gaming summer
why crypto’s killer app — incentives — are a perfect fit for gaming
At the heart of many great games is a toy economy. Games like Runescape, EVE, Team Fortress 2, and CSGO introduced players to the concept of digital assets with tangible value. These experiences inform a consensus that “crypto makes sense for gaming.” However, far too much attention is placed on NFT item ownership, and not nearly enough on NFT emissions potential to attract and incentivize players.
This post will serve as a guide to thinking about crypto and gaming, establishing that:
Game economies are great fits for blockchains
Crypto’s killer use case is incentivization
Games are an even better fit for incentivization than DeFi protocols
game economies + crypto
Popular games that allow item transfers create emergent economies, whether centrally organized as a marketplace, or as player-to-player bartering. This form of in-game asset ownership has long predated crypto. A few examples include:
2001: Wizards of the Coast sold digital booster packs in Magic the Gathering Online at the same price as physical packs. A digital-to-physical redemption mechanism kept the virtual economy peg. Most commerce happened player-to-player via an in-game trading system. An online card marketplace named MTGOx would later pivot to selling Bitcoin directly. The asset values of individual cards were low, usually between $1 and $5.
2009: Valve popularized loot boxes to Western audiences by introducing them into Team Fortress 2. With only in-game player-to-player trading available, custom “trade servers” where players would mill around selling wares instead of playing the game became popular. As it was a pure barter economy with no circulating currency, certain fixed supply items became standardized stores of value at useful increments. The values ranged between $5 and $100, with some rare items going for $3,000+.
2023: Steam marketplace volume sits at $1 billion annualized, 25% of OpenSea’s volume, and growing quickly. In 2017 it also reached similar volumes, largely due to CSGO skins used as collateral for gambling and esports betting sites. In an effort to combat this, Steam introduced a seven-day transfer restriction on newly transferred items, which slowed volume. However, native in-game item demand remains strong, and recently skins have sold for upwards of $400,000.
Weekly Steam Marketplace Volume in USD - https://www.trade.tf/volume
These examples show that when a game gives players ownership of an item, via transferability, they will assign value to it. That value scales with liquidity — an item with a global marketplace will find better price discovery than one in a barter system. NFTs are, by their nature, transferrable and instantly tradable on a global marketplace. This means NFT item ownership is a real benefit, and Pareto superior to the ownership paradigms that came before it (even though NFTs aren’t a requirement for player-owned in-game assets).
The main utility of NFT game items comes from their default composability rather than the strong item ownership. After all, while rumors exist that Vitalik Buterin partially created Ethereum because the World of Warcraft developers nerfed his favorite ability, NFT ownership would not have improved the situation. World of Warcraft, like almost all games, is centralized, and simply owning an item doesn’t stop the game developers from making decisions that negatively affect said item. This happens all the time in card games, where certain powerful cards are banned from play. The player still owns the card, can still sell the card, but can’t actually use it in the game. In truly decentralized games, where players co-own the game alongside the devs, ownership becomes much more powerful (an exploration for another time).
It is composability that allows for NFT items to be instantly tradable on multiple global secondary marketplaces, providing optimal price discovery while also forcing marketplace fee compression. Steam Marketplace takes a 20% tax, forces a seven-day transfer restriction, and caps the value at $5,000. IOS takes a 30% tax and caps the value at $100. These restrictions weigh heavily on current game designs. By running everything on an unrestricted and neutral payment rail such as Ethereum, arbitrary ecosystem limitations can be avoided.
It is that same composability that allows for permissionless external game integrations. The closest we have today to cross-game item interoperability is within a single company’s ecosystem (e.g. a deluxe Overwatch purchase that includes a WoW pet). And it is the composability that turns game items into strong financial assets, which players can rent, sell off claims to, or even take loans against.
Unfortunately, these benefits of ownership and composability only apply to successful game economies. As stated above, value scales with liquidity, and the largest input to liquidity is player base. Very few people care about owning an item in a game that no one else plays, and similarly the composability of an unwanted asset is low. In other words, NFT item ownership can greatly benefit desirable assets, but items are not inherently desirable because they are NFTS —people have to want the item for external reasons.
Enter incentives.
crypto is good at incentives
Crypto’s killer feature is community incentivization. If you give early adopters economic ownership in the venture, they turn into powerful evangelists, which can create exponential growth for a new network. Over time, from PoW mining coins to ICOs to DeFi to PFPs, the market has iterated on different models, but one design stands above the rest.
