mechanisms for player empowerment and community management.

Currently, the gaming community is not yet able to keep pace with the success of the game, nor is it able to share in any form of revenue.

Players generally have no say in game development, as most games are closed betas. Game revenues were never shared with players and early believers, even though they were a big part of the game's success.

NFTs and token-powered games offer a solution where players can have financial exposure to game tokens both early and after game launch.

In the early development stages, game developers can identify and involve some of these enthusiasm holders in the game building process. These early believers, who have enough reputation or skin in the game, can also be polled for their opinion on the development of the game.

Governance tokens allow the community to participate in the governance and management of the game as it launches. Open lines of communication build trust and understanding, driving deeper engagement as players have a way to make their voices heard by developers.

Rally 3: New forms of user acquisition due to interoperability of assets, game history and token usage

A permissionless and open environment that allows game developers to integrate third-party NFT assets (even assets from other games) by creating special custom outfits for use in their own games. Developers can seek out the communities that seem to be the most enthusiastic or best suited to their target personas to market their games to.

As tools for determining legitimate wallet activity mature, a player's on-chain history or metaverse profile can be accessed and targeted by other games for user acquisition and airdrops. This creates a win-win situation where game developers have a new form of user acquisition while strengthening the IP, utility and network effects of integrating NFT assets.

Ownership of tokens and NFTs facilitates organic marketing as the community becomes an effective evangelist for the game with minimal marketing budget.

Rally 4: Fundraising power of game studios improves with Web3 usage

Early liquidity provided through token investments rather than equity has helped blockchain gaming projects raise funds from institutional investors due to perceived lower exit risk. According to a report by Dappradar and BGA, the blockchain gaming industry will raise $4 billion in 2021, compared to a total of $4.7 billion raised by traditional gaming startups in 2020.

In addition to pure asset speculation, we have also seen players willing to pay to achieve their desires. As the market matures, participants will choose to primarily fund projects that demonstrate responsibility for development progress and community building.

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To fully enjoy the benefits of building in Web3, we believe developers should implement the following core elements:

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1. Intricate world building and IP development

In short, when there are tons of activities to do in the world, players spend more time in it, which directly correlates to the money spent on the game.

Additionally, developers should socially coordinate around common technical standards and actively advocate for their adoption to improve asset portability across various virtual game worlds. As more third parties and content creators integrate original NFT assets, the value of IP will increase with attention and awareness.

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2. Immersive social and MMO experience

A high degree of customization, identity building and social interactivity should be emphasized. With more attention paid to in-game avatars and properties, there is a growing incentive to consume and display, which encourages consumption in the virtual economy.

Satisfying the psychological needs of players and bringing them into the "magic circle", the game will successfully make players forget about the open economy of asset financialization.

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3. Deep economic meta-game

Skill and effort should be rewarded more than passive gameplay or pure consumption, as these players are likely to be higher value customers that will be reinvested in the economy. Games require stable content patches and real-time operational activities to encourage an active secondary market for trading materials and valuable items, thereby increasing the game's royalty income.

Token inflation is a tool for acquiring and retaining users in the startup phase of the economy. Developers will need to monitor key economic indicators to adjust sinks and taps and actively manage the health of the economy over time. The goal is to strive for the stability of the token-based base currency by aligning inflation with the growth of the player base. In-game businesses and operations can only be established if there is confidence in the long-term stability of the economy.

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4. Gaming is democratizing

4. Gaming is democratizing

To extend the game lifecycle, developers should make joint decisions based on input from invested and reputable stakeholders in the community. A well-managed community-owned game should reflect the community's point of view, increasing engagement and retention.

Open sourcing game code is also critical to ensuring the community has the ability to fork the game, maintaining the continuity of the virtual economy if the developer is deemed to be a poor steward of the game. We envision that different development teams may be hired to create content and maintain operations for the game in real time, and at the end of each season, players can vote on their ability to grow the game and retain players.

