Gaming of today

Gaming is an economic powerhouse industry. Both the sales data and industry experts will highlight the importance of the gaming market in the entertainment space today. Many analytics firms are projecting continued robust gaming growth through the end of the decade (2030).

However, many of today’s games and game economies are silo’d by the game studio and do not monetarily reward the actual player or gamer for their time. Players put money into a game and the money (or player’s time/value) stays in the game. Game studios develop the game, then extract all future value from the player or community. No monetary value or items are allowed to leave the game economy/ecosystem.

This gives the game studio full control over the economy, which is beneficial for monetary policy and governance but leaves players without financial incentive. Thus to date, players have interacted with games with the mindset of entertainment only.

Gaming of tomorrow

The question becomes: Is play-to-earn (P2E) possible? With cryptocurrency and blockchain technology, I believe it is possible.

Note: I think “play” is a misleading word, because it insinuates “fun”, “casual”, or even “relaxed” ways to make money when playing a game. While this might be true for some games, most “games” are going to have unique “play” mechanics for which players earn or are rewarded financially. I think the better terminology for web3 users is “perform”-to-earn.

Anthony Lee Zhang has a great paper explaining the new financial trust that blockchains enable market participants to have with each other. This new financial trust enables the monetization of time spent online (i.e., actions on-chain) without the need of a centralized authority moderating activity. In other words, blockchains and smart contracts allow for automated game economies to be constructed without a centralized authority governing. The code (smart contracts) is governing. And people can be financially rewarded for their actions and time spent on a blockchain.

So how do we unlock this financial reward? There are three parts to unlocking GameFi: 1) fungible tokens, 2) non-fungible tokens, and 3) on-chain game logic (i.e., smart contract’s rules for all players).

Unlocking P2E: Part 1 - Fungible tokens

Simply put, cryptocurrency (fungible tokens) allows for any game studio to create an open game economy with the broader crypto world, if they so choose. Launch a token, provide initial liquidity on a DEX, and voilà, the game economy (token) is now able to be purchased and traded by the masses (e.g., ApeCoin, APE). More importantly, the tokens enable the game studio to raise funds, reward the early community members, and create a play-to-earn mechanic.

While launching a token for a game can help bootstrap a game studio’s treasury and assist in community building, game studios are at the mercy of the market valuing the game’s token. Solutions for “token sell pressure” arose, such as “ve”, staking, or bonding, to help stabilize token prices for ‘x’ time duration. Token price stabilization can provide more confidence in the development team and the game’s future economy. However, once a token’s emissions schedule is announced and set, it becomes increasingly hard to redesign and relaunch without losing faith in the community and investors at large.

Token design is NOT easy whether it’s for a game or a protocol!

With all that said, fungible tokens are required to enable an open economy. They are part 1 in unlocking GameFi.

Unlocking P2E: Part 2 - Non-Fungible tokens (NFTs)

In 2021, NFTs caught the world by storm. People began to have a new understanding of NFTs, what they can represent, and how they can be applied in communities and gaming. In a blockchain game, game studios can now represent a 1/1 asset as an NFT (ERC-721 or ERC-1155) and have a fungible token (ERC-20) be the currency of the game world.

Now, game studios have the two necessary pieces to a game: NFTs, or 1/1 items, and fungible tokens, the game’s currency or store of value. With NFTs and fungible tokens, native digital trade and commerce can occur, not only token speculation.

NFTs, or 1/1 ownable objects, are the second key unlock for a game economy.

[Side note: shout out to the Double Protocol team for creating rental NFTs with the ERC-4907 standard. This adds another tool to the game developers’ toolbox when creating game objects and incentive loops. One loop would be buy-now-pay-later.]

Unlocking P2E: Part 3 - Fun games

Fun, as defined by Merriam-Webster, is: “what provides amusement or enjoyment".

The “fun” of a game, while extremely subjective, is going defined by the game logic and the game’s design to keep a player in a flow channel. Flow channel theory is important to game design because flow channels are defined as “the state of mind that keeps a person focused on an activity.”

A game’s logic will govern all players playing the game (aka the rules). The game logic must facilitate gamers with an opportunity to enjoy him/herself. Ideally, the game logic allows players to hit flow channels by providing challenging, yet achievable gameplay as a player’s skills improve.

Flow channels are essential to a game being fun!

Using the diagram below, let’s assume a new player starts at Point A1. Depending on the player’s skills, the gameplay could send our player to Point A2 or A3. Let’s walk through the scenarios:

• A1 to A2: our player is skillful and is easily progressing through the game’s obstacles and challenges. If this flow state persists too long for our player, our player will remain in the “Boredom” zone.
• A1 to A3: our player’s skills are not good enough. Our player experiences “Anxiety” because they are unable to accomplish the quest or in-game task at their present skill level. Our player might have to attempt the challenge many times before they are able to progress in the game and move to A4.

