This article is from The Way of Defi, reprinted and published by Odaily with authorization.

Original compilation: Captain Hiro

This article is from The Way of Defi, reprinted and published by Odaily with authorization.

Today Siddharth Jain and Sumanth from IndiGG and I did a thought experiment. We'll try to understand why humans love games so much, what the advent of Web3 (also known as Web3.0) really means for our society and economy, and how gaming guilds are the future of gaming.

The stock market had a bloodbath last week. It made me realize why the traditional financial world only trades on weekdays. Meta (Facebook) lost nearly $250 billion in market cap in one business week. It seems that the market doesn't buy Mark Zuckerberg's vision of the future metaverse (we'll save that for a future article). Today, I want you to turn more attention to another aspect of the metaverse: games. The gaming industry has seen four unprecedented acquisitions in the past few months:

• Microsoft buys Activision Blizzard for $68 billion

• Take-Two Interactive, the company behind the most profitable game of all time, Grand Theft Auto, acquires social game developer Zynga for $12.8 billion

• Sony acquires Bungie, the studio behind Halo and Destiny

• ByteDance (TikTok) buys video game developer Moonton for $4 billion through its gaming unit Nuverse

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Cave paintings are the original NFT. Source: Link

The painting above is located in an ancient limestone cave in Indonesia. It is believed to be one of the oldest cave paintings in the world. But if you think about it, the cavemen who painted this picture were engaged in the same basic activity as us, we might have spent hours playing games while they spent hours drawing. We are all creating an alternate world, imagining a different, fantasy reality through drawing or playing games. Play opens the door to our imaginary world, which is often crucial in helping children acquire useful skills. As children grow and engage with play, they learn about social hierarchy, coordination, good and evil, and nonverbal communication through play. But why are we playing the numbers game? In an age of constant attention deficits, what keeps millions of people sitting in front of screens for extended periods of time?

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Sid's hierarchy of needs for gamers

videovideo, to learn more about the relevant background. At the highest level, games allow their players to find self-fulfillment through gainful employment, such as winning prizes by participating in esports tournaments, or empowering new gamers to continually climb the game ranks. I guess this is part of what makes gaming more interesting than other consumer areas like dating apps and social media. They can touch multiple aspects of our hierarchy of needs at once. I think by contrast, a lot of the self-actualization level needs don't happen on dating apps. I won't go into a lengthy description of the game, this section is mostly background information for non-gamer readers.

From Web2 to Web3

The earliest era of gaming followed the logic of selling toys. They only sell games once and update them every few years. Game studios make the most money when their games are released, just like movie studios do today. The average game costs between $50 and $100, so gamers have to make conscious big decisions when purchasing a game. And the advent of the internet meant that players could remotely update these games from time to time, and more importantly, it connected gamers with each other. Games at this time can charge for downloadable content (DLC for short) and extend the time for game publishers to make money from selling games. This pattern was prevalent in big games like Far Cry 5 and Just Cause 4, and even now. As the industry becomes increasingly competitive, we see the emergence of vertical bounding models, and subscriptions have become a new money-making model. Instead of selling individual games, the subscription model gives players access to a library of hundreds of titles.

This means that a larger user base flows to subscribed games, and the game company's revenue continues to grow after the game is released. Today, Apple is doing just that with mobile gaming apps. Microsoft and Sony also have such moves with Xbox and PlayStation. Revenues from both models are surpassed by sales of digital goods. Considering a community of a million gamers, in-game digital items tend to sell well because of their socioeconomic context. Rare items are either obtained by possessing certain skills or purchased at high prices, which are symbols of the player's status in the game. The larger the community, the more valuable are the tools for determining status. At some point in the past decade, game studios realized they were better off offering free games to players and focusing on selling small in-game items. These small items could be new weapon unlocks, aesthetic changes to a character, or virtual in-game money. The chart below compares how Xbox's revenue stream has shifted from retail to online, which is a good basis for how the gaming industry's business model is going digital.

