Skin in the Game🎮
My take on crypto's mainstream adoption...
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Over the last few months I have reiterated several times that for web 3 applications to achieve mass adoption, radical improvement in UX is paramount.
I’m confident there will be a time in the not-so-distant future when people from all walks of life are operating and transacting on crypto infrastructure without even acknowledging it. But for now, designs are cumbersome and technical, severely limiting the addressable market. Coinbase and centralized exchanges have allowed people to dip their toes into crypto markets, but still shield users from the intricacies of decentralized protocols.
Centralized organizations offer a familiar order of operations to users, whereas decentralized systems are beneficiaries of a new computing paradigm that has yet to establish an effortless user experience.
When I saw this tweet from GameStop’s director of product, Damiana Amabile, I was reminded at how much progress is still to be made.
All of these applications are very raw, but this is to be expected at the onset of any computational paradigm shift.
Lately, I have put great thought into the way by which crypto and decentralization will find its way into the mainstream. Fred Wilson, co-founder of Union Square Ventures, wrote a blog post that has provided a framework for my thought process on the subject. A summary will not do it justice, so here it is:
“...you’ve been handed the football and you are looking for a hole to open up and run through. What you really want is some running room beyond the opening. We’ve known for a while that crypto is the next big tech architecture. We’ve known that once the wave breaks on the shore, there will be enormous opportunities unleashed. Like the web. Like mobile. Like the PC. But what has been hard to see is the opening. It wasn’t trading/speculating, although that has been huge. Coinbase announced (in August) that they have 68 million verified users. It wasn’t DeFi, although that has also been huge. What we have been looking for is the consumer opportunity to emerge. Until you have billions of consumers around the world using a technology, you don’t have a new wave to ride. So like the running back, you wait and hope you don’t get hit. But in the last few months, the opening is emerging. In slow motion. I can see the left tackle move his man off the line. I can see the left guard move his man off the line. And there is running room. The defensive backs are on the other side of the field.
…But it is hard to take on the existing gaming companies with a new architecture. The user experience around new stuff always sucks and who wants to play a game with a (crappy) UI? ...So the existing incumbents are the defensive line. They look impenetrable. Until they aren’t. That’s when the opening emerges. The opening is emerging around NFT experiences, something we’ve been excited about for quite a while now. …The NFT experiences operating at the interaction of gaming, communities, and social nets. And they are not taking on any of the incumbents directly. They are building on top of them all...I am saying that NFT experiences are showing the way. They are the left tackle that you can run behind into the opening. Where enormous opportunity exists."
That was long, but worth it.
Let's get into it.
The transition to mobile was galvanized by the godfather of design, Steve Jobs, who put the power of a computer into the hands of millions and now billions of people worldwide. One of the many pearls of wisdom bestowed by Jobs was that any successful product should start with the customer experience and work backwards to the technology. I am a proponent of NFT’s, but the craze that has centered around digital art has been one of technological enthusiasm where many of the projects will be cornerstones of internet history, but there are also many that have no sustained value.
My thesis for adoption stems from NFT experiences, and today I’ll add another layer to Fred’s mental model, play-to-earn.
Play-to-earn is the third evolution of digital gaming.
Gaming 1.0 was defined by the era of paying to play, where users could make a one-time purchase (buy the game/disc) and have unlimited access to gameplay. This strategy relied on game sales to generate 100% of revenue. Gaming 1.0 has evolved and now many games include in-game purchases.
Gaming 2.0 disrupted the gaming industry and turned the pay-to-play model on its head by unleashing freemium gaming and giving the product away for free. Mobile games like Candy Crush popularized this model, but Fortnite came in 2017 and has served as the poster child for freemium gaming.
Having revenue be solely dependent on in-game purchases turned out to be wildly successful. In 2020 over $54 billion was spent on in-game purchases.
Gaming 3.0 is a radical shift from earlier versions of play and redefines the economics of the player-game relationship by utilizing unique blockchain characteristics to enable asset powered gaming.