Generally for a game to be fun, it needs to keep a player progressing through these flow channel loops at a reasonable rate.

This is why I am personally bullish on both centralized games and decentralized games succeeding in the game design space. It will not be exclusively dominated by one or the other. Centralized game studios can provide high-quality game loops, and well-structured, storyline franchises for gamers; while, decentralized games can provide a high-quality community, game experimentation, and GameFi “lego-blocks” that are interoperable and composable. A good example of a centralized game (and economy) would be Fortnite. A good example of a decentralized community game would be the loot project (and the expansion Loot Realms).

Why is GameFi early?

GameFi is early because most of us in web3 are still playing PvP games against each other. The game rules (Part 3) have not been defined or designed by a game studio, DAO, or protocol to create a GameFi game that rewards participants for coordinated, net-positive flow channel experiences.

Alas, today, GameFi is more PvP and less P2E.

And this is not to put fault on game studios or game developers. It is likely more crypto tools, infrastructure, and development are needed before the world experiences transformational GameFi operations.

Note: I’m of the opinion that crypto, generally, is the biggest PvP game that exists. As of July 2022, crypto’s rules are primarily defined by the Bitcoin and Ethereum protocols (Proof of Work and Proof of Stake). Cryptocurrency rules might change and morph over time; but at the moment, Bitcoin and Ethereum’s code (or rules) are determining how most users are incentivized to "play" on L1 blockchains.

Today’s Games: PvP

Today, many crypto games launched are PvP games or zero-sum games - to win, someone else must lose. According to Jordi Alexander in the article “Of Smoke and Mirrors, Part 1”, this should not come as a surprise:

“Pooled resource games are as old as history, evolving over the centuries to tap more and more effectively into the base needs we Homo Sapiens are wired with: The desire to make it. To belong to a community. And to be a part of something larger than ourselves.”

While pooled resource games (or PvP games) are fun and they create lasting communities (i.e., poker), they do not get gamers toward an MMO world, which is what many people imagine when they consider P2E (or GameFi).

“Of Smoke and Mirrors, Part 1” outlines the fundamental principles and pitfalls of ponzi games designed and launched in 2021. Essentially, crypto ponzis games can be spun up quickly, are usually shrouded in complexity or generalities, and tend to be extremely predatory. Designing long-term game incentives with positive community network effects is difficult.

Another take-home point from “Of Smoke and Mirrors” is opening up a game economy to the broad crypto economy (i.e., trading pair on a DEX) subjects said game economy to mercenary players and capital. According to traditional economic assumptions, players (or firms) will be profit maximalists, and if the game rules (Part 3) allow for value extraction, then it will likely happen. Open game economies will be subjected to similar problems faced by nation-states when constructing monetary policy. A game economy’s token needs value accrual so that foreign exchange (FX) occurs in both ways. In other words, money enters the game economy at a greater rate than it leaves (ideally!).

PvP games will continue to dominate the “GameFi” space until game economies incentivize players to play coordinated games.

Tomorrow’s Games: Thoughtful tokeneconomics

Luffistotle, researcher and investor at ZeePrime Capital, discusses how project teams can optimize rewarding their communities with better airdrop and token design mechanics. One example from the article suggests that a protocol or game could design a continuous reward mechanism based on a game KPI or community KPI. This way early contributors are not the only ones rewarded and late entrants do not feel like they “missed the boat”.

Designing thoughtful token emissions and inflation schedules is essential to migrating from PvP to P2E. With improved tokeneconomics, game studios will be able to better align their community with the long-term success of the game and its economy.

Each game genre will likely need to design and experiment with tokeneconomic parameters based on the games’ desired incentive (reward) loops. Tokeneconomics is not a copy pasta type of activity. P2E games will have different incentive loops than PvP.

P2E is effectively looking to define what “work” in a game can be monetarily rewarded in web3 in perpetuity.

Tomorrow’s Games: Strongly on-chain

Based on a game’s design requirements and purpose, “GameFi” will evolve to encompass a full spectrum of on-chain games. To this point, aaaaaaaaaa categorizes on-chain gaming in “Thoughts on on-chain gaming” as either “strongly on-chain” or “weakly on-chain”. Not all on-chain games are created equal. There are trade-offs (see table below) for the gamer, game developer, the monetization model, and the game’s UI/UX depending on the game’s on-chain requirements.

Most games today are developed and owned in totality by the game studio. The game studio rents/owns the servers the game is played on, owns the game assets, and controls the game’s token. Players are paying the game studio for the usage of game assets, and players are at the whim of the game studio’s monetary policy. Additionally, if the game studio folds or decides to unplug the servers, poof, the game assets, achievements, and collateral put into the game is gone.

