Web3 Gaming Dead or Not?
Continue reading to find out why I believe we're in the bottoming process for web3 gaming.
TL;DR
Web3 Gaming Challenges: The web3 gaming sector has faced significant challenges, with token prices plummeting and VC investments declining, leading some projects to pivot back to web2 gaming.
Big Studios Enter Web3: Major gaming studios like Zynga and LINE are entering the web3 gaming space, emphasizing the importance of value in web3 gaming, potentially sparking further industry interest.
Big Tech's Influence: Apple and Google are beginning to embrace web3 gaming, with changes in their policies allowing blockchain-based games, paving the way for more mainstream adoption.
Crypto Native Games: There are some shining exemplars of web3 gaming. One of them is called Parallel, a trading card game with deep lore and gameplay. The other is a growing niche called on-chain gaming with over 100+ gaming experiments.
Catalysts For Growth: The combination of legacy web2 studios empowered by lenient app store policies and native web3 gaming innovations will lead the next bull run.
INTRODUCTION
My first experience with play-to-earn was over 20 years ago.
In 2002, I played a game called Realms of Kaos (a hybrid 2D text-based/graphical MUD). We would form parties to battle monsters and PvP other parties in moshes. It was important to form parties so that we could defeat stronger monsters to acquire better loot.
Different zones would be represented by a square on the map and could have different types of monsters. Moving from one square to the next often had huge lag spikes especially when moving in large groups. The plan is to attack the mobs in Square A then mitigate damage by running to Square B.
This one time after an epic mosh I was extremely lucky, though to be honest I didn’t even know what really happened, since my screen froze from the lag. Nonetheless I was the last man standing and looted a rare staff.
The highlight of the moment wasn’t that I got the rare drops but that someone wanted to buy this item from me, with real money. To me, this staff was just a 2D picture on my computer screen. Facilitating this transaction was nearly impossible, however, the buyer had to send dollars to me via postal mail, then trusting that I would transfer the item in return.
These pixels transformed into profits. This got me even more excited about gaming.
Fast forward two decades later, I came across Axie Infinity in early 2021 and realized that item trading was permissionless, trustless, and frictionless. This economic exchange was native to the game. Web3 was a new, yet familiar, paradigm – attaching online activities to real-world value.
Naturally, I went down the web3 gaming rabbit hole.
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Rise & Fall Of Economic Value
The rise of Axie Infinity in the gaming bull run led to many game studios and industry veterans wondering what’s this “blockchain, crypto, web3” thing. Web3 gaming projects were raising at valuations that were multiples of their web2 counterparts.
Then the web3 gaming sector got decimated. Most, if not all of the web3 gaming or metaverse coin prices dropped by 97%, some went straight to zero. Even the iconic Axie Infinity ($AXS) token fell from $160 to $5.
The negative sentiment in web3 gaming liquid tokens market has also affected venture capital (VC) investments. Why would an investor invest in a seed round at $50m FDV when there are alternative projects with liquid tokens at $50m FDV, and with much more funding?
Of course, there are many factors to consider, but this landscape has definitely dissuade investors from seed deals.
Data from DDM’s report supports this view: Q2’23 web3 game investments plunged to $243 million spread across 45 investments. This figure is 38% lower compared to Q1’23 where a total of $390.7m invested over 68 investments.
Negative investor sentiment is not only applicable to web3 gaming space but also across the entire gaming sector, with 1H 2022 investments totaling $9.8B while 1H 2023 investments was $1.7B, that’s a -82.7% as seen in the image below.
While bring frozen out of the private markets and treasury assets trending down, projects are running out of runway. Some ceased operations due to the difficulty in securing follow-on rounds. Others with runway pivoted to web2. I’m unsure if this is the right strategy, but it definitely hurts the industry.
While it is evident that many studios are exiting crypto and abandoning their web3 ambitions, some studios are making a contraction bet.
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Big Gaming Studios Entering Web3
Enter Zynga web3
On 14th Aug 2023, Zynga revealed Sugartown, the mobile game developer’s first web3 game. This is big news. Zynga created Farmville which at one point had 80 million daily active users. They were the pioneers of social gaming but are now venturing into web3.
“Web3 gaming is about value first, gameplay second. If the game focuses on the inverse, you are now competing with web2 publishers” - said Tommy Ngo, Head of Product at Zynga web3 gaming in a twitter thread.
While many of the thought leaders in web3 gaming have been saying that web3 games have to be fun and focus on gameplay first, Tommy said that “value is what brings people to crypto, NFTs and web3 gaming”.
