Blockchain Gaming: Play to Earn

VeradiVerdict - Issue #162

This week we are going to dive into Blockchain Gaming, but specifically on the Play to Earn model. We have a special Q&A section with my friend Amy Wu, who leads crypto and gaming at Lightspeed Venture Partners. In addition, appreciative of the feedback from Brian Cho (investor at Patron and formerly A16z and Riot Games), Aleksander Larsen (co-founder of Axie Infinity), and Gabby Dizon (co-founder of Yield Guild Games).

All eyes have been on the gaming space in recent years, and rightfully so.

Gaming has gone global: there are over 2.7 billion gamers worldwide, particularly concentrated in Asia, Europe, and Latin America. It has also firmly embedded itself into many peoples’ daily routines: 60% of Americans play some form of video game every day. Video game streaming reaches 1.2 billion viewers every year. Fortnite, a smash hit from Epic Games, generated $5.1B in revenue in 2020 from over 350M monthly active players, illustrating the enormous success even a single game can achieve. Analysts anticipate that the industry will surpass $300B in value over the next few years.

Despite the space’s promising trajectory, today’s games still face a number of important shortcomings:

  • Players don’t truly “own” anything. Last year, gamers spent over $50B on in-game items: outfits, weapons, power-ups, and so on. These purchases typically enhance the player’s performance and enjoyment of the game, but don’t serve any other purpose; you can’t sell, lend, or collateralize your items. Today, they fall into the entertainment spending category, not true investment.

  • Cross-game interoperability is limited. Today’s games, for the most part, remain walled gardens: they are distinct universes with their own items and experiences. And this is for good reason! Game developers should have full independence to control their creative efforts. But what if game developers could cooperate in more complex ways?

  • Lack of business model optionality. 80% of total digital games revenue comes from free-to-play (or “freemium”) games. Of the paid games that have succeeded, most are skins-driven, such as CS:GO. This shift has been great for players—paying $0.99 for a mobile game is practically unheard of—but can limit the design space for certain developers. Form follows function; as new business models emerge for game developers (such as commissions on secondary NFT sales), so will new forms of gameplay. 

Crypto, I think, is the missing building block that the gaming industry has been waiting for, one that empowers developers to open up entirely new design space. And I’m certainly not alone in holding that belief.

The intersection of blockchain and gaming will no doubt be the topic of many future posts—there’s simply too much to say. This week, though, I wanted to focus on a specific trend that has picked up broader attention recently: play-to-earn (P2E).

What is play-to-earn gaming?

It’s impossible to talk about play-to-earn without first talking about Axie Infinity; the game has undoubtedly pioneered a new type of gaming, similar to free-to-play’s dominance following the “Candy Crush moment” in 2012.

Axie Infinity is similar in gameplay to Pokémon: players raise, breed, and battle their Axies, axolotl-looking cartoon characters. The difference, though, is that instead of earning points for victories, players earn Smooth Love Potion (SLP), the game’s native token. 

Source: Decrypt

Unlike the items of “walled garden” games, all of Axie Infinity’s assets are plugged into the decentralized universe. SLP can be transferred instantaneously into another crypto-asset, used as collateral, or cashed out as fiat. Axies, as well as the game’s digital land, are bought and sold between individuals as NFTs. The game even has a governance token (AXS) that allows holders to guide the game’s future.

While Axie Infinity was released in 2018, the game has skyrocketed in adoption in recent months. At its peak in July, the game was generating over $15M in revenue each day, sending the governance token (AXS) to a fully diluted valuation of $22B. To put that in perspective, Axie Infinity—a game that is itself built on Ethereum—has earned over half of Ethereum’s total revenue in the past 30 days. The numbers are mind-bending.

Source: Token Terminal

The game has over 1.5M daily active players around the world, particularly in the Philippines, Indonesia, Brazil, Venezuela, India, and Vietnam. For thousands of their users, playing Axie Infinity has become their livelihood, sometimes providing substantially more than they could’ve earned working a local job. Most are not crypto-natives; they found Axie Infinity through viral word-of-mouth.

The explosive growth, global reach, and widespread income generation that Axie Infinity has achieved is truly remarkable. Regardless of Axie Infinity’s future—which I wouldn’t necessarily bet against—it has pioneered a model, play-to-earn, that will outlive itself.

