Today we're going to talk about games. Gaming is one of the few consumer-facing use cases that has a real opportunity to scale to a billion users in the digital asset ecosystem for several reasons.
First, gamers are used to digital assets; they often pay for in-game transactions (i.e. items).
Second, this is a high transaction frequency use case, and our current financial infrastructure does not serve the global market well.
In the end, games help us divert attention and provide key functions such as community.
Expensive JPEGs and non-existent users
Funding for blockchain-related games has exploded from $83 million in 2020 to over $2.4 billion in 2021. The success of Axie Infinity fueled this 30x surge at the dawn of a new category. The amount of money flowing into the ecosystem is likely to be much higher, as founders and VCs rush to build everything from developer tools to wallets for the gaming ecosystem.
However, two years later there isn't much hype (we know AAA games like Fortnite take years to build).
There are a few reasons for this:
For one, traditional gamers play games for entertainment and distraction. Currently, Web3 games focus too much on financial aspects, which detracts from the gaming experience. You can't create a Web3-native version of GTA 5 or Red Dead Redemption in 18 months. And for a studio with an existing user base, it doesn't make sense to force on-chain primitives. Their users have spoken out against these ideas, creating potential confusion and bad PR.
On the other hand, the bear market has hit Web3-native games like Axie Infinity, which saw a surge in new users in Q3 2021. A drop in token prices means that ordinary users have less economic incentive to care about Web3-related games. Consumers have come to view these products as more transactional and less fun. These games cannot sustain as a means of earning a living or as a great way to pass the time. The average daily users and revenue of these games are rapidly decreasing.
Established game studios with decades of experience making games are no better off with their Web3 projects. Ubisoft made just $400 by integrating NFTs into one of their flagship games, Ghost Recon. The response was so poor that they stopped any NFT-related updates in less than five months.
the reason is simple. When we impose Web3 on games as a way of storytelling, we add layers and layers of complexity to an already usable product. Users will only care if it provides an exponential advantage. Over the years, gamers have seen studios develop more and more ways to squeeze money out of them.
In their current form, NFTs are just another way for studios to loot user assets. There was a time when gamers could trade friends for physical copies of their favorite games. This disappeared when game distribution went digital, and platforms like Steam and Origin became centralized marketplaces for games.
Game developers realized that they could sell expansions of the original game in downloadable content (DLC), rather than releasing the full game. Microtransactions are introduced when studios are hungry for more profit. And perhaps the most controversial monetization practice in gaming over the past decade has been loot boxes, which are effectively lottery tickets sold to minors hoping to get random upgrades for their in-game characters.
Over the past 15 years, there has been both success and controversy surrounding game monetization. It used to be that you could buy a game and own it outright without small deals or expansion packs. However, the economics for game publishers are not ideal, especially for multiplayer games. There are ongoing costs for maintaining servers, managing users, releasing features, and building mechanisms to keep the game relevant.
If all these costs were bundled together, the game would die because so few users could afford it. This is part of the reason new-age games like Fortnite are transitioning to subscription models. Additionally, ecosystems such as Microsoft's Xbox and Sony's PlayStation have their own bundled platform subscription packages.
Think of gaming platforms as digital towns where users gather, interact, play, and often transact. Unlike the early 2000s when games were linear experiences played through storylines, these digital products are now social consumer goods packaged as gaming experiences.
Every time a new financial primitive is introduced into a game, there is a backlash because it empowers the developer over the user. Think about it, go to a restaurant to eat, and you have to pay for each bite of the dish. This is what tools like microtransactions do in their current form. Especially in Web3 native games, the "entry requirement" is generally to buy a jpeg, which may be a month's salary.
To achieve fair outcomes for gamers and developers maintaining these digital realms, we need to find financial primitives that serve both parties. Gaming has come to be considered "home" by those who spend the most time. However, few primitives allow creators and gamers to take ownership or directly profit from their game work.
It might seem far-fetched to think of a market where creators will make a living off of gaming experiences. Many can remind us that most gaming enthusiasts spend their time managing communities for non-transactional benefits, such as the relationships they form.