With strongly on-chain games, this poof scenario is not possible. Strongly on-chain games are persistent because the assets, game logic, and game state are stored on-chain. To support this claim, Will Robinson, co-Founder of dfdao (Dark Forest DAO), tweeted that on-chain games have the entire game logic and game state on-chain; while, animations, other graphics, shapes, sounds, etc. can be left off-chain on the client-side. By storing the entire game logic and game state on-chain, players are able to trust the game’s state to the extent that they are able to trust the consensus/settlement layer. Dark Forest is built on Ethereum, thus, the game’s logic and state are subject to Ethereum’s security, which is great!

In the coming years, game studios and development teams will likely continue to experiment with the percentage of game logic and states put on-chain as teams look to strike a balance between the pros and cons of strongly and weakly on-chain games.

Tomorrow’s Games: from PvP to P2E

How does crypto move more to P2E? Tokens exist, NFTs exist, and game designers are thinking about GameFi. However, putting it all together is a monumental feat. And a game’s on-chain requirements will dramatically change the game economy design and determine if the game is more web3 or a hybrid web2.5-type game.

If a game is going to qualify as a trustless, P2E game, the financial components must be on-chain. Moreover, it is likely that all inputs that contribute to the financial outcome will likewise need to be submitted on-chain. This reiterates Will Robinson’s point that the entire game logic (remember Part 3: the rules) and game state will need to be on-chain for full GameFi eligibility. Otherwise, there will be a centralized party that gamers must trust to facilitate money movement and financial outcomes.

This transition to GameFi will happen over years, not weeks or months. The most difficult part of GameFi will be the “Fi” part, or the game’s automated token economy and governing rules.

NFT Metagames: A GameFi game?

NFTs exploded in popularity and speculation in 2021. NFT project founders and community members recognized the value of aggregating web3 people into groups through NFT collections. Thus, NFT networks found success by aggregating talent, “alpha” information, amazing content creation, and resources and capital from people who had joined the NFT community.

I suggest that NFTFi (or SocialFi) is the concept that an individual or group can capture value from the network(s) or brands that they are a part of through NFT ownership. By holding a 1/1 NFT from a collection, a web3 player now has exclusive access to online content, games, information, merchandise, and IRL events that non-NFT holders are excluded from. This NFT metagame has created enough FOMO and speculation that hundreds of thousands of dollars were invested into NFT projects and communities across numerous blockchains.

Arguably, NFTFi could be considered one of the first, global on-chain iterations of a GameFi game. Why? Because it passes the necessary unlocks of P2E outlined above:

• Part 1 - Fungible tokens: ETH (or SOL) is the fungible token used by the game.
• Part 2 - NFTs: NFTs are at the heart of this game. NFTs represent 1/1 personas, exclusive access, or membership to a community.
• Part 3 - Rules: The rules are simple. To join, one must own an NFT. Additionally, all NFT transactions and authentications occur on-chain making NFTFi a strongly on-chain game.

NFTs became the shelling point for web3 players to join new groups and networks to find connections and value (that could lead to new opportunities). Is this not the same thing that clubs or professional societies promise?

While the NFT metagame saw many pump-n-dumps, scams, and cash grabs, the NFT metagame launched legitimate projects, networks, and media content that will likely survive the bear market of 2022. There are potential lindy effects for these NFT networks and brands that survive the bear market. To date, NFTFi has primarily been evaluated by NFT community floor prices, but I anticipate more complex metrics to develop as NFT networks continue to grow and produce goods and services.

Stretching the imagination a bit further, one can foresee a future where NFT communities coordinate at higher levels to drive more value to their digital community (or its underlying blockchain) rather than to a nation-state economy.

Closing Thoughts

I think it has been extremely positive to have had the amount of bubbly excitement around GameFi, even if it’s early. Identifying how transformative GameFi will be to crypto and the larger crypto market has been beneficial as investors and teams focus on what to build in the upcoming months and years. GameFi will now be a focus area of investor speculation, game development, and user-generated value creation for the rest of the decade. When combining it all - fungible tokens, NFTs, and game design/rules - I believe GameFi will redefine societies, nation-states, and how humans coordinate on a community and global scale!

Blockchain researchers and developers are still working on scaling blockchains for everyday usage, let alone on-chain gaming requirements. Games cannot be strongly on-chain if the blockchain’s transactions-per-second (TPS) is not ready for gaming mass adoption. Game development and GameFi experimentation will continue to occur as blockchains evaluate and deploy scaling solutions. Some teams working on scaling GameFi capabilities are Starknet, Polygon, and Avalanche.

GameFi introduces a new set of opportunities on how the world is incentivized and designed because game designers will be able to create novel reward mechanics to reward on-chain actions, which in turn can reward a human in the meatspace. I’d speculate that robust GameFi economies are about two to three years (2024-2025) away from mainstream adoption, political movements, and economic disruption.

Thank you for reading this research piece on GameFi. The best part of research is hearing the thoughts of others. Please reach out to me, @ryguy_eth, if you have additional thoughts or considerations about GameFi.