Inspired by Axie Infinity, Gabby Dizon recently co-founded Yield Guild Games, a “guild” for this new play-to-earn economy. The organization, governed by a DAO, provides scholarships for people who would like to play Axie Infinity and other play-to-earn games professionally, sharing a portion of their earnings. The DAO, as a result, holds NFTs from various metaverse games, making its governance token, YGG, an index of sorts for the play-to-earn economy. The project is still in its early days but already has over 4,500 scholars, paying out over $1M per week.

A number of other play-to-earn games have gained popularity alongside Axie Infinity in recent months, such as CryptoBlades, Zed Run, Cometh, REVV, and others. Many of these are developed by blockchain-focused game developers and are used predominately by crypto-native users.

However, after Axie Infinity’s jaw-dropping success, I think the play-to-earn revolution is too promising for big-name game developers to ignore. I suspect that we’ll see established industry players begin to incorporate these ideas into their games and bring them to the masses.

Slowly, then all at once: why now?

For longtime observers of the space, play-to-earn has been a hot topic for years. So what changed recently that has seemingly opened the floodgates?

There’s no clear answer, but a series of trends have likely played a role:

  • Scaling. Layer-2 Ethereum scaling protocols, new high-throughput blockchains, and other scalability solutions have made it possible for blockchain-native games to flourish. There’s still a lot of work to be done, but we’re in a much better place than even a few years ago—remember the network congestion CryptoKitties caused in 2017?

  • NFTs go mainstream. A number of NFT-related innovations—including the ERC-721 standard—have given birth to the recent boom in NFT adoption. Gaming companies now have the tools to NFT-ify their games and, more importantly, a better public understanding of why rare in-game assets can have value.

  • DeFi architecture. Now that basic DeFi primitives (such as an automated market maker) have been battle-tested and widely implemented, game developers can incorporate these tools to financialize their games. Buying, lending, collateralizing, and other basic financial activities can now enter the realm of gaming.

  • Web2 interoperability. As legacy big tech giants begin to plug into the decentralized ecosystem, it will open up a distribution mechanism for crypto-powered games. For example, Apple’s recent App Store changes could make it easier for NFT-based and play-to-earn games to be directly accessed by iOS users. This important change allows games like Axie:Origin, an upcoming mobile app from the Axie Infinity team, to reach a much wider audience.

  • The metaverse. Working from home, the improvement of VR/AR technology, and a number of other global trends have made “the metaverse” a new frontier for digital experiences—from working in a virtual office to playing an adventure game—to be built. It also seems to have piqued Facebook’s interest. 

Some insights from Amy Wu.

To add a bit more color to the P2E movement, I invited my friend Amy Wu from Lightspeed Venture Partners, who leads gaming and crypto investments to also comment.


What do you think caused Axie Infinity to inflect? And why them vs another blockchain game?


It was a combination of factors, including word-of-mouth referrals in the Philippines, the P2E documentary driving interest, streamers spreading awareness, but with all that, I think the key thing was their move to Ronin, which suddenly made transactions like buying Axies free. As for what’s special about Axie Infinity, given there were other blockchain games as well (Gods Unchained, etc.), I think the community playing Axie Infinity, including PvP players and Axie collectors, had always been strong. Retention is an important metric people use to track the strength of gameplay and community, and for Axie Infinity it was significantly higher than other blockchain games (north of 30% D30) even before they inflected.


Is play-to-earn the next game monetization model? 


I don’t think of play-to-earn as a game monetization model, like free-to-play, premium, or pay-for-power are. Play-to-earn can co-exist with a game monetization model. It more describes player acquisition strategy, since it’s an incredibly viral method of acquiring a particular type of player, one whose primary objective is to earn money playing. Monetizing these players look different than acquiring a player who’s primarily spending money playing the game. With a large enough volume of P2E players, a company like Axie Infinity can introduce financial services products including crypto trading (on Ronin) to these participants, which is valuable. Ideally, a game has a good balance of regular players and P2E players. If you don’t, you could still balance the game economy, but would need more whale players spending a lot in-game to do so.


What are you seeing now at the intersection of blockchain gaming and gaming?