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7. Our Evaluation Framework

A game's success is a function of the product, sales, and economic balance driven by a competent team. Here's a slice of our evaluation process:

1. Team pedigree. We love seeing a great mix of game development and crypto talent, with a strong vision for the game.

Launching a game successfully requires the ability to attract and retain talent, allocate resources efficiently, and coordinate functional teams (often over 100 people) across art, music, technology, and more. With such complexity, it's not surprising to see the game delayed for a long time and never released.

Additionally, understanding distribution channels (publishers and marketing partners) and methods of building hype is key to a successful launch. Even after launch, it is important to maintain the cadence of the live service, i.e. generating new content, updating game patches to extend the game life cycle.

For Web3 games, crypto-native experiences come into play with different business models. Teams should have in-depth knowledge of how to launch and drive token and NFT accretion; managing treasury and incentive programs; and the mechanisms provided by smart contracts (such as staking) that Web3 games can leverage to kick-start flywheels and accelerate growth. Community building should be second nature, maintaining clear communication and accountability to build a passionate and trusting community of players, contributors and game owners.

Essentially, the team creates the base layer for the ecosystem to thrive and is the steward of the grand vision. Someone with experience who has actually released a game and at the same time is passionate about Web3 is critical to success.

2. Products and distribution. A fun game that will appeal to a broad audience willing to spend money.

A question we like to ask ourselves is, can we envision ourselves spending time and money on this concept without a potential payoff?

• Games should be tested and iterated until they are confident enough in the game loop before an official release. An open iterative approach to game building with the community is helpful in this regard. Differentiated game loops should be designed to accommodate different stakeholder groups, each optimized for their own definition of winning.

• Free-to-play gamers who feel free to spend their time and energy just having fun

• Raid the toughest dungeons and compete for hardcore player vs player, guild vs guild leaderboard positions

• Creatives who help design and build in-game areas and experiences

Merchant and trader of speculative economic resources and meta-games

It is crucial to fully understand the target player base and how to capture them through the most effective distribution channels. Marketing partners, launch events, and community building efforts need to be planned in advance to ensure a successful launch.

To improve the onboarding process and retention of a game or mobile app for higher conversions. Developers also need to abstract away the blockchain experience where necessary. Players in the game client need to be able to easily access tokens and game assets.

3. Economic Sustainability: Managing Inflation and Curbing Economic Volatility

We believe that the health of the economy is critical to the longevity of the game. As the blockchain unlocks virtual game economies, it is imperative to simulate faucets and sinks in games and build adjustable macro leverage to balance token inflation with player growth.

Major changes to the game loop and economy should be delicately balanced and communicated with input from community stakeholders. Developers should strive to achieve sound token design to ensure that all fungible and non-fungible tokens within the ecosystem have clear utility and value accretion.

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8. The best games will form the Metaverse

We believe that on a technical level, the underlying blockchain technology is ready for the game to target a mainstream audience. What needs innovation now is user experience issues (asset custody, gas payment, cross-chain requirements, etc.). Developers should try to educate on the difference between on-chain and off-chain assets, abstracting away the complexity while slowly introducing on-chain elements for more advanced users.

Due to the deep game loops of the economy and society, the most obvious genres best suited to utilize elements of Web3 are MMORPGs (massively multiplayer online role-playing games), such as World of Warcraft, and 4X (explore, expand, exploit, and exterminate) strategy games such as " Clash of Clans". The use of blockchain technology will also lead to innovation in game design from 0 to 1 and create new genres due to the possibility of assets and game logic being stored on-chain.

Researching the current game design space and recognizing the different challenges that each approach encounters, we are excited about both "top-down" and "bottom-up" approaches to building Web3 games. Here is a typical overview table of the two methods:

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Summarize

Summarize

From the level of talent we've seen entering the space, it's reasonable to believe that the next generation of defining franchises will be built on top of Web3, reversing the generally negative sentiment towards Play-to-Own games using NFTs.

We believe that building games on an open peer-to-peer network will unlock greater economic value and dramatically expand the reachable market for the games industry—an estimated $1 trillion in economic output over the next 10 years.