Why Blockchain Gaming is the Future

By  Will McKinnon December 6, 2023

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Summary

  • Axie Infinity popularized the Play to Earn game model that many teams and developers are now iterating on.
  • Ownership of in-game assets, customer acquisition through giving away digital assets, and the potential complex in-game economies are some of the reasons big game production companies like Square Enix are now getting into the blockchain space.
  • Utilizing blockchain technology as a backbone for a video game introduces some complexities and inefficiencies, but the benefits are still seen as worth it for many developers.

Intro

While the concept of blockchain-based games has been around for many years, the initial run of Axie Infinity during the 2021 crypto bull run sparked a veritable arms race for independent game developers around the world to capitalize on this new concept.

Square Enix's Symbiogenesis, Source: Square Enix

Fast forward to 2023, and we now have AAA game production companies like Square Enix (creator of Final Fantasy and Kingdom Hearts, among many others) making their first forays into the world of blockchain technology. Most recently, blockchain games Big Time and Parallel have made waves with the success of their associated utility tokens, and so we decided to take a look into the concepts they are leveraging for success and how incumbent companies may be looking to take advantage of them.

What is a "blockchain game"?

Blockchain gaming is a broad term that encompasses any game that utilizes elements of blockchain technology. This may come in the form of NFT's as playable characters in the game, utility tokens used to buy in-game items, or even tokenized wearables which allow for decentralized trading on a secondary market. In the case of Axie Infinity, the game featured a number of tokenized in-game assets which came together to create the first popular "Play to Earn'' economic system in crypto.

Axie Infinity In-Game Footage, Source: Sky Mavis

In essence, Axie players could earn a fungible token, SLP (Smooth Love Potion), by playing the game. SLP could then be used to create more Axie characters to play with, increasing the amount of SLP earned by that player, and so on. While there were additional complexities within the economic system, this was the core game loop. As the game increased in popularity, the assets being earned also increased in value with SLP token going virtually parabolic, which in turn of course attracted more players.

As the old saying goes, however, "all good things must come to an end". Players began to give way to something more akin to "financial farmers", with users coming not to play the game but to earn money from playing the game. The financialization of Axie became so strong that at one point it was one of the highest earning jobs available for residents of the Philippines, with about half of all players estimated to come from the country. Most of these players played the role of what is known as a Scholar, in which users who owned a number of Axie's would loan out their assets to the Scholars in exchange for a cut of the SLP produced. The system quickly optimized itself for maximum profit, ultimately undermining the mechanisms in place to offer in-game value to SLP specifically; rather than farming SLP as a part of the game, it was farmed to be immediately dumped on the open market.

SLP Price over time, Source: CMC

Despite the spectacular collapse of Axie's economy which highlighted the financial dangers of Play to Earn gaming, there was something far more important proven by their brief success: a blockchain game was able to generate over $1b in revenue in a single year. A sector previously seen as far too small to have a successful video game economy suddenly showed its true potential for gamers and game creators alike.

Why use blockchain?

Blockchain technology is certainly fascinating and has myriad applications, however specifically in the gaming industry there are many downsides. The largest problem with using blockchain tech has to do with the scalability of the technology itself; it simply isn't meant to be used for something that requires such high throughput for rapid, simultaneous transactions as gaming does. Additionally, some chains indirectly restrict games due to the nature of gas fees which are required to pay transactions.

If blockchain tech places serious hindrances on game performance and architecture, why is it even worth using? By building the game itself to perform transactions off-chain (or in other words, the "traditional" way), game developers can avoid the negative elements of blockchain tech as it relates to their games while retaining the ability to take advantage of the power of tokenized assets.

Big Time Game In-Game footage, Source: Play to Earn

What makes tokenized assets so interesting within the gaming world is the idea that players can truly own their in-game assets. Just as in Axie Infinity where you can own your playable Axies, players could own everything from weapon skins in Call of Duty to gold in World of Warcraft. To clarify, ownership in this setting means the tokenized items can be withdrawn from the platform of the game to then be sold, traded, or transferred.