Today's Web3 game is focused on better financial infrastructure and asset verification. If these primitives are to be relevant, we must focus on empowering users and creators through this infrastructure. This is where UGC comes in. Understanding User Generated Content (UGC)
Most traditional studios have limited production speeds. This is by design because high-quality content creation, whether writing a book or producing a movie, is time-consuming. Finding inspiration and the drive to turn ideas into consumable content takes time. When the content is finally produced, there is the added risk that it may only appeal to a small percentage of users around the world.
That's why most big movies focus on universally applicable sentiments, like love and family, or stories about self-made protagonists. They optimize their affinity for the masses. By researching any traditional publisher, you'll find that their audiences often share ideological leanings.
The Internet has disrupted this relationship to a great extent. Instead of centralized publishers producing content, everyone is creating and consuming content. Since the internet has drastically reduced the cost of distribution, it makes sense to offload the expensive cost aspect of creating content to users eager to build an audience.
Unlike traditional media, social networks reduce the cost of creating content to zero, while also making it possible to capture more and more user attention. Passing on the cost of producing content to users, while increasing the time the average user spends on these platforms, is the double leverage that makes new-age social networks so lucrative.
Compared with traditional media, they gain user attention with minimal operating costs. When you spend time scrolling through TikTok, Byte doesn't spend any extra resources creating content feeds. Their costs are limited to content moderation and maintaining servers. Facebook spent more than $500 million hiring experts to help curate content. It is estimated that between 15,000 and 30,000 moderators sift through content on the social network on a substantially daily basis.
When it comes to gaming, UGC stands out online by streaming to watch other gamers play. Gamers tend to enjoy watching others play, especially if there is an interesting commentary to go along with it.
Twitch is the streaming platform for gaming-related content today, and all viewers combined spend 2,500 years per year watching Twitch content.
But the fun of watching others only lasts so long. Therefore, some games allow creators to build assets and sell them to others. This includes everything from developing simple racing games to games that require complex strategies to win. Suddenly, what players can do is no longer limited to what the developers provide. Instead, users can create unlimited variations of different games on top of it.
Think of it as the difference between releasing a book and releasing a copy of Microsoft Word, and see what unique stories your creators come up with. The game studio owns the intellectual property surrounding the characters and the code of the world the player lives in. They are also responsible for bootstrapping the initial user base around the game.
Games like CSGO and Age of Empires allow players to create unique levels and challenges within the game. Fortnite has a creative mode that enables users to build their own worlds and characters. Far Cry 5's arcade mode consists of custom game levels created by community members. Unlike MODs, in-game UGC usually requires low expertise and is usually supported by the game's design mechanics. Users have been discussing them since as far back as 2012. From game to platform
UGC is a powerful lever for new games and has two core functions:
First, they extend the amount of time the user base can engage with the game. A linear game with a progressive storyline is fun until the story ends, after which the player has little reason to keep playing. But the online mode can prolong the life and profitability of the game. That's why Rockstar's GTA V is the most profitable entertainment product of all time. Its sales worldwide have reached $6 billion.
Second, it allows the game's most active contributors to continue investing. Building unique levels and worlds in a digital realm creates an emotional attachment to the game. When games become a conduit for creative expression, the feedback players get from other players is a validation of their efforts. Essentially, UGC helps a portion of the game's user base change from passive participants to active creators.
Most games are validated, released with compelling storylines (for example, Assassin's Creed or Call of Duty), and eventually transition to channels where UGC is part of a broader content offering. More recently, games like Fortnite have developed a mode where the user is less engaged in battle royale and more engaged, chaotic and random with a large number of online users participating in custom content participate.
The randomness that comes with massively multiplayer games becomes the hook for users because the gameplay is unpredictable. Each game session has something different to offer. This fosters an effective feedback loop where users are motivated to use the product simply because they don't know what to expect.
Minecraft and Roblox are the exceptions to this norm, they have become a platform. A game that has become a platform usually has relatively few IPs and can have a smooth storyline, depending on who builds on it. These are games where the user spends more time with the user-generated gameplay experience than with the storyline or levels developed by the studio behind the game. Fortnite is in a unique period of transition to the platform, and according to reports, users now spend roughly half of their time in the game interacting with UGC.
Transitioning to a platform over time is the holy grail of most games and opens up avenues for monetization in unique ways. Fortnite, for example, has partnered with over 100 brands over the past few years. Also, focus on being a UGC platform, enabling games to pass some revenue from users to creators.
