Web3 has been revolutionizing gaming in recent years, with the space capitalizing on the opportunities unlocked through widespread decentralization and tokenization.
Web3 and blockchain-based gaming accounted for roughly $55.38Bn of the market as of February 2022, as stated in Crypto.com’s 2022 report.
That may seem like a modest portion of the market at present. However, venture capitalists have been betting on this young sector’s undeniable potential. Funding in this area has increased by 194.19% YOY, with Web3 and blockchain-based gaming projects raising $6.9Bn in 2022 so far.
The market is reacting to the idea that players want to have more control over, and impact on, the actual games they play. This trend has led to a plethora of blockchain-based decentralized games, ecosystems and communities that are delivering on evolving player demands.
Central to this shift is GameFi, the concept of being able to create value within a gaming environment that is transferable outside of that environment. The result of which is real-world financial potential and digital assets owned by the players themselves (as opposed to any centralized authority).
Traditional gaming and P2P/F2P
From the humble arcades of the 1970s to the high-definition, realistic graphics of the games we see today – innovations within the wider world have always presented huge opportunities for game developers and studios.
Visiting arcades, inserting coins into the slot and playing an Atari game represents the original concept of P2P (pay-to-play). As time went on and gaming technology improved, console providers such as Sega, Nintendo and Sony emerged, allowing players to bring gaming entertainment into their homes.
The internet allowed for unprecedented connectivity, giving rise to online gaming communities. You could play games (either on a console or PC) with players in different towns, cities and countries.
Free-to-play (F2P) games arose later, allowing players to access the core game online and pay extra for additional content. This content often comes in the form of further playable areas of the game, or digital commodities like exclusive avatars, weapons, skins and more.
However, gamers never really had the capacity to derive (much) tangible value outside of the game’s closed environment. Within traditional gaming, the player never really owns their digital items; they are effectively renting those items for the time they are playing, usable solely within that specific gaming environment.
Unless you were a professional gamer or content streamer – there wasn’t much you could do with in-game content that had value in the outside world.
Enter the concepts of GameFi and P2E (play-to-earn)
The term “GameFi” was coined in 2020 by Andre Cronje and is a portmanteau of the words ‘gaming’ and ‘finance’. Similar to the way we use the term “DeFi” (decentralized finance), GameFi refers to the decentralization of financial mechanisms specifically within the gaming world.
The idealistic version of GameFi sees most, if not all, games being hosted via Web3 infrastructure. This will allow players to engage with a seamlessly connected gaming universe (or Metaverse), trading assets and cryptocurrencies that have tangible monetary value.
They could then use those assets across any game on the network or trade them on a marketplace for financial gain. And of course, ensuring that player ownership of these assets and tokens is secured with immutable and trustless blockchain technology.
GameFi flips the script on the traditional P2P and F2P gaming platforms, offering players financial incentives to compensate them for their time and attention when playing games.
In the past, players would buy a game at the store, take it home and play it (pay-to-play or P2P); P2E platforms allow players to recoup their initial setup investment from the outset and earn ongoing cryptocurrency rewards.
Earning cryptocurrency while you play
Blockchain technology underpins the P2E system. Each blockchain-based game (or series of games) has its own economic model, but the vast majority (if not all) are token economies. These games allow players to earn in-game tokens either by completing tasks, defeating NPC enemies and other players, or by some method of trading (for example, trading card games).
Players will need to have an established Web3 wallet such as MetaMask connected to the gaming network in order to play and earn rewards. Many Web3 games are hosted via the Ethereum blockchain network and Layer-2 platforms such as Polygon.
If building with Ethereum, gaming studios will deploy a dedicated ERC-20 compliant token that acts as the in-game cryptocurrency and reward mechanism. Once earned, players can utilize third-party cryptocurrency exchanges such as Binance and FTX to trade these in-game tokens with major cryptos such as ETH, and then go a step further and even exchange for fiat currency (USD etc).
This represents a level of distributed economic opportunity never-before-seen in gaming, opening streams of monetary value from gaming beyond the realms of professional players.
Blockchain-based games are very popular in developing countries, particularly in the Southeast Asia region. Usage of MetaMask crypto wallets is high in the Philippines, Indonesia and Vietnam, where many people don’t have access to traditional bank accounts.
The popularity of Web3 games in these countries stems from the ability of the player to supplement their income in economies with lower average earnings. It’s worth noting however that entry into P2E games can carry a significant cost – particularly if the game requires an NFT asset to enable gameplay.
This can act as a barrier to adoption for many gamers given the amount of time and effort it could take to breakeven. Not to mention the value of the actual in-game token itself that could experience volatility and uncertainty in the face of broader market conditions.
A related challenge is the graphics and gameplay. These games are built on the blockchain, which means they’re subject to the technology’s current limitations. That includes limited TPS (transactions per second), which is a major challenge when it comes to scaling blockchain technology. There’s also the issue with transaction and gas fees which can become incredibly high during peak sessions and time periods.
Poor performance can significantly hamper players’ enjoyment of a game and pose a significant drawback. However, with specialized Web3 gaming studios and platforms coming onto the scene, these challenges are already being overcome.
NFTs in Web3 gaming
Another form of player rewards alongside cryptocurrency is NFTs (non-fungible tokens).