The Economics of Gaming
In 2020, the U.S. video game industry grew 27% to $56.9 billion in revenue, says NPD Group, surpassing movies and music combined. ($32 billion for both home and theatrical movie releases, and $12.2 billion for music.)
The current version of gaming is built on Web 2 infrastructure and drives profits to the centralized entities that create the games. In-game purchases accounted for 95% of the gaming industry’s total revenue in 2020 despite being totally ethereal and trapped within the walled garden of the specific game. This is an important to point to understand in order to grasp the economic opportunity offered by gaming on crypto infrastructure. When players buy more lives in Candy Crush, those lives are totally ethereal; their utility adds no economic value outside of the game itself. Similarly, in Fortnite for example, players spent $5 billion dollars last year on in-game purchases of emotes and cosmetic add-ons (skins and accessories), but do not own those purchased digital goods, they are only being licensed by the game creator.
These purchases are expenses that have no opportunity to being exchanged for real world value. In traditional gaming, players have zero upside in the game’s success. On average, players spend hundreds of hours a year playing these game with nothing to show for it other than having a fun time. The transition to gaming 3.0 allows users to enjoy gameplay while participating in the economics of the game’s business model and benefitting from the success of the community.
Asset powered and play-to-earn games combine the entertainment value of traditional gaming with the ownership and freedom of blockchain technologies. This combination creates a trojan horse to introduce the unlimited potential of crypto infrastructure to the world.
Crypto assets are composable, which means the asset and the value earned as a reward can be kept inside the game’s ecosystem or extracted out of it and exchanged for real world value. For example, if a player owns a valuable asset within the sphere of the game that wreaks havoc and thereby earns more rewards, the player can take that asset and sell it on a third-party marketplace for other assets like ETH and earn real world value. This is a glimpse at the true promise of NFTs.
This transforms the player-game relationship and turns video game players from consumers to producers who can apply their skills and earn an income in a parallel, crypto-enabled economy.
Axie Infinity is the first example we have of an asset backed, play-to-earn game built on the Ethereum blockchain. In the game, players buy digital pets, called Axies, as NFTs, and breed, battle, and trade them. The game maker issued a fixed number of Axies, so meeting the demand of new players depends on existing players breeding their Axies to produce new ones.
The Axie protocol generates revenue by taking a 4.25% fee when players buy and sell Axie NFTs in its marketplace, and by charging fees in the form of its token for breeding Axies to create new ones. Breeding fees are not negative sum as the new creation can be used to generate profits within the game or can be sold on the open market to new players.
Play-to-earn games reward players for engaging with the game and its ecosystem, an action that creates value for both the product and its users. Using assets to generate new assets for the game that can be sold to new players so they can participate – players are rewarded for it and the ecosystem grows.
Equity incentives have driven massive innovation in technology companies for years by giving employees an ownership stake in the business. Similarly, play-to-earn games have an incentive structure that aligns the interest of the players with the interest of the game and thus has baked in network effects such that it becomes lucrative for players to invite new players to the ecosystem. Organic, word-of-mouth growth is the most efficient marketing and is inherent to applications built on crypto infrastructure. A typical game would spend millions of dollars on marketing and keep all of the profits to itself; Axie Infinity spends nothing on marketing, but lets players keep 95% of the value created (the 5% the Axie protocol takes goes into the Community Treasury).
Gaming is notoriously erratic; one day’s most popular game could be tomorrow’s old news, but the incentive alignment of play-to-earn games could lead to games with sustainable success. If a player wants to stop playing the game, they sell their assets on the open market an move on.
People who have never interacted in the crypto ecosystem will be onboarded through a video game. This model will galvanize adoption and open the floodgates to new crypto users.
The Philippines have already shed light on what a future of play-to-earn gaming could look like. Many international players are earning more money playing Axie Infinity than they did in their previous jobs. Crypto has the potential to create new economic opportunities for all types of people around the world by delivering on the promise of a more level playing field while also capturing economic value.
The advent of NFTs in the realm of gaming promises to reshape business models and align the economic interest of the players and the game.
Until next time ✌️,
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