Web3 Gaming and Play-to-Earn Economics
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August 18th, 2022

By Catherine Yeo (@catherinehyeo), Author of The Creator Revolution

A research poll conducted in late 2021 found that 32% of internet users in the Philippines own NFTs. You read that correctly — 32%, as in close to one-third of all Pinoy internet users.

This shocking statistic, as well as the overall rise in Web3 adoption and interest in the broader Southeast Asia region, are driven in large part by the emergence of Web3 games. One particularly popular game, Axie Infinity, sees 35% of its traffic (and the biggest share of its nearly 3 million daily active users) from the Philippines. Globally, the blockchain gaming industry has grown by 2000% in the first quarter of 2022 alone and is projected to be a $40 billion industry by 2025.

At a high level, Web3 gaming falls into two categories:

  1. Games that rely on the unique technical affordances of crypto,
  2. Games that are enabled by unique economic structures offered by crypto.

This article focuses on the latter category, diving deep into the economics of the play-to-earn model and how we can strengthen them to be more economically sustainable in the long run.

Web2 Gaming and the Free-to-Play Paradigm

The games we currently play are built in the Web2 ecosystem (e.g. League of Legends, Candy Crush, Angry Birds) and fall under the free-to-play paradigm.

Just as its name indicates, this model encourages more users — especially non-gamers — to explore the game by enabling free gameplay. The strategy is simple: reel in as many users as possible, then monetize their playing experience once the user has spent more time in the game. Monetization generally consists of in-game advertisements and purchases, such as buying rare skins in League of Legends or purchasing more lives to bypass a Candy Crush level.

This paradigm is often governed by a dual currency system:

  1. Soft currency, which is virtual money you use in-game to advance or enhance your gameplay,
  2. Hard currency, which is real money that you can use to convert into soft currency.

Only ~2-7% of users are willing to spend hard currency, so it is challenging and delicate to build a profitable game economy. To do so, one must balance the economy’s sources (what a user buys and earns) and sinks (what a user spends). On the company’s side, the game must consistently introduce additional sources in order to keep players active in the game. The more options a user has to gain in-game soft currency (e.g. complete missions, build streaks, watch ads for rewards), the more they are incentivized to keep playing and eventually spend hard currency. In turn, to achieve balance, games can introduce new sinks as well, which enable users to progress faster, earn more soft currency, and so on.

Web3 Gaming

Play-to-Earn Paradigm

Many Web3 games fall under the play-to-earn paradigm. In these games, users can own in-game assets and earn tokens (including NFTs) in return for participating and playing. As a result, gaming is no longer purely recreational — instead, playing these games can offer financial and ownership incentives. In the Philippines, many Axie Infinity players have used their cashed-out game earnings to pay rent and make a living.

Rather than being seen as an alternative or competing model, play-to-earn should be viewed as an extension of free-to-play. “Imagine free-to-play for the open economy,” FTX Ventures’s Amy Wu said. “That’s what [Web3 gaming] is like.”

The emergence of the play-to-earn model enables two main shifts:

  1. It unlocks gaming for a larger demographic.

    Play-to-earn games have unlocked new potential incentives, and each appeals to a different set of people. Of course, there are still those passionate gamers who still desire to earn in-game assets to advance their gameplay. Outside of gamers, however, there are further demand spaces who may be interested in exploring play-to-earn games: those who want to earn income, those who want to mine in-game assets as collectibles, etc.

    “Every time there’s a new paradigm shift of a new genre of gaming, it unlocks gaming as a medium for a new group of people,” Justin Banusing, co-founder of Southeast Asian campus gaming community startup AcadArena, told me. “What I’ve seen with Web3 gaming from an industry perspective is that it’s similar to the mobile gaming shift. You’re seeing so many people who would never have played games otherwise start to spend time playing games. For some, it’s now a viable way for them to become breadwinners.”

    New incentives point to potentially higher retention and revenue. However, there is still a lot of work to be done to fully see this expansion of demand play out. Crypto itself is still highly gated, which makes exploring new play-to-earn games a complicated process. Even as a technical individual, it took me an exhausting hour to figure out how to onboard onto Axie. The starting price of the game is outrageous in itself, setting players back $1000+. Thus I hope that Web3 games go beyond targeting crypto-native users, work on removing these barriers, and build with Web2 masses in mind.

  2. It unlocks and legitimizes ownership of in-game assets.

    The idea of owning digital assets in-game is not new. For example, many Web2 games let you purchase cosmetic assets such as outfits/skins to dress up your character. However, even though you “owned” these assets, these games generally did not let you sell or trade your assets to others. This resulted in the rise of blacket markets with counterparty risk, i.e. you never knew whether your counterparty would act on their word and deliver the skin you were promised.

    In contrast, tokens enable a player to withdraw their asset from the game so that it can be freely traded or sold on another platform. “[NFTs] are the perfect vehicle to store unique game data that players should be able to own and use, potentially across other experiences,” Aleksander Larsen, co-founder of Axie Infinity’s parent company Sky Mavis, said to IEEE Spectrum. Web3 gaming legitimizes in-game ownership so that the assets are now owned by the player, not the gaming company. As a result, a player would not need to worry about a game shutting down and thus losing all their in-game assets.

Ultimately, Web3 gaming is not better or worse than Web2 gaming. Rather, Web3 gaming is a new paradigm shift that extends the possibilities games can unlock and supercharges the incentives of gaming and owning digital items.

Case Study: Axie Infinity

Developed by Vietnamese game studio Sky Mavis, Axie Infinity is a blockchain-cased game where users can earn money by collecting, breeding, trading, and battling NFT pets called “Axies.” With 2.8 million daily active players, over $3.6 billion worth of transactions traded, and $150+ million raised in venture capital, Axie has been frequently cited as an exemplary success of the play-to-earn model.

