Web 3 gaming, or GameFi, has transformed the crypto world, accounting for 49% of the industry’s blockchain usage. More than 1.4 million unique active wallets interacted with blockchain games in 2021, and venture capitalists have invested over $4 billion in GameFi.
The growth of NFTs (non-fungible tokens) last year accelerated the development of GameFi. The Blockchain Game Report 2021 from DappRadar highlighted that “gaming” NFTs had over $4.5 billion in trading volume and accounted for 20% of the total NFT sales in 2021. Much of that was triggered by the skyrocketing growth of play-to-earn (P2E) tokens, especially from one game – Axie Infinity.
But subsequent backlash and cratering token economies have changed the way players, developers and investors view this nascent industry. And yet P2E isn’t a flash in the pan based on one successful game, but a potential avenue for the deployment and development of many new tokenomic models that bridge the gap between in-game experiences and economic incentives. The search for new models is on.
Axie Infinity, the catalyst
Axie Infinity, which is built on the Ethereum blockchain, saw the price of its AXS token rise exponentially by 31,500% in 2021. Axie was the first game to demonstrate an innovative tokenomics model within games and provide great economic incentives to the masses.
Its model had two sets of tokens that accrued value differently. The AXS token was the governance token, whereas the SLP token was distributed as in-game rewards. The SLP tokens could be sold on exchanges or used to breed new cute digital creatures. Breeding Axies required both tokens and created NFTs that could be sold on NFT marketplaces. This multi-token economy and their interaction created a revolutionary economic model around the game.
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The game’s popularity, however, put extreme pressure on its tokenomics. The rate at which SLPs were created was five times more than their “burning” ratio, or the rate at which they were removed from circulation. That resulted in a steep fall in the price of SLP tokens, making the entire game unattractive for users. You could play the game only after purchasing thousands of dollars’ worth of NFTs.
Still, the $3 billion market cap of Axie infinity and its staggering $1.2 billion in annualized revenue signaled a huge opportunity in P2E games. Axie Infinity’s valuation has both intrigued and repulsed gamers and companies in the traditional gaming industry.
The gaming sector responds to GameFi
Building on Axie’s popularity, leading global gaming studio Ubisoft announced Ubisoft Quartz, a platform for collecting and trading gaming NFTs. The backlash from gamers in its community, however, was immense, and the project died a silent death. Gamers were repulsed by the blatant revenue grab of an NFT model, which added little to the overall game experience.
Early last month, Axie’s SLP price crashed, creating concern about the sustainability of the game’s tokenomics model. Based on our interviews, there appears to be widespread belief among developers in Web 3 gaming that Axie’s P2E model may not be sustainable.
Roby John, the founder of SuperGaming, one of India’s largest gaming studios, stated bluntly that “present crypto tokenomics models look more like MLM (multi-level marketing) or pyramid schemes. If the number of users remains low or static, the entire model collapses”.
While this has done little to dull the enthusiasm around GameFi, it has sent serious developers on a quest for new tokenomics models. Shreyansh Singh, head of Polygon Studios, believes the potential for GameFi to create an entire financial ecosystem around gaming, including microloans for in-game assets, is immense. But that will take models developed from scratch.
“The Web 2.0 ecosystem is not experienced with tokenomics, and the Web 3.0 ecosystem is not experienced with game development,” he said.
The hunt for new GameFi models
Multiple models are being tested. Ish Goel of Web 3 game PlotX believes that skill-based P2E games will see huge adoption. He is gamifying prediction markets with a P2E token and has seen good adoption in his initial rollout.
Both value accrual and value destruction become important in new generation gaming tokenomics, according to Vish. He believes Star Atlas on the Solana blockchain appears to capture an economics model similar to the real world. By creating a strategic and expansive metaverse play with incentives to build cities, warships and so forth, it mimics models of land development and price appreciation that we see in the real world.
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Last month, Siddhart Menon, a co-founder of WazirX, an Indian crypto exchange, and SuperGaming’s John announced the launch of Tegro Games. Siddharth revealed their plans in building a sustainable gaming model through effective categorization of Web 2.0 and 3 elements.
Tegro has classified Web 3 gaming models into four generations with a combination of NFT and fungible token plays. Gen 0 comprises pure NFT plays for games with low trade frequency. Gen 1 is designed for higher liquidity and a combination of fungible and non-fungible plays. Gen 2 is built for predictable supply and long-term liquidity. Gen 3 is a pure P2E play akin to a service economy or job economy. Finally, Gen 4 relates to economic governance.
“We are now at a tipping point where every major gaming title has a Web 3 strategy in place. However, most will start off at pure NFT plays, which isn’t something that protects players sustainably,” Menon said.
The search is on for tokenomics models that will find that a sweet spot between in-game experiences and economic incentives. With the time it takes to develop a game, we can expect a variety of GameFi models to hit the market within the next 18 months.