In-game microtransactions are far more attractive than large purchases of a game because:

• Buying at a lower price usually means less cognitive load

• Customers tend to buy multiple items over a period of time, resulting in more consumption per user

• It opens up a huge user base for the game, which means gamers have a huge "money funnel" to keep making money selling digital items

There is an argument here that the pricing of games is now optimized for low-end players, because it means that children can often buy 1-2 items without affecting their parents' spending, but the game model of Web3 is not like this, Web3 Game modes work somewhat like economics, with a few key points:

• Ownership: Web3-based applications are primarily focused on users owning their data. In the context of games, ownership extends to in-game assets. Users should be able to transfer, trade, or use in-game assets in a different game if they decide to do so.

• Liquid economy: Most token-based games we see have reward systems tied to tokens. These are somewhat similar to credits in a game, only in this case, users can withdraw and sell these tokens for real money, which is the basis for the economic function of earn-as-you-go games.

• Interoperability: This is a theory that has not yet been realized, but if the assets in the game are transferable and the basic economy of the game can be traded, then the assets in the game can interact with each other. Let's say you spent 50 hours playing one game, and you might also have to start another game from scratch. But what if the resources earned in the game can help you level up faster in the next game? Users own their own in-game assets, which also means they are likely to sell them to gain an advantage in new games they play.

The Challenge of Web3 Native Games

Functionally, games for Web3 combine blockchain-based infrastructure with financial incentives to provide financial support for the time players spend in games. This is at the heart of what makes Web3 gaming both addictive and repulsive. On the one hand, games are supposed to be fun. As I said before, games are a way for players to escape the difficulties of reality. However, since the early 2000s, there have been gaming agents (or boosters) who play games for work in exchange for monetary benefits. RuneScape, Farmville, or GTA5, they all have a thriving boosting market, where boosters with skill or time are compensated by other players looking to progress faster in the game. For most web-oriented games, the great challenge they face is how to find a delicate balance between the excessive financial aspect and the fun aspect of the game. Modern life is built on the belief in a utilitarian society, and if we were told that only those with money could win, most of us wouldn't choose to play the game in the first place. The same thing applies to game design: if they are designed so that only users who are willing to pay can win, the user base will be significantly reduced. In turn, for those who can afford it, it also makes the whole gaming experience worse, because no one likes to play alone. Philosophy aside, there is another aspect of the game that makes it unique.

Gaming in its current form is zero-sum: players must focus on a single game at a time, where they are forced to optimize over a limited set of parameters. Users must constantly make a trade-off between creating wealth (by owning assets) or having fun. The quadrants below explain this to some extent. The limitations of today's game architectures mean that the most graphically intense games cannot be optimized for users moving assets around all the time. Think of popular games like Just Fight or GTA 5, optimized for visual appeal and fun, not for customization or asset ownership. Axie, on the other hand, allows asset ownership, but it has very limited customizability. The outlier here is Minecraft, where an individual can set up his own server, with his own variables, and choose how he runs it. At the extreme end of the table low ownership and low fun correspond to taxes and drudgery. Both of these belong to the default game we ourselves are in: real life.

That's part of why balance is so important. A person who chooses to have fun (such as "GTA5") may miss out on the potential income obtained in a play-and-earn type of game (such as Axie). This applies to game design, too: when a game's earning potential exceeds real-life wages, it's when users see it as an avenue for work, rather than for leisure. Now, let's consider Web3 games in the context of Maslow's hierarchy. I mentioned earlier that a game can often address multiple aspects of Maslow's hierarchy. The current gaming economy is overly focused on generating revenue. Some commentators have begun to refer to the grind in the P2E (play-to-earn) economy as bullshit work. The term refers to a job that does not actively contribute to personal growth, and exists only because it is not yet cost-effective to be replaced by machines. While there is some logic, it is worth mentioning that the P2E economy allows participants to have better options than what is usually readily available. If it's more cost-effective to do a traditional job, it's logical to do that job instead of playing P2E games. Second, working in an environment like Axie Infinity equips participants with the kind of soft skills needed to collaborate and coordinate in a digital-first, remote work environment. This is something that traditional academia cannot do today. Third, most people who play these games don't start and end with one game. The P2E economy is vital, incentivizing individuals to upskill and learn about other opportunities in the market. That's where the major rebranding is going on.From play to earn to play and earn, most Web3 native games will evolve from a single revenue stream to one that complements other revenue streams, and an important part of making this transition are so-called guilds.

