Breaking into the scene only in 2021, Web3 gaming has enthused many who see it as a significant improvement over Web2 gaming, due to the novel feature of blockchain-based in-game asset ownership, which offers unique opportunities for game design, player engagement, and immersive experiences. Despite the sector raising a remarkable $8+ billion in 2022 and the initial excitement surrounding the breakout game Axie Infinity, the enthusiasm for Web3 gaming appears to have waned in the wake of the ongoing crypto winter. In the December 2022 edition of the widely read and highly regarded “Messari Crypto Theses” publication, author Ryan Selkis expressed his bearish views on Web3 gaming, labeling it the most "overhyped sector." The question remains: is such gloom warranted, or is there still cause for optimism within this nascent industry?
In January of 2023, GSG and Arcane Group assembled a group of esteemed gaming industry veterans and investors to participate in a thought-provoking roundtable discussion, delving into the current challenges and future prospects of Web3 gaming.
In this initial instalment of the “Web3 Insights” series by GSG and Arcane, we present a summary of the group's collective wisdom on a range of topics that pertain to Web3 gaming, including game design, user experience, tokenomics, gaps within the ecosystem, and investment theses.
Elevating Game Design and User Experience for Better Engagement
In 2022, “gamefi”, a synonym for Web3 gaming, became a popular buzzword within the crypto circle, with the “finance” aspect of the term garnering considerably more attention and momentum, as legions of speculators joined the Web3 gaming craze in pursuit of making a quick buck. Nevertheless, all panelists unanimously affirmed that the true essence of “gamefi” lies in the “game” element, with “finance” serving as one of the many features of a Web3 Game. Rather than fixating on how the game makes money, gaming project founders should instead focus on enhancing game content and design, thereby improving user experience, and promoting extended engagement. This, in turn, can lead to increased user participation and contribution to the platform. Furthermore, the panelists posit that some game genres are better suited for Web3 than others.
In particular, Arthur Cheong of DeFiance Capital believes that MMORPGs (Massively Multiplayer Online Role-Playing Games) and 4x (Explore, Expand, Exploit, Exterminate) games are particularly well-suited for Web3, and these genres can also be very effective at drawing in more players, thereby expanding the total addressable market for Web3.
Dan Wang of Infinity Ventures Crypto shares the view that MMORPGs have the most potential to benefit from blockchain integration. This is because MMORPGs have an open economy that closely mirrors the real-world economy, and the integration of blockchain technology would make it possible to levy taxes on in-game transactions and potentially regulate over-the-counter sales. However, Wang caveats that MMORPGs are probably among one of the most challenging genres to implement for Web3 due to complexity.
Tokenomics Framework for Managing Multiple Incentives
In addition to the game’s fun factor, tokenomics is also a crucial factor in driving user acquisition, retention, and growth. Panelists hold the opinion that creating a robust and sustainable economy requires a delicate balance between the amount of value extracted and the amount reinvested, which is tricky to achieve in the Web3 environment where there is an added component of extraction and interoperability due to free capital flow. The ideal tokenomics model should maintain a balance of higher demand than supply.
Gabby Dizon of Yield Guild Games notes that while many people in the crypto world know how to increase token supply, few have figured out how to increase token demand. He advises gaming projects to focus on identifying the right target audience and providing them with a valuable experience to create a strong demand for their tokens.
Simon Davis of Mighty Bear Games suggests that "starting by giving out fewer rewards" is a good rule of thumb. By slowly introducing rewards and finding the right balance, games can keep players engaged and also earn time to build a sustainable economy.
Ryan Foo of Limit Break is interested in the potential of Web3 enabling more composability into the process of building games — where developers are incentivized to contribute components and open-source their contributions. Web3 allows games to potentially create and enforce incentives for contribution, and could lead to a Cambrian explosion of new game experiences.
The presence of speculators is an additional factor that adds complexity to tokenomics design, as their financial focus can potentially conflict with the interests of serious gamers. However, Dan Wang argues that speculators are an important part of the gaming community and can provide valuable liquidity to the game. Nevertheless, the key challenge is to engage speculators without negatively impacting other players.
Gaps in the Web3 Gaming Ecosystem
Being a nascent industry, Web3 gaming ecosystem still has several gaps that need to be filled before it can fully flourish. According to the panelists, one of the biggest challenges facing the Web3 gaming industry is the high cost and low efficiency of acquiring users. Current efforts to target users based on wallet activity and social media proved to be clumsy and ineffective, and the cost of acquiring new users through paid means is prohibitively expensive, averaging $30-$40 per user. Marketers for Web3 games are struggling to streamline the process of user identification, onboarding, and wallet adoption.
The tried-and-true methods of user acquisition in Web2 gaming do not translate to Web3 gaming, as it demands a new advertising model that engages users beyond simple exposure to ads. This uncharted territory has become an exciting opportunity for traditional ad agencies, with many now exploring ways to tap into the casual gaming audience of Web2 and guide them toward Web3.
In addition to the issue of user acquisition, the dearth of talented game developers with Web3 knowledge is another significant obstacle. The workaround has been the “drinking from the firehose” approach whereby Web3 games onboard talented Web2 developers, and then seek to get them educated and up to speed as fast as possible. As Web3 gaming gains more mainstream adoption, panelists expect that the talent pool will expand, easing the shortage.
Refining the Investment Thesis Post Axie
After experiencing the ups and downs of investing in Web3 games in 2022, most VCs have finetuned their investment thesis and approach. While the panelists all share the view that content quality is an essential investment criterion, some are shying away from AAA games as that is a highly crowded market. Dan Wang explains that his fund focuses on the long tail of casual and free-to-play players, which is less crowded but growing rapidly. Although he avoids investing in single short-term hyper-casual games, he is optimistic about studios that produce many hyper-casual games and can move their players from one game to the next. Typically, he invests in the platform rather than just one game, using a SAFE plus token with warrants.
Arthur Cheong highlights the problem of investing in content that is past its peak by the time it can be sold. He explains that while investing in content has the potential to generate significant returns, the failure rate for investing in content is high. Many games have short lifecycles and by the time an investment is made, the game's peak has already passed. Therefore, venture capital investments in individual game studios that focus on one or two games are particularly risky.
Learning from the challenges of last year, some VCs have shifted their investment focus towards fewer but bigger bets on games that focus on quality content with just enough blockchain technology to improve the user experience. In addition to investing in games, VCs are also interested in investing in gaming-related verticals that can bring more developers and users into the ecosystem.
However, investing in Web3 games is more of a wildcard than in other sectors, with a higher degree of unpredictability and less assured prospects of success. Dan Wang emphasizes that there is a subjective element to the gaming industry, which makes it challenging to control for all factors. Even with a well-executed plan and a strong product, there is still a chance that the community will not respond as desired. Therefore, VCs must have a diversified portfolio of games to spread the risk across multiple investments and increase the chances of seeing a return on investment.
Look out for the next instalment of the “Web3 Insights” series by GSG and Arcane: Tips and Strategies for Creating Successful and Investable Web3 Games.
We extend special thanks to the following panelists for their contributions: Gabby Dizon (Yield Guild Games), Simon Davis and Teri Tan (Mighty Bear Games), David Waslen (Accretive), Ryan Foo (Limit Break), Arthur Cheong (DeFiance Capital), Joshua Toh (T.E.A.M. DAO), Aditya Saraf (The Spartan Group), Vincent Lim (Play Ventures), Samson Oh (D.G.Pals), Dan Wang (IVC), and Jordan Kang (Arcane Group).
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