What does crypto bring to games?

By Pete Mscichowski

I believe that web3 games will be one of the largest consumer onramps into crypto. There are over one billion gamers worldwide driving $180b in annual revenues for the global video game industry, and gamers seem like natural web3 adopters - they’re young, internet native, and have grown up living in the digital world. They spend ~$80b per year on virtual goods. Yet, today the largest crypto games barely scratch 1m monthly active users. What gives?

I would argue that web3 game developers have focused too much on the financialization of games (i.e. on how players will earn and trade assets) instead of focusing on leveraging what blockchains uniquely enable in order to create more engrossing game experiences that draw gamers in.

So what are the most important things that crypto actually brings to gaming?

We are still in the early days of figuring this out, but here’s my working hypothesis on what web3 games can uniquely enable:

• Stakeholder ownership and community incentive alignment

• Data sovereignty, digital identity, and composability

• Empowerment of the “Superwhale”

• Crypto-native games

Stakeholder ownership and community incentive alignment

True ownership rights are a crucial advantage of web3, but most attention seems focused on the ownership of in-game assets. I’m not convinced this will be the big draw for gamers, who have been able to “own” and make real money trading game assets for decades (e.g. some RuneScape players have made >$100k/month selling gold). It’s true that this is a weak form of ownership, with players simply “renting” assets that live on private servers. Digital property rights enabled by blockchains are a clear improvement that can provide the foundation for massively open, high-velocity gaming economies. However, from the perspective of a hardcore gamer, this kind of ownership is an incremental improvement at best. In fact, many view real-money auction houses in games quite suspiciously, either because they’re seen as money grabs from game publishers or because they introduce “pay to win” dynamics that ruin games (see, Diablo 3). Even more importantly, most gamers today associate “crypto” and “NFTs” with scams and fraud, so marketing a game by highlighting the ability to own and transact in-game NFTs can actually turn many traditional gamers away.

By contrast, crypto uniquely enables a different aspect of ownership that will be transformative to the gaming experience. This type of ownership has more to do with rewarding stakeholders who contribute to the gaming experience by giving them a stake in the game’s success.  This will be especially important for user-generated content (UGC), both within the game and in the layers that sit on top.

Blockchains are good at using token incentives to coordinate the actions of large, distributed groups of people, and the alignment of incentives through stakeholder ownership will supercharge community building and UGC within and around games.  Games that pay people to play are likely unsustainable, but games that thoughtfully reward contributors have a tremendous advantage against web2 incumbents. One could imagine games tied to protocols that share upside and reward creators for making levels, maps, art, quests, lore, etc., all of which drive player engagement. Game modding has always been an important part of video game culture, but it’s historically sat in murky legal territory. Web3 games have an opportunity to not just embrace modding and UGC but embed them as a fundamental part of the game and community.

Shrapnel is an early example of a game leveraging incentive-aligned stakeholder ownership with its map builder. The center of the game map (The Podium) was created by the developer, but outside of that are UGC maps and points of interest. As players engage more with these UGC maps they get moved closer to the center of the map and their creators are rewarded. Not only does such UGC save time for studios who don’t have to constantly create new maps, but it also creates a tight feedback loop between gamers and the game in a way web2 incumbents will find difficult to match.

Beyond in-game UGC, there are layers that sit on top of a game that provide tremendous value to players and game developers: YouTubers and Twitch streamers, esports and competitive tournaments, game lore, fan fiction, worldbuilding, etc. Today, most people who stream gameplay for hours, moderate a game’s subreddit, or create viral memes for a game they love don't have a direct stake in that game’s success. The best web3 games will align incentives for these valuable stakeholders and share the upside in the games with them, in turn turbocharging community growth and player retention.

One early example of this is Forgotten Runes Wizard Cult (FRWC). FRWC launched in the summer of 2021 looking like a 10k NFT profile picture project. It’s since grown a rabid cult following, with community members writing lore for their characters and the world, as well as creating a number of derivative characters and games tied to the FRWC universe. FRWC is working towards launching a game, and their approach of leaning into their community first could solve a number of potential issues that most new games face including fundraising and marketing.

One of the biggest challenges new games have, particularly indie and non-AAA games, is getting people to care about the game release amongst hundreds of new launches each year. FRWC will approach this challenge with a core fanbase that is excited to play and evangelize the game from day one. Though we are still in the early experimentation days, there is a huge opportunity for game developers who focus on creating a sense of community, ownership, and identity within their game, kickstarting a UGC flywheel that will drastically benefit players and developers alike.

Data sovereignty, digital identity, and composability

Blockchains give users sovereignty over their data and digital identities, enabling data that is owned by the player rather than stuck within the walled siloes of an individual game. Web3 allows for a portable digital identity that can be an interoperable, composable building block for developers to build on. This will have a number of implications and encourage a wave of innovation from developers that is impossible to predict, but let’s expand on a concrete example.

What if gamers were issued a non-transferable NFT player card associated with their identity? It would capture and embed any data on achievements, records, or stats the player achieves across any game. This NFT could aggregate metadata across games and, eventually,  from any other on-chain apps (e.g., NFT communities or social networks), and it could be fully customizable for players to express their individuality. Imagine a cross-world reputation system with verified game credentials tied to an open social graph that connects you with friends and lets you customize your identity with your CryptoPunk NFT Avatar, for example. We are in the nascent stages of experimentation here, but such a construct is not possible in web2 games and will be powerful.

Stadium Protocol, for example, is building NFT player cards as part of a foundation for community-run competitive gameplay and esports. This kind of player card could help game developers provide a uniquely customized gaming experience. When a player boots up the web3 Call of Duty, it could read that user’s player card and know whether to give them a complete walkthrough tutorial of how to play the game, or it could immediately put the player into a skills-matched game lobby by looking at their Kill/Death ratio, win rate, and other history.