One of the largest problems this solves for players is the idea of in-game cosmetic items being sunk costs once the player has become bored with the game. In the normal world, the $100's you spend on Fortnite skins are gone as soon as you hit the purchase button. However, were those skins tokenized, players would have the ability to sell their now-unwanted skins to other potential players. In this event, the veteran player is able to get back some of their original investment into the cosmetic items (dependent on the secondary market pricing), relinquish their skins to a player that wants them more, and the game itself can make money via trading royalties. It could be argued that this concept diminishes user stickiness and increases user churn, however if theoretically the new player is more interested in the game than the old one, the game has just successfully acquired a new sticky user in place of one that would have left (and no longer spent) anyway.

CS:GO Weapon Skins Secondary Market, Source: DMarket

First Person Shooter (FPS) game Counter Strike: Global Offensive (CS:GO) was one of the first to popularize a secondary market for cosmetic items within their game, which in time has led to certain rare items being prized so highly that they have generated individual sales in the hundreds of thousands of dollars. This is more or less a proof of concept for the idea of tokenized in-game assets, as CS:GO cosmetics weren't tokenized themselves. The dangers of a secondary market without true ownership were shown recently when CS2 was released, which made some changes to the weapon skins that caused the CS:GO skin market to self-implode.

The Benefits of Fungible Tokens

While the first iterations of Play to Earn gaming may not have succeeded in the longer term, it did highlight some interesting behavioral characteristics of players. Namely was the ability to attract players with significant funds by incentivizing play with earnable assets, like the SLP token. For the first time in gaming history, a company was able to essentially pay users to play their game using an asset they had created themselves.

One of the biggest reasons game prices have continually scaled up over the last few years is that the cost to create a AAA game and then market it to a player base has become astronomically high. For example, the production cost of Bethesda's recent premier game Starfield was $200m. This means Bethesda would have to sell almost 3 million copies just to break even on production, and that's not even including marketing costs.

This is where fungible tokens come in. Axie Infinity's SLP token may not initially have been meant to be used as a user acquisition tool, but regardless of intentions it became a powerful one. There is no greater motivator in a capitalist world than monetary incentives and that potency was shown by the sheer number of players Axie was able to attain even in a market as prohibitive to outsiders as crypto.

Big Time Twitch streaming stats rocket after $BIGTIME release, Source: Streamscharts

Game-related tokens offer the game itself a number of advantages, namely: 1) the ability to financially incentivize players to join their game, 2) more control over player behavior and game economy using token incentives, and 3) direct-to-consumer marketing through the distribution of tokenized game assets and the token itself drives marketing costs much lower. We have yet to see just how powerful these factors could be in the hands of existing gaming giants like Bethesda, Activision Blizzard and more, however with the likes of Square Enix already creating their first blockchain game we may see sooner rather than later.

Token Drawbacks

Tokens don't come without their drawbacks, for example adding a token that can be traded on markets outside of your game introduces a whole new level of complexity to the game economy. You're no longer controlling just how players spend and purchase your game resources, you're controlling how anybody could spend and purchase your game tokens. As the game grows over time the complexity increases exponentially and thus it is very important that the tokenomics can be tweaked to adjust for new variables.

This issue of scale and complex game economy was ultimately the downfall of Axie Infinity. The game loop involving SLP was able to be turned into a pure financial farm and as the token system couldn't be adapted quickly enough to control for the massive scaling happening, it experienced a spectacular crash. The founder of blockchain game Parallel, known as Kalos, highlighted the importance of adaptability and forward planning for a token in a recent tweet . With the fact this technology is very new and once again, has not yet been tested on the "big stage", easing into it is important. A massive system of checks and balances needs to be in place as we learned from Axie that token sinks related to just game features are simply not enough.

Conclusion

Blockchain technology represents a truly exciting suite of tools for game developers to take advantage of as the gaming industry continues to grow. For now we'll keep an eye on leaders like Parallel and Big Time Gaming as well as blockchain newcomers like Square Enix to see just how much they can achieve.