There is an explosion of new blockchain gaming teams currently, dozens of new teams forming on a weekly basis, and deep pools of venture and crypto capital looking to invest in this category. It’s the best time to be a blockchain gaming developer. Most of these teams are crypto and NFT native, and my recommendation is they bring on folks with native game design and development DNA in the genre of game they’re making because, at the end of the day, games with longevity are not easy to build. There’s a reason some of the biggest AAA hits take years, not months to build. Some teams realize this. I think players will see a golden age of blockchain games a couple years from now, but there is a first-mover advantage to releasing games sooner.  

Where do we go from here?

If gaming ends up being a way to earn an income, the implications are massive. A worker who may have ordinarily worked in the “gig economy,” such as driving an Uber, may decide that play-to-earn is an equally compelling alternative, one that’s far more entertaining. New types of jobs, from digital real estate agents to NFT art curators, will be highly sought after in the metaverse. Even casual gamers will now view their gaming-related expenditures as investments, not merely consumption. It’s difficult to overstate how large of a societal shift this could be.

Last week, with the excitement around Loot, we saw a hint of what the future of NFT gaming might look like. Loot is an unusual “game”: 8,000 bags of items were minted as NFTs and purchased by users, containing “randomized adventurer gear” of different rarities. For example, one “bag” might include a “Gold Ring,” “Divine Robe of Skill,” and a series of other items. However, while the NFT holder “owns” them, there’s not really a purpose for them, yet—it’s a “bottom-up” project where the items are created before the game itself. Very quickly after launch, the community was set in motion: the floor price for a Loot bag jumped to over $20,000, artists began designing the items (some with AI!), and several game developers are beginning to architect Loot’s interplay with the metaverse. 

All of this, and more, happened in less than 10 days. A “game” is being built, piece by piece, by a passionate community of Loot holders and supporters. This is a paradigm shift for the industry, one that is quite powerful. This is the first, but certainly not the last, NFT-based game to follow this new model: “community, then game” instead of “game, then community.”

With that in mind, here are some questions that I’ve been thinking about lately:

  • In the play-to-earn economy, what makes a game good? I worry that the phrase “play-to-earn” can send the wrong message: the earning part should be a byproduct of a fun, well-architected game, not the primary consideration. Games, first and foremost, must have high entertainment value, strong community buy-in, and a plan for long-term sustainability. Without any one of those, it’s difficult for me to imagine an in-game economy accruing durable value. So, while play-to-earn is certainly an exciting idea, it can’t exist on its own: you still need a great game. My bet is that the most fulfilling, engaging games—the types of places that people will spend a lot of time in, which the modern era’s currency—will also have the most vibrant economies.

  • How does play-to-earn fit into my portfolio? In the case of Axie Infinity, there are a number of ways you can get in on the action: buy an Axie, digital land, the game’s native token, or a piece of a guild like YGG. But each asset is very, very different; buying land in a metaverse-based game, for example, requires time and resources to best develop your property, similar to real estate in the physical world. In addition, betting on the right game is extremely difficult. Unless you’re an avid gamer or an industry insider, it can be very difficult to predict which ones take off and which don’t. To resolve this differential access, new financial instruments, such as Index Coop’s Metaverse Index, could give a wider group of investors access to this exciting asset class.

  • What infrastructure will develop around this industry? Yield Guild is exciting because it’s a logical piece of the ecosystem. A central organization that invests in, advocates for, and mobilizes play-to-earners is intuitively compelling, similar to what drew artisans to guilds in the medieval era. What else is this new economy missing? Will play-to-earners develop a union, organized as a DAO, to lobby for more player-friendly revenue splits? Or what about a platform for play-to-earners to get access to basic benefits such as health insurance, the same way that gig-economy workers do? This is an entirely new class of workers, and I hope that builders are starting the build the types of products that will make their lives easier.

The bottom-line: Play-to-earn has been a work-in-progress for a while, but it feels like it has finally arrived. Following Axie Infinity’s absolutely explosive summer and the recent excitement around Yield Guild, play-to-earn is now on the radar of gaming behemoths and crypto thought leaders alike—it will be fascinating to see what projects are built on these strong tailwinds. This is certainly an interesting time to be an investor in the space, but, more broadly, it also marks a shift in the way we think about labor, leisure, and value. It’s definitely a trend you’re going to want to pay attention to.

- Paul V



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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.