In 2021, Roblox has more than 1.7 million unique users creating content on the platform. Of these, more than 8,600 earned more than $1,000. Additionally, some 74 developers have netted over $1 million each. It's not just about money, though. It's about the variety and the amount of human attention games that have transitioned to platforms that can appeal. In 2021, the median Roblox user visited 40 different experiences on Roblox.
They have evolved from standalone media consumption goods (such as TV shows) to platforms where users create most of the user experience. The Challenge of User Generated Content
UGC is a powerful lever for a game looking to grow into a trading platform. But it may not always work as intended. Even a large gaming marketplace like Steam struggles to sustain creator spend for extended periods of time. In 2015, long before NFTs or royalties, Steam had a Creator Studios section that paid out over $50 million to creators who made mods, skins, etc. for a handful of games.
Only 25% of royalties were paid to creators at the time. The program had to be shut down after four months, citing "unexpected user behavior".
Roblox and Fortnite are powerful platforms for creating new forms of work. Back in the decade or two, passionate gamers had few avenues to turn their time and skills into income. Today, developers make an average of $0.29 for every dollar they spend on Roblox. If that seems low, consider that Fortnite creators only earn around 5% of the revenue they generate for the platform.
That's not to say the game studios behind these titles are stealing from the creators. There are expenses for maintaining the game, paying ongoing development fees, and platform fees from Xbox, Apple, or Google. For the most part, users are happy to see any money their efforts bring in. From their perspective, the annoyance comes from the threshold constraints required to pay. For example, Fortnite requires a $100 minimum due to financial transaction costs. Embedding a Web3 native wallet and using tools like Stripe to pay in USDC could lower the payment threshold to a fraction of what it is today.
Another aspect is the enforcement of copyright mechanisms today. It is difficult to automatically verify and audit which user created the experience in the first place. Manual intervention helps, but can take weeks. Then there's the risk of copyright infringement through in-game music or art.
Most recently, Roblox paid a $200 million settlement for music copyright infringement. They have since partnered with several large studios, allowing known tracks to be embedded within the experience without copyright infringement.
You might be wondering why we care so much about copyright and payments in an unfamiliar game. That's because these virtual worlds are the creators' workplaces of the future. In 2021 alone, Roblox will pay over $500 million to creators on the platform. That's a far cry from the $1.6 billion that OnlyFans paid out to creators on its platform that same year. But it suggests that developing, nurturing and maintaining gaming experiences could be a form of employment in the future.
If that's the case, then payment tracks and rights management must be done through better tools that don't require human intervention. Ironically, many of the primitives we talk about in the blockchain ecosystem today fit perfectly here. The Hyperfinancialization of Games
A few weeks ago, I asked Tegro's Siddharth Menon what the most "fun" game in Web3 was. He replied that users don't come to Web3 games just for fun. Half of the entertainment in these communities is financial.
For me, the fun of game mechanics is a solved problem. It's not a new problem and has been around for many years. However, Web3 games present a new problem. The game with an open economic layer that balances financial incentives and solves the game of both will be the winner. Games need to be designed not only for players, but also for investors and traders.
—— Siddhartha Menon
This is why Web3 games are controversial to traditional gamers. This industry was built for speculators, not today's gamers.
It is your responsibility to onboard users, collect their banking information, conduct the necessary AML/KYC checks, and process payments. If it is done on-chain via stablecoins, then this responsibility falls to external parties such as exchanges, each of which is heavily regulated.
This is especially important in UGC because all of a sudden, you've opened the door to two things. On the one hand, as a platform, you can reward users with in-game assets for actively contributing in the early stages. On the other hand, you can create a marketplace for these assets where users can cash out their hard-earned in-game assets.
These economies don’t need studios to burn cash to incentivize creators. Amy Wu explained this phenomenon quite elegantly in a recent talk.
Repetitive content is one of the biggest challenges in maintaining a great game. UGCs, coupled with token incentives and a liquid market, are powerful levers to attract creators who otherwise wouldn't be paying attention to Web3 games at all. Progress on both generative content and creator incentives, including tokens, is early and promising.