Kiet (0xkapital_k) and I spoke numerous time about this topic: what will attract people into web3 gaming?
What we can now say is that Axie Infinity has proven that game assets have a fair market value that is non-zero. Said in another way, people can now play games, and get some form of financial value from it.
Therefore, with the idea that “potential value = hook” getting people interested in the game and then “fun gameplay = engagement” keeps people playing, and with more gameplay comes “rewards = retention”. Tommy is spot on in his web3 gaming framework.
If Tommy’s team is able to pull off a game that delivers value with exciting gameplay that rewards gamers, then they’re on track to gaining real traction. This was what Axie did extremely well at the start of their bull run, resulting in a deluge of players, spawning countless communities. Axie prices were on an uptrend which attracted even more new players.
But, as we all know, what led to the bubble bursting was that the gameplay loops were not deep enough, hence players dropped off when gameplay content dried up.
Zynga's web3 team has promise because of their web2 game-building experience combined with their web3 know-how. Another reason why Zynga's involvement is exciting is that this may cause other large publishers and studios to pay attention to Web3, possibly even tempting them to dive in.
Line x Sega
On 10th July 2023, LINE Next, the popular mobile messaging app in Japan and Thailand LINE’s venture focusing on NFTs announced that they have signed a deal with Sega to make a web3 game for LINE’s Game Dosi Platform. Line Next will license one of Sega’s popular game IP for this purpose.
This announcement has been a surprise since on 6th July 2023, Bloomberg reported that “Sega pulls back from Blockchain gaming as crypto winter persists” citing that Sega’s Co-COO Shuji Utsumi is cautious about the prospect of web3.0.
One possible way to view this is that while Sega is cautious about web3.0, they still want to explore ways to be in the web3 game in case it takes off. This will be a common theme amongst the large studios. They can’t afford to miss the opportunity but also can’t take on the reputation risk of committing to Web3.
At the same time, on 25th July 2023, CoinDesk reported that Japan’s Prime Minister, Fumio Kishida said that Japan plans to improve the environment for web3 when it comes to using tokens and revitalizing the content industry. It won't be surprising to see Japanese gaming studios exploring web3.
For this reason, it’s definitely worth keeping an eye on web3 projects in Japan as well as following what Japanese game studios like Sega, Nintendo and Sony are doing. If and when these Japanese gaming studios make a meaningful move in web3, there is a high probability that they will spark the next web3 gaming bull run. As the saying goes, watch what they do, not what they say.
Speaking of observing actions of large industry players, Big tech companies like Google and Apple are more than crypto-curious, they’ve made impactful changes to their policies towards web3.
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Big Tech Coming to Web3
Google and Apple Warming Up To web3
Apple’s NFT policy allows apps to show a user’s NFT, provided that the NFT ownership does not unlock features or functionality within the app – essentially blocking most of the utility of NFTs. While this has not changed, Apple has accepted Uniswap’s mobile trading app on the App Store. Following that, Axie Infinity Origins managed to get approval to be on the App Store too.
These are good signs because it’s the first time Apple has agreed to make an externally purchased NFT usable on the platform. Users can either use their own NFT axies to play or use upgradable starter axies. The small changes signal Apple is warming up to web3.
On the other hand, from September 15th 2023, Google will allow advertisers to promote blockchain video games that uses NFT. Google PlayStore also recently updated it’s policies permitting blockchain-based games and apps. This is a significant change as prior to this, web3 games could only utilise Epic Game Store, others such as Steam, Apple and Google had prevented developers from selling such games. With this change, web3 games can now use the largest gaming platform (mobile) to reach the masses.
With Epic Game Store and Google Play Store now friendly towards web3 games, web3 game developers can be more confident to continue or initiate mobile development plans. Will Apple continue to warm up to web3 and eventually follow Google’s footsteps in fully allowing web3 games?
What’s certain is that with big game studios entering web3 and platforms opening up to web3, the landscape for the web3 gaming space is definitely improving.
Today, we have large studios entering the sapce but in the 2021 web3 gaming bull run, there were only crypto native teams building games such as Axie Infinity, Crabada, Crypto, etc. Crypto natives shouldn’t be faded, however, since few of them are actually gaining momentum.
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Crypto-Native Games Still Going Strong
It’s Prime Time
ParallelTCG's token, $PRIME, has seen a striking surge of 300% from its May 2023 low. This surge has positioned it center stage in the web3 gaming discussions. Notably, established influencers from the Axie community are jumping on the $PRIME bandwagon, further fueling interest in ParallelTCG and token demand.
