Why Web3 gaming needs to put gameplay first

Web3 has opened up a whole new avenue for gaming.

It enables ownership of in-game assets with the players as against the game itself. There are a set of players who play, accumulate rewards (in the form of in-game characters, skins, powers, etc.), and are able to sell their rewards in an open marketplace to earn money.

With the ability for players to trade their assets, in exchange for money (typically crypto which can be exchanged for fiat currency via an exchange), a new class of players has emerged—the Play-to-earn (P2E) players. These are players whose motivation is to amass assets that can then be sold in the marketplace.

This is distinct from ‘traditional’ Web2 games, where players come in via free-to-play games. Players spend money through in-app purchases (IAP) to enhance their identity in the game. Most players are in the game for entertainment, competitive gameplay, and a sense of community with other gamers. Earning is not an objective, in fact, the longer one plays, the higher the in-game spending.

The first generation of Web3 games has focussed on attracting the P2E players, with attractive financial incentives modeled into their token models. The gameplay itself is rudimentary. As a result, regular gamers are an insignificant part of the game. This, as we argue here, is an unsustainable model.

Without a focus on game play and a loyal cohort of regular gamers, Web3 games cannot succeed.

Let’s consider the leader and innovator in Web3 gaming—Axie Infinity—a Pokemon-like game where cute pets engage in simple battles and evolve over time.

Axie Infinity has a token-driven in-game economy, based on Ethereum-based cryptocurrencies where players need to buy digital pets, known as Axies, using cryptocurrencies in order to enter the game. Players can sell their in-game tokens as well as Axies themselves (which are on-chain NFTs), at a higher value than what they spent on it.

This was a first since most games do not require the players to pay to begin the game, nor do they permit unrestricted sale of in-game currency and assets. But Web3 made all of this possible and soon ‘Guilds’ cropped up, financing players via ‘scholarships’ so that players could enter the game without fronting their own money.

Guilds and the scholars have a revenue share of the profits once a scholar exits the game.

So, there are two types of gamers: those who are solely motivated by earnings i.e. P2E gamers, and those who are in it for the game play, let's call them ‘regular gamers’.

A ‘traditional’ game like Valorent, Call of Duty, Free Fire, World of Warcraft, Fortnite and others is played by regular gamers. These are games with a highly engaging gameplay loop, which is designed to engage both the novice gamer and the experienced gamer with the right balance of challenge and rewards.

They also have a deep and committed community of gamers, who play the game individually or in groups. The economics of the game is straightforward: the regular gamers contribute to the game via IAPs, or group competitions where the prize money is aggregated from the entrants with the game taking a cut of the total money collected (similar to what real money games such as Dream11).

Simple economics of games in steady state look like below:

Money In (money being contributed into the game economy)

 = Money out (money taken out of the game economy)

Money in = Gamer IAP + Game Entry Fee

Money Out = P2E_Sales + Game Developer Take

Money_In contributors are those paying to enter the game: ‘regular gamers’, P2E players and scholars sponsored by Guilds. Note, however, that P2E players and Scholars are net money out in their contribution. In other words, while they may contribute to the game economy in the beginning to enter the game, their objective in a relatively short term is to turn a profit.

Guilds might sponsor scholars to play the game, but their success metric is an attractive return on investment. The only stakeholder that is contributing to the economy as a net money in, is the regular gamer.

The idea of playing a game to earn a real wage is innovative and represents a new way of employment. It was not a surprise then that thousands of P2E gamers flocked to Axie (particularly from the Philippines). This worked, even in the absence of regular games, during the torrid growth phase of Axie. The number of people joining the game, and hence contributing to the economy in the hope of making more money down the road was a lot greater than people selling out their Axie assets to cash out.

So long as this phenomenon persists, where the P2E gamers coming in remain a lot larger than P2E gamers cashing out, the game will have a thriving economy.

But from the Axie token graph, it appears that is not the case.

The earnings for P2E players between May and Sep of 2021 were a lot higher than those who are looking to exit the game after that. The active user base is now declining per a report from Bloomberg. For the week that ended March 28, the number of daily active users (DAU) of the play-to-earn game has plummeted 45% to 1.48 million from a peak of 2.7 million in November 2021.

This creates a conundrum for Axie players. With net new additions of P2E games going negative, the existing players will not have a motivation to pay to enter the game, which feeds a vicious downward cycle for the asset pricing within Axie. As P2E gamers turn net money out, the game economy shrinks.

The absence of regular gamers is hurting Axie.

The sad reality is that for most of the users of Web3 games, those who are buying their tokens, are financial players masquerading as gamers. Web3 games that have burst upon the scene, start out by targeting the P2E gamer. But the players all games need to attract first and foremost need to be the regular gamers.

What is of consequence to regular gamers is gameplay.

Game play requires an intense focus on the game loop, graphics, strategy and evolution of players in the game and the delicate balance between making the game challenging and regular progress within the game for the players.

This is difficult, but that is the secret behind the success of legendary gaming franchises such as World of Warcraft, Grand Theft Auto and Clash of Clans.

Once Web3 games are able to attract a strong and stable base of regular gamers, they can add P2E elements. In such an environment, P2E players will play an important role by enabling regular gamers to buy assets that might not otherwise be available, or to trade-up their assets in an open marketplace. A mix where regular gamers greatly outnumber P2E will make for a healthy game economy.

The story is yet to be written on Axie Infinity. It’s too early to say if it is a success or failure. Success in the gaming world looks like World of Warcraft, or League of Legends, they’re going strong after 17 years. Yes, 17 years! For Axie to be successful, they will need to evolve their game play, like Pokemon, into a compelling and sticky game loop.

Maybe it’s time to confront the reality that the fundamentals of Web3 gaming success will rest on the same old-time-tested principles that were instrumental for success in Web2, Web1 or console games.

The tech behind Web3 is full of promise, yet elements that drive breakout success here are neither new nor surprising. Gaming is ultimately about gameplay.