Token emissions — including airdrops — are a growth mechanism that attracts early adopters, incentivizes their behavior, and aligns their interests with the growth of the protocol (sometimes). A well designed tokenomic program, like the compound farming rewards, can help a protocol skip past an early two-sided marketplace bootstrapping problem. The launch of sushi farming and resulting liquidity vampire attack compelled Uniswap to launch a similar emission program. The general market discovery of emissions and subsequent implementation/experimentation phase is commonly referred to as “DeFi Summer.”
As NFTs evolve from community Schelling points to something better positioned to take advantage of crypto’s inherent strengths — tracking assets on a ledger and user incentivization — the gaming use case becomes more obvious.
Compare a multiplayer game’s player base to DeFi protocol liquidity. Both have classic cold-start problems. Unattractive and not very useful at low utilization, they gain compounding network effects with scale. This framing captures crypto’s true value prop to gaming — bootstrapping player liquidity via incentives. By rewarding early adopters with economic ownership, games and DeFi protocols alike can subsidize the poor user experience of a new network.
Bootstrapping a game’s playerbase is ostensibly even easier than bootstrapping a liquidity network as there is only one side to coordinate. This concept was notably implemented by Axie Infinity in a category now known as play-to-earn, while another approach led by Digidaigakus is called free-to-own (F2O).
The launches of multiplayer games may soon look similar to protocol launches, with emissions and airdrops attracting initial users who then stick around (or don’t!) based on the underlying merit. This solves a fundamental marketing problem for new games, and while the incumbent big studios are unlikely to adapt per usual, the transition will likely impact the gaming industry on the scale of the freemium/shareware->free-to-play shift.
defi:erc20 :: gaming:nfts
DeFi protocols gained adoption not because their mechanisms were superior to all others. Overcollateralized DeFi loans are strictly worse than offchain alternatives, and constant function decentralized exchanges suffer from worse slippage and “impermanent” loss. But segments of the market wanted access to these tools onchain, and emissions helped bootstrap the liquidity to function.
With gaming, NFT items are strictly better than prior schemes, all else being equal:
Inherently strong item ownership
Composability unlocks global liquidity
Built on a native, neutral high-throughput payment processor
Most importantly, incentivization solves gaming’s largest problem: marketing to attract new players. Most video games fail because they couldn’t attract a large enough player base, regardless of the inherent fun of the game loop. AAA games spend more on marketing than they do game development, and indie games must hope to go “viral” to compensate for a lack of advertising budget. NFT incentivization costs almost nothing, and can even lead to revenue via royalties as players speculate on the items.
NFTs are even better incentivization mechanisms than fungible tokens when the flexibility of their implementation can be taken advantage of, as with gaming. Fungible tokens only have one desired use case: value accrual, whether through “number go up” or yield. NFTs can optimize for value accrual, but can also represent rare in-game items or skins — digital assets desired for their own sake. NFTs can also separate hierarchies and functions within the same collection, something a fungible token cannot.
The success of Axie Infinity opened a lot of people’s eyes to the opportunity set of an incentivized economic ownership model in gaming. While there were issues around the emission supply/demand curve and the gameplay itself had room for improvement, it found an explosive product market fit around incentivized gameplay.
Finally, it is important to recognize item ownership is an intentional choice that game designers make. As soon as a game allows transferability, it allows for “accomplishments” such as earned skins to be bought for money, which can potentially cheapen the experience. Many of the most popular games such as Fortnite, Call of Duty, League of Legends, Overwatch and even Hearthstone, do not allow item transferability and thus have no in-game economies. External economies around trading entire accounts still emerge. However these are very illiquid due to the complexity and compliance of account selling.
Even if NFT item ownership becomes the new gaming standard, you will still see games intentionally opting out of economies via non-transferrable NFT items as a game design choice. Luckily, non-transferable items still act as great incentives — just look at the rise of “Battle Pass” systems like in Fortnite, where players earn limited seasonal items for playing the game.
/end
Understanding why certain market phenomena worked is crucial to projecting forward to the next one. Economic incentives, in the form of token emissions, helped DeFi protocols bootstrap past the two-sided liquidity marketplace problem. This worked because the products, mostly lending markets and dex’s, needed to reach a scale threshold before finding PMF. Taking this framework, and applying it to gaming’s fundamental need to bootstrap a player base, looks a lot like incentivizing player liquidity. Call it gaming summer.