Guilds and GameFi

The guild is the platform for coordinating resources in the game. In the context of Web3 native games, they are socio-economic platforms built on top of DAOs. Certain games, such as Axie Infinity, require players to own a certain number of NFTs before playing. In some newly listed games, there may also be a requirement to own tokens. The emergence of guilds has greatly lowered the entry barrier for a large number of players who are new to the Web3 game ecosystem, making it possible to play games without owning NFTs or tokens. How is this possible? There is now an entire industry around "renting" NFTs, which players get paid to work on in-game. As a DAO, the guild owns NFT and the tokens required for the game. Individuals who find skilled players are called brokers. They are similar to scouts in sports, taking a cut of the revenue generated by players. Players in turn receive a portion of the token rewards from the game. This is a very rudimentary model for accelerating the adoption of the P2E ecosystem.

Our understanding is that guilds will quickly evolve into something much bigger and will have a lasting impact on future games, jobs, and culture. Since guilds are functionally channels for attracting large numbers of users, they can quickly become a source of attention. Just like we make Twitch the streaming platform for traditional games today, Web3-native streaming platforms will emerge to encourage creators focused on the Web3 gaming ecosystem. Guilds will be able to use their community to find supporters for winning teams, raise funds for social causes, or simply bring together people with similar interests. Recently, we have seen a wave of such events where the YGG community came together to raise funds for a typhoon in the Philippines. As users gather around these guilds, we naturally see player hierarchies emerge from them. The most talented gamers will be given additional resources (such as in-game merchandise and sponsorships) to compete in major esports competitions. It will become common for guilds to sponsor teams in their own community for a portion of the profits.

The biggest problem with DAO or guild based work today is that it lacks the security that traditional work gives. People employed by DAOs have no health care, pensions, and in many cases even no banking. There are a number of businesses seeking to solve this problem, but a key piece of the puzzle is how the Guild itself becomes a financial conglomerate. What if guilds used some of their cash flow to acquire stakes in emerging games? Or, given their long-term outlook on the industry, they could hold scarce NFTs for a longer period of time. In this case, an effective guild would be more akin to a large pension or endowment fund, and would be a highly favorable partner for newer P2E games to strategically raise funds for. The ideal guild is a financial conglomerate with cash flow, assets and growing investments on the books. There are platforms that enable this shift, for example, Openguild.io enables individuals to invest in a guild’s revenue stream; GuildOS is an enterprise that can manage large-scale guilds effortlessly; moreover, BreederDAO aims to build analytics for large-scale P2E games and NFT distribution layer.(Note: We need a market map for guild-related apps. I'm going to set up a $1000 bounty for readers who want to build one)

Guilds provide an exponential bet for the Web3 gaming ecosystem, as they often touch multiple games. In a Web3-based game, the key commodity is not IP, nor the infrastructure for game deployment, but the user base. Guilds are most closely associated with them. Investing in them is a way for investors to gain indexed bets in the gaming and NFT ecosystem. In our view, the gradual evolution of Guild is to become a large-scale financial application to meet the specific needs of its user base. A guild bank will provide remittances, insurance, foreign exchange and its own in-house lending desk, assessing creditworthiness based on gamers' reputation. Ultimately, Guild's development will become a full-stack fintech application.

But what does all this really mean? In our view, the gaming ecosystem will evolve over the next few years due to the gradual explosion of three key factors:

• The COVID-19 pandemic took a lot of people out of work in early 2020. People quit their old jobs and seek new meaning and income through non-traditional sources. And gaming is developing into a good source of income for a rapidly growing segment of the population.

• The education ecosystem has failed an entire generation that is now looking for other options to improve skills and earn more. The P2E ecosystem is precisely able to achieve this, although it has not yet formed a scale at this stage. The business model here is still underexplored. Can we simply reward individuals for improving their skills? The concept of learning to make money has become common in some fringe segments of the market.

• Considering what GameFi (where gamers can trade, lend, or rent out their game winnings, or borrow against them) may evolve into, we may still be in prehistoric times right now. Loans against NFTs? Why not take a loan against in-game reputation? Could you try to share the revenue with the next live-streaming bigwig? In-game NFT derivatives? There's a ton of models to tinker with here, and it's too early to think this ecosystem isn't important.

I think one of the problems with Web3 gaming at this stage is that investors may place high valuations on projects that have poor unit economics. If I were an investor, I would first focus on value capture, unit economics, and profitability of a game project.