NFT player cards can also enable collaboration across games in interesting ways. Players could accomplish specific tasks in game X and game Y to achieve a new meta badge that unlocks special access or awards. Game developers can use such meta badges to cross-promote their other games, with the lines between games one day melding into a larger metaverse composed of many different games.  And because blockchains are transparent, new game publishers may query NFT player cards in order to target and attract hardcore players of a certain game type or specific skill level in nuanced ways, which could drastically lower customer acquisition costs.

Another potential evolution of data sovereignty and digital identity in gaming is allowing game designers to create player NFTs tied to the game for a more permanent notion of “digital death.” For example, a player’s identity NFT could be burned when they lose in certain game modes, drastically raising the stakes of play and introducing a new dynamic to esports that creates an even more compelling viewing experience. NOR is an example of a project pioneering this idea of “digital death” in games.

We are in the very early phases of experimentation around using web3’s unique properties of data sovereignty, digital identity, and composability within games. With a design space so vast, I’m incredibly excited to see how builders creatively leverage these capabilities to bring new gaming experiences to life.

Enabling the Superwhale

Web3 games will blow out the ceiling on how much the most hardcore gamers will engage with and spend on the games they love, leading to the rise of what I call “superwhales.” For context, it’s important to understand how gaming business models evolved over the last decade. Games largely transitioned to the free-to-play model, leading to microtransactions and purchases of cosmetic in-game items becoming the primary monetization methods. As this model spread, a well-known dynamic emerged where the vast majority of players don’t spend on in-game purchases while a relatively small number of whales spend thousands of dollars per year and drive the majority of revenue. I think web3 games with open economies can increase the lifetime value (LTV) for most users, but will especially supercharge this dynamic and enable the rise of superwhale players who spend tens, if not hundreds, of thousands per year. This will be made possible by frictionless DeFi rails, true ownership of NFT gaming assets with open secondary markets, and better targeting and customization for users.

Games built on blockchains with frictionless DeFi rails will have an incredible advantage in terms of spending/payment infrastructure. Today, the iOS and Google Play app stores limit developer flexibility in terms of pricing structures, throttle in-app purchases to a maximum of a hundred dollars, and take a ~30% cut of everything. Compare this to Yuga Labs’ Otherside Metaverse Mint earlier this year, where 55,000 Otherdeed NFTs were sold at $5,800 per NFT, bringing in roughly $318m in sales in less than 24 hours. Obviously, one can question the sustainability of Yuga Labs’ sale (since it occurred right around the top of a hot bull market), but the fact is: this level of spending is simply not possible without web3 payment rails. What’s more, as DeFi infrastructure for NFTs matures over time, the utility of these NFTs will only grow. Soon, players will be able to rent out assets for yield or borrow/lend against them for liquidity, making these NFTs even more valuable.

This is where true digital native ownership comes in. If I truly own the asset - if it’s mine, regardless if the game publisher shuts down or changes its terms of service - and there are open frictionless secondary markets that provide liquidity for those assets so I can easily recoup some of my investment, then it’s much easier to justify spending more on digital items. You could think of these as sovereignty and liquidity premiums.

The best web3 game developers will recognize this dynamic and encourage it because it offers a way out of some of the most predatory aspects of the free-to-play business model. Instead of tricking players into buying more assets to propel them through a game, developers can encourage a vibrant, high-velocity economy and simply take a small cut of all commerce. This aligns incentives between developers and players and sets the stage for a more stable business model for games in the long run.

Projecting a future for crypto-native games

Historically, as new technological paradigms emerged, the biggest breakthroughs did not come from taking old ideas and form-fitting them to the new tech, but rather from building new products from first principles and creating what is only possible in the new paradigm. When the Web first emerged, most websites looked like read-only digital magazines, but it was social media platforms like Facebook and YouTube that embraced web2’s unique capability for users to both read and write online to create a fundamentally new, delightful product experience. I believe we will see a similar dynamic in web3 gaming, and for that reason, I believe fully crypto-native games have the most potential upside in the long run.

Gubsheep lays out the simplest criteria for what it means to be a crypto-native game:

• The source of truth for game data is the blockchain

• The game logic and rules are implemented via smart contracts. For example, combat in a game, and not just ownership, is all on-chain.

• The game is developed in accordance with open ecosystem principles. The game contracts, and an accessible game client, are open-source.

• The game is client-agnostic.

• The game embraces real-world value digital assets.

Though we are in the earliest stages of development for crypto-native games today, there are some promising green shoots. Dark Forest is a great example of a game experimenting in this area and demonstrates the promise of using zero-knowledge proofs to create interesting information asymmetry dynamics in a game by allowing players to discover areas of the game map without revealing any of this information to opponents. This use case is basic, but, in general, the ability for players to prove or verify something without revealing any other information to opponents is a key primitive enabled by zero-knowledge tech that will find many creative uses within games.

There is a long way to go for crypto-native games. We will need drastic improvements in scalability and the development of on-chain game engines to open up the creative space for game developers, but I’m incredibly excited to watch projects like Topology, Matchbox DAO, Lattice, and others innovate on this frontier and enable truly unique game experiences.

As one of the most committed investors in the web3 space, we at GSR spend much of our time speaking with builders at the frontier of web3 gaming. I couldn't be more excited about the games that will be developed in the coming years. The breakout successes in web3 gaming will leverage one or all of the elements I’ve described, creating new gaming experiences that will attract millions of users into the crypto ecosystem. If you are an entrepreneur interested or currently building in this area, please reach out, I would love to learn more.