Parallel is a trading card game with NFT elements, unfolding in a futuristic Sci-Fi realm. Its gameplay is similar to Magic: The Gathering. Players need $PRIME tokens to buy NFT cards to build their decks to both play and reap rewards.
Uniquely, Parallel has incorporated 3D avatars, offering players a distinctive identity and added perks, like extra rewards when winning matches.
The recent spike in $PRIME prices may be fueled by both speculative interests and genuine demand for Parallel's NFTs. Taking Tommy’s model (as described earlier), $PRIME’s value acted as the hook, getting potential gamers interested in the game. Thus far, I’ve been hearing positive feedback on the gameplay, which is keeping gamers engaged. Over the next month or two, we’ll continue to observe Parallel’s retention rate.
Some commentators are already calling Parallel the next Axie.
The previous gaming bull run was sparked by Axie’s rise, all we need is a game that can reach escape velocity like Axie, what if, $PRIME is primed to rise?
ParallelTCG is not the only crypto native game trying to spark the web3 gaming bull run. A close-knit group of crypto native builders are nurturing a new nascent space: fully on-chain games and autonomous worlds.
Enter Autonomous worlds – on-chain gaming’s next frontier
Back in 2021, few fully on-chain games like Dark Forest, Loot Realms and Crypto Raiders started with minimal traction. The image on on-chain gaming landscape published by Terry Chung from 1kx on May 2023 shows 38 on-chain games. The Autonomous Worlds hackathon in June 2023, showcased 109 on-chain gaming projects.
The rapid rate of experimentation for this niche segment in gaming puts fully on-chain gaming and Autonomous worlds as the brightest spot in web3 gaming in terms of innovation and development of novel gaming experiences.
Despite being a huge skeptic in the on-chain gaming thesis since 2021, I continued to track its development. Now, I think it’s time to pay attention.
In my conversations with Ian, a game designer, we discussed about the gaming industry being known to only take step-up innovations, because the game studio’s business is in making guaranteed profits — building a game that gamers are already familiar with, reduces the risk of a game failing. In most game designs, 90% of the mechanics are conventional while the remaining 10% offers slightly newer elements. .
For example, everyone is familiar with plain vanilla shooter games like Counter-Strike (CS). Valorant takes similar gameplay from CS then adds special character abilities to alter gameplay. Now, Valorant is one of the top shooter games. Yet this is more evolution, than revolution.
Although this is great as gamers love these games, there hasn’t been any radical innovation in gameplay. I believe that web3 elements open new avenues for the next revolution of games.
We have started to see early stages of this with word3, an iteration of Wordle where you have to pay for the letters you choose, and price of the letter depends on demand as shared by 0xConglomerate in his on-chain gaming primer. We’re only starting to imagine what is possible.
* * *
Building A Stronger Foundation For A Sustainable Web3 Gaming Future
The web3 gaming market is setting up to have twin engines of growth instead of just one.
Engine #1: Web2 gaming giants
Engine #2: Crypto native game devs
As highlighted earlier, in the 2021 bull run, builders were mainly crypto natives.
Today, we have both web2 gaming giants like Zynga, Ubisoft, SquareEnix amongst others and crypto native builders attempting to create the next big web3 game.
Axie achieved its success in 2021 without the distribution of Google PlayStore or Epic Game Store. Imagine if it had distribution channels available today, the future is brighter than most of us think.
While these developments are extremely positive, it will still take some time for web3 gaming projects to build out the game, iterate, and ship.
We’re in the bottoming process, with newer, stronger, and more motivated players substituting older ones. It feels like the engines are being refueled and getting ready for ignition.
It’s time to prepare your web3 gaming cockpit, you don’t want to be left out when the twin engines blast off. That’s why on top of our gaming news channel and blog, we’ve introduced a brand new TG channel dedicated to web3 gaming and just launched On-chain space station (OCSS).
Calibrate your web3 gaming cockpit with me and thecoreloop. I’ll see you there.
Resources:
Zynga unveils web3 game Sugartown
Zynga web3’s GM and Head of Product, Tommy Ngo’s twitter post
Line Next signs deal with Sega for web3 game
Sega pullback from blockchain games
Japan signals more web3 promotion policies
The case for fully onchain games by 1kx’s Terry Chung
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h/t to thecoreloop contributors: @0xkapital_k @chng_raymond @cloudxgmf @wassiecapital @iandaog @playtern @friandoteth @0xconglomerate @itsbambam