Its own website describes Axie as “a new type of game, partially owned and operated by its players.” The game follows a dual token structure:

  • AXS (Axie infinity shards) is a governance token used for staking and payment. Governance includes receiving AXS from the community treasury, where players receive a portion of the Axie Infinity’s revenue. The game plans to eventually grant voting rights to those who own AXS.
  • SLP (smooth love potions) is a utility token that users earn from playing Axie. Inside the game, SLPs are primarily only used to breed Axies. As a result, SLP is often treated as a token to be sold for cash instead.

“Axie is its own economy. It might have swings like any emerging market based on macro factors, but long long term we believe that our digital nation will experience high GDP growth which will spur our in-game economy,” Axie’s co-founder Jeffrey Zirlin had told CNBC in 2021.

While the volatility of cryptocurrency is certainly a concern for all Web3 games, as well as its security (see Axie’s recent $600+ million Ronin Bridge hack), Axie’s existing economic structure is an essential issue at hand in considering its long-term sustainability and viability. To put it more bluntly, its economics looks like a Ponzi scheme.

An economy can only grow if the money stays inside and circulates through that economy. As an analogy, a country’s currency strength is determined by how much currency stays within the ecosystem; the same can be considered for a game’s economy. In the current play-to-earn model that Axie has fostered, players are incentivized to cash out because there are few other ways to contribute to the ecosystem.

Furthermore, the gameplay itself is still underdeveloped, so playing the game is known as “grinding” and earning SLP tokens is known as “farming.” If the game cannot even provide a recreational value, the incentives will be purely financial.

Thus to continue generating value, Axie must continue growing at a fixed rate. No economy that is based around cashing out will succeed in the long run, especially when there is a ceiling of how many users the game can grow to (i.e. it is capped by the number of humans on Earth).

In this screenshot of a player requesting a scholarship to rent an “Axie” creature in the game’s public Discord, the player states that they can “farm 100 to 150 [SLP] a day” and “grind more than 8-12 hours per day” in order to financially support their family during the pandemic.  
In this screenshot of a player requesting a scholarship to rent an “Axie” creature in the game’s public Discord, the player states that they can “farm 100 to 150 [SLP] a day” and “grind more than 8-12 hours per day” in order to financially support their family during the pandemic.  

“In a play-to-earn system, someone needs to figure out how to keep growth slow,” Michael Markell, a crypto engineer at Royal who used to build tools for Axie Infinity guilds, commented to me. “They need to make sure the tokenomics of the game is not being abused and turned into a money making machine in order to keep a long-lived game.”

How to Make Play-to-Earn Economically Sustainable

I see two primary strategies to make play-to-earn games more economically sustainable:

  1. Design better gameplay. (In other words, make the game fun!)

    The main way to keep demand for a token high is to encourage usage, and there’s no easier way to achieve that than to start with a great game. If the game is fun, players would naturally buy into the game. They would choose to spend the token rewards in-game, rather than only cashing out, as we can see in many popular Web2 games.

    Most current crypto games have only had about 10-20 months of development time, so the underdeveloped gameplay of many play-to-earn games can be partially attributed to this. As Web3 gaming startups continue growing their games, the user’s gameplay experience should be the first priority no matter what. Thus it’s important to hire experienced game developers (and not solely crypto developers) to achieve this objective.

    “Fun games will universally beat those that are not fun,” Constellation Labs co-founder Matt Katz told me. As intuitive as this may seem, it’s much easier said than done.

  2. Only reward in-game tokens to actions that contribute to the game’s ecosystem.

    Currently, playing the game is less economically beneficial to Axie than it is to the players. Successful gaming economies are all about balance, so the play-to-earn model must make it a fair trade for the hosting economy as well.

    How we can achieve this is by shifting rewards toward contributions of skill, rather than rewarding anyone who plays and participates in the game. Examples of player contributions could include being a community leader, owning specific tokens, being a top player, building mods or additional components (potentially to make the game more fun 👀), etc. — any and all actions that generate more value to the entire game’s economy as a whole. All such contributions would then be rewarded proportionally.

    Sure, this in turn means less people will be earning income from the game. But it will make the economy more sustainable in the long run, which allows more individuals to continue playing.

    “Play-to-earn needs your gameplay to be positive-sum for other players,” Banusing emphasized.

Final Thoughts

As the industry continues to evolve, we must consider the economics of Web3 gaming in a nuanced and sustainable method, which are especially important to crypto hotspots such as many Southeast Asian countries where earnings from Web3 games have often exceeded wages during the pandemic. This begins with designing in-game economies that are balanced in incentives and rewards.

To me, the most intriguing part of play-to-earn games is how owning a gaming asset can incentivize people to play and contribute more. Participants can now grow an ecosystem for everyone with their creativity — so a new incentive is to earn value (through digital assets) over time, beyond the pure entertainment value of gaming and the speculative value of tokens.

The ultimate vision for Web3 gaming is that “you can play the game on-chain in a way that’s easier, more frictionless, and more fun,” according to Wu. I am excited to see the rise of more Web3 games (and apps in general, like STEPN and Dreamland) that combine innovative on-chain mechanics with stable economic structures (some interesting ones I’m looking at are Dark Forest and AI Arena) — only time will tell how the play-to-earn model will play out.


Acknowledgements: Thank you to Scott Kominers, Amy Wu, Justin Banusing, Michael Markell, Matt Katz, and Andy Zeng for all your input and insights!

Catherine Yeo is a creator, entrepreneur, and investor studying Computer Science and English at Harvard University. She recently published the book The Creator Revolution (available now on Amazon), which examines the historic rise of digital content creators and their impact on transforming both our present and our future. You can find her on Twitter @catherinehyeo.

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