——Amy Wu
Ideally, users who spend time playing games or creating gaming experiences will trade the assets they earn with users who don't. I was skeptical about the paper, so we contacted Roby John from Super Gaming (one of the largest game studios in India) to review the paper.
Trading between users is not new, the way users mine gold and trade entire accounts has existed for over 20 years. I noticed this when I was helping clan leaders trade and transition items owned by some of their top clan players to other lower level players in their clan in a game I was developing.
I didn't understand this for years, but then realized it sometime in 2017 and built it into a feature of MaskGun itself. Today, blockchain-powered ownership can do this more easily without the intervention of customer support or tools.
Of course, it also took away the excitement I had as a customer support guy trading dummy AK-47s and SCAR-Hs between clans before clan wars.
Actually, there are two levers at play here. First, the profit motive will make the vast majority of the user base more motivated to create experiences or hone in-game. Game studios miss out on immediate revenue while doing this. Traditionally, developers earn revenue when users buy assets directly from studios. But this was balanced by decreased CAC and increased retention.
Second, studios are likely to make more than they would otherwise, in terms of royalties alone, due to transactions between gamers. For example, Yuga Labs and Nike have each earned more than $100 million in royalties from digital asset transactions between their user bases.
What we've seen with games like Axie Infinity are pioneers who are willing to try another format. It's too risky for big studios like Epic and Ubisoft to annoy their existing users with a different model. This is also the window of opportunity for new entrants to disrupt incumbents.
The royalty aspect isn't some "breakthrough" feature that games have found recently, and today's tech stack could easily allow more developers to take a cut of the fee each time a user trades an in-app asset. But what is unique is that these on-chain primitives are very close to the complex ecosystem of financial primitives.
Let me explain what I mean by "close" here. Most new Web3 games and NFT launches today will find their early user base among the crypto-native crowd. These users are used to parking billions of dollars in DeFi and spending the same amount in NFTs.
Li Jin, creator economy pioneer from the Variant Fund, brought this aspect to light when she discussed it with her.
Using Web3 primitives in games gives creators the confidence to own the fruits of their efforts. It also speeds up the speed and means with which they create wealth. In the future, creators use game assets with DeFi primitives to accelerate development: tokenize revenue streams, borrow against custom art, and possibly even raise investments.
——Li Jin
Many people aren't using new Web3 primitives just for fun. If there is a profit motive, they will bridge assets across chains, participate in weird secret rituals and join what you are building. But with their capital comes expertise on how to use license-free assets to grow profits.
We noticed users taking out loans against in-game NFTs, issuing derivatives to speculate on their prices, and setting up DAOs to buy in-game assets at bulk discounts. Traditionally, these are things that game developers haven't been able to get from gamers.
They probably don't want the price of the in-game assets they offer to crash due to liquidations on NFT lending platforms. But this is the benefit and risk of building permissionless and composable tools on the blockchain. You never know how good (or bad) things are going to be.
We reached out to Gabby Dizon of YGG, one of the largest gaming guilds in the world, to comment on these thoughts:
Building user-generated content on top of permissionless assets is a major improvement over the existing UGC model. Not only does it allow the community of players to create new content, but it compounds network effects in ways the original game developers never thought possible before. This is also for a fairer transfer of value and ownership to the creators who make UGC.
Essentially, you're trading the certainty of what users will do in a constrained environment for the randomness of what happens when users decide to make your product. Sounds like an interesting version of DAO. Guide the development of UGC economy
Web3-native games transitioning to UGC platforms usually follow a similar path:
All games start with a major product launch that attracts at least a few thousand users per day.
Once enough users are playing the game, the next step is to introduce scarce assets that can only be earned by playing the game long enough. These assets usually give the holder a slight advantage in earning points or winning games.
Traders and gamers, generally unwilling to spend days playing games, acquire these assets at prices determined by the free market.
At this point, games are incentivized to launch their in-game marketplaces to deter scammers and provide users with a safe environment for transactions.
Assuming the market has sufficient liquidity and naturally occurring transaction frequency, developers may introduce native assets such as Robux or Fortnite's V-bucks. The economics behind these assets will vary by game, but the currency can in turn be used to incentivize users to generate content within the game.