Regarding NFTs, the choice is in the hands of the player – keep the NFT-secured digital asset for themselves as part of their collection, or trade it to other players on a dedicated marketplace with hopes of turning a profit. NFTs can also be bought and sold outside the realm of gaming, on secondary marketplaces like OpenSea.
Usually, in-game NFTs unlock exclusive content, avatars, weaponry and other items depending on the theme of the game itself. In the case of Green Park, a sporting fandom Web3 gaming community, NFTs come in the form of exclusive soccer jerseys for their ‘Greenie’ – an alien-like avatar that all players are provided upon joining.
Green Park allows for players to not only earn NFTs through a reward structure for participation, but also to skip that effort by putting money into the game directly. Hosted on Immutable X (a Layer-2 platform designed for game developers to build their gaming networks), Green Park NFTs can be purchased in either ETH or Immutable X’s own token (IMX).
If purchased in IMX, the funds go directly into Immutable X’s staking pool which gives the purchaser the right to a proportion of this pool every 14 days if they meet the general staking requirements.
Popular GameFi projects and platforms
Several P2E games have stood out from the crowd since the advent of Web3 gaming. Splinterlands, Alien Worlds and Decentraland are some of the more popular titles. Axie Infinity is perhaps the most recognizable example of GameFi.
Axie Infinity was created by Vietnamese gaming studio Sky Mavis and centers around creatures known as ‘Axies’ – NFTs that players can collect as pets and use to battle other players, similar to Pokémon. Smooth Love Potions (SLP) are the in-game currency, which is earned by gameplay and can be used to buy Axies, as well as being tradeable off-game for other cryptocurrencies such as ETH.
Axie Infinity had more than 2.5 million daily users in 2021 and has the most traded NFT collection across all industries, with a historical trading volume of over $4Bn as of 2022. Blockchain technology has allowed player-centric economies in the game’s universe to thrive.
The company’s whitepaper states that “Axie NFT assets can be seen as tickets that grant access to all current and future experiences build [sic] on top of the Axie IP. In this way, Axies serve as base layer for a world of infinite experiences.”
Axie Infinity recently launched its Ronin sidechain, moving its gaming infrastructure there from the main Ethereum blockchain. This helps to mark another advancement in blockchain gaming – dedicated blockchains designed with Web3 gaming in mind. These platforms help to solve the scaling issues and high transaction fees present with larger public blockchains.
Innovators in this space include Ronin and Immutable X. To help facilitate the gaming industry’s transition to Web3, Polygon opened Polygon Studios in 2021, ring-fencing a $100M investment fund for game developers looking to build Web3 games on its Layer-2 network.
The Metaverse, DAOs and creating ‘gaming economies’
The Metaverse has started to gain prominence alongside the decentralized autonomous organizations (DAOs) that administer Web3 games. A Metaverse is a virtual space that is set to connect gaming worlds, enhancing the immersive qualities of the digital realm by utilizing AR (augmented reality) and VR (virtual reality).
The term has been popularized by Facebook’s rebranding to ‘Meta’, and their release of Meta Horizon – a virtual reality where people can co-work and interact with each other through their 3D persona or avatar. Decentraland and The Sandbox are heralded as further examples of the intersection between Web3 gaming and the concept of a Metaverse.
Many may remember Second Life as an early example of a Metaverse gaming economy. Launched in the early 2000s, the Web2 sandbox-style game allowed players to create virtual worlds, own parcels of land, and trade in the in-game currency ‘Linden Dollars’. These could be exchanged for ‘real’ dollars (at an unfavorable exchange rate).
Blockchain-based gaming and GameFi allow players those same possibilities, but without being beholden to one currency, exchange rate or organization. It also gives developers creative freedom to expand their siloed game into a thriving virtual metropolis, attracting players with the promise of earning potential whilst they enjoy the aesthetics and playing experience the studio has worked hard to design.
DAOs give thousands, if not millions, of people worldwide unprecedented access to the games that they play. Whereas traditionally the ownership of gaming organizations has been gate-kept, the decentralization of these new entities gives opportunities for everyone regardless of location, creed or background.
Ownership is not governed by corporate shares, but rather tokenization. Web3 games have both in-game tokens (earned by gameplay) and governance tokens. They can exchange in-game tokens for governance tokens, which gives players the opportunity to share ownership of the game’s wealth and have an impact on its future through token-based voting rights.
The adoption of blockchain and Web3 technologies in the gaming world shows no signs of slowing down, quite the opposite.
Global decentralized networks, community-driven DAOs, code-based governance via smart contracts and token-based virtual economies. The mixture of these elements redistributes power and wealth increasingly into the hands of those with arguably the largest stake in the industry – the players.
To state the obvious – without players, the gaming industry could not exist. Equally, without developers to keep building innovative games that players love, there would be no reason for them to continue playing.
The shift towards Web3 represents a rebalance towards equilibrium between developers and gamers, creating a more harmonious environment for all.
Join the Web3 gaming revolution
Protokol’s Web3 experts can help you to smoothly transition your Web2 infrastructure and enter this new phase in gaming. If you are already a Web3 gaming studio, our specialist Web3 development services can help you scale your game, business and community.