But why bother with such things? Why "reward" users with an on-chain tool that they can trade or loan? There are two aspects of a product that can be unlocked when asset ownership is passed on to the user. First, instead of deciding what can be done in a restrictive way, developers allow users to imagine what they can do with it. It can range from creating a lending market for assets to using it to build a small in-game DAO.
Second, it helps to find the fair value of in-game assets before any UGC rolls out. Because if you do this before the active market, there is a good chance that the platform will have many garbage experiences to scam the airdrop. This is the challenge most DeFi and NFT-native products currently face. Founders are often unaware of the true size of their user base, as they expect the majority of users using the products to receive airdrops.
Sandbox and Decentraland are the pioneers of UGC in cryptocurrency. They incentivize creators with their native tokens and provide the infrastructure to bring traders and creators together. But they ignore the fact that unless you have a large enough user base interested in the joy of using your product, the ecosystem won't last. Traders typically buy plots of land or development experiences in anticipation of future profits.
But like China's ghost towns, unless there are real people looking forward to spending time in these virtual worlds, the prices of these assets can quickly collapse.
Strong UGC is likely built by focusing on gamers' motivations. Web3-native games would be less fun if they were financially compensated. Most of the users we see in the P2E economy come for the extra revenue it generates. Such users may have an evolutionary arc. With enough time spent, users will earn enough money to purchase in-game assets and trade them.
With enough profits, players can rent assets to other players, similar to the guild model. At its peak (in terms of a game's commercial value) - players will have enough skill to craft a unique gaming experience, lead a community around it, and earn passive income.
This evolution of gamers, from linearly related income to time spent, to actively creating and managing in-game experiences, is something most Web3 native studios today miss.
We often think that primitives in DeFi, DAOs, and NFTs have no value to ordinary people. The way to make it meaningful is to embed them in the game and gather a large enough user base around them.
For example, if an in-game creator can show enough commitment, he might raise funds from his peers by setting up a DAO. In exchange, contributors receive a portion of the revenue generated through the experience. Just as we've seen developers in traditional areas acquire and develop properties, we may see studios specializing in building experiences in Web3-native virtual worlds such as sandboxes.
That might seem far-fetched today, but consider that in 2021 there are over 70 developers making over a million dollars on Roblox. Seven more developers have earned more than $10 million.
As the ecosystem around Web3 native UGC develops, we will witness the on-chain positioning of the most active wallets. This will be beneficial for games that are trying to scale up to offer discounted attributes and similar incentives to creators who build great experiences across different titles. creative gap
Most of the Web3 games we have today are highly transactional economies. For this trend to trickle down to ordinary people, we need to transition to being a conduit for creative expression. Most social networks of this era made this transition a decade ago. Making creative output makes the platform a fun place to be.
When creators go from building an audience to making a lot of money, they will care less about capital and more about impact. For them, creative expression will be at the top of their priorities. That might seem far-fetched, but consider that just last year, one user made $5 million from Fortnite's creator support program. It's also puzzling that he earned over $100 million from the game.
Consider how Gen Z and Millennials are reaping the benefits of traditional assets like real estate. We are too early for the space age. Our right to "ownership" and the dignity that comes with it is often in digital tools. It's not fair to compare a house in New York to real estate in Decentraland. But these early adopters in the digital realm stand to reap as much, if not more, over the next decade.
And unlike the technological booms of the past, the Internet will (ideally) make these opportunities equitable to everyone. We heard similar arguments about ICOs and NFT minting, many of which ended up being the sickle. The difference is that in games you can't just benefit from being early, creators have to build what users want or end up being a digital ghost town.
The challenge for most games that explore this theme is how to balance community and profit motives. As we’ve seen time and time again in protocols and DeFi primitives, the “asset owner” profit motive can lead to some poor product decisions. This situation will repel users for a long time. This is why in Part of the reason for introducing UGC components into games, it will be incremental. You can't bootstrap a sustainable market without a sticky community.
There is a lot of work to be done here. Regulators will have to recognize games as a work channel, not pure entertainment. Who knows, we might see an in-game Creators Union in the future. Investors may want to start looking at the development of experiences in games through the same lens as SaaS products. Finally, and most importantly, there will be a learning curve for creators to understand what they can do with this newfound "ownership".
**This article only represents the views of the original author and does not constitute any investment opinion or recommendation.
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