Why Web3 Gaming Hasn’t Exploded Yet
Despite its potential to revolutionize the way we play and own in-game assets, web3 gaming has yet to explode in popularity. In this article, we explore challenges facing the industry.
by Adam Kreitzman, intern, and Juan Aranovich, editorial research
Introduction
Web3 gaming has become one of the strongest narratives around blockchain. Across the crypto landscape, talented developers are working to usher in a new era of gaming that prioritizes user ownership and community-centric development.
Despite the potential benefits of blockchain gaming, the industry has yet to take off with many projects failing to live up to the hype. In this article, we delve into the challenges facing web3 game developers as well as the advantages that come with blockchain gaming.
Most of the narrative surrounding web3 gaming in 2021 and 2022 relied on the promise of the metaverse, an idea that envisions a digital extension of our lives and identities. However, many tokens and projects tied to the metaverse failed to attract and retain users.
Providing gamers with the opportunity to make money through gameplay has attracted many users to web3 games, but the lack of strong-knit and interactive communities has resulted in low engagement and retention, with many criticizing the games as not being fun.
The popularity of both streaming and e-sports has been a major growth area for the gaming industry, allowing players to build a following and make a living through their gameplay.
Still, there remains room for improvement with this model. Popular streaming platforms such as Twitch and YouTube take a large percentage of revenue generated from creators, and most of the traffic is confined to a select few accounts with millions of subscribers, leaving little room for streamers with smaller audiences to make legitimate revenue. The current model also does not adequately reward those who are dedicated to a particular game or help them grow their community.
Overview
In the 2021 bull cycle, several web3 games such as Axie Infinity, Decentraland and The Sandbox gained popularity due to their potential for monetization.
Since then, the value of their tokens has dropped along with the rest of the crypto market, and their user base has decreased as people no longer see a viable way to profit from the games.
Another notable web3 gaming project is TreasureDAO, an interoperable gaming ecosystem that makes building a web3 game easier. TreasureDAO addresses the current shortage of infrastructure in the blockchain-powered gaming space by simplifying the process of creation.
While the aforementioned projects have laid the groundwork for the future in this industry, web3 gaming remains in an elementary stage of development. Yet, there are many projects in the pipeline leveraging the power of blockchain to generate value for gamers.
Benefits of Decentralized Gaming
Genuine ownership over in-game items
Underpinning in-game assets is one of the most straightforward use-cases for NFTs. The average gamer will spend nearly $58,000 in their lifetime on anything from Fortnite skins to FIFA cards. However, once purchased, items are challenging to sell for their real value without going through difficult back channels.
Currently, gamers do not have actual ownership of those items. However, if these digital assets were represented as NFTs and were transactable on the blockchain, proof of ownership would then be verified in an immutable record.
Decentralized ownership of the platform itself
A possible scenario for decentralized game development is the use of a token model that is similar to the one currently used in DeFi, where revenue is distributed to governance token holders. In this scenario, game developers could seek funding and community engagement through a distributive token model. This could involve issuing tokens for a public sale and offering additional token incentives for those who drive traffic to the game, beta test, and provide feedback to help drive development. These tokens would have inherent value as they would represent genuine ownership over the game through both governance and revenue.
This approach can be beneficial for new developers who are trying to gain traction, as it creates a powerful vector for growth for games that reward early adopters and those who drive the success of the game. Token models can be complex, but with a good design, they enable partnerships, decentralization and equitable distribution. This can empower developers, gamers, and users, while creating a more symbiotic environment that rewards each group for their contributions to the success of the game.
Fairness in gameplay
Decentralization also promotes fairness in game development, as community-building is positioned at the forefront of its ethos. For example, FIFA recently faced criticisms as players suspected that the game was rigged to keep games competitive rather than reward players for achieving a lead.
Challenges of web3 game development
Challenges around game design itself
Many web3 games have rushed development to capitalize on speculative mania, resulting in poor quality, low-engagement games. There is currently no true example of a successful web3 game, reflecting the large disparity in the popularity of web3 and mainstream gaming.
Fortnite, one of the most popular games at the moment, generates about $2.6 million in revenue per day, which is rivaled only by Ethereum when comparing blockchain revenue across the entire crypto industry.
It is difficult to determine the formula for a successful web3 game, and aligning incentives in a way that is fair to developers and players while also generating sustained revenue is a complex challenge.
Balancing revenue generation with in-game economy
Maintaining an in-game economy that prevents assets from losing significant value while also generating sustained revenue is a challenge. A game like Madden, for example, releases new cards throughout the year that make older cards obsolete, effectively killing the old cards’ market value. This tactic keeps money flowing into the game but it would not work in web3 games as it would harm early adopters or investors who spent money on these items.
Competing with legacy gaming industry standards and player awareness
Many gamers have loyalty to specific video game franchises and are unlikely to veer away from what they are comfortable with. Additionally, these games receive more funding, allowing them to hire top developer talent and run major marketing campaigns. The Call of Duty franchise, which releases a game once a year, has an annual budget of over $300 million.
For blockchain games to compete against these titles, they will have to do so with fewer resources and less notoriety.
Challenges around scalability of smart contract platforms
Most of today’s technology is not sufficient to support a wide variety of games on chain. Thus, it is important to find efficient ways to solve the scalability problem. During the last bull cycle, Ethereum faced high costs for executing simple swap transactions when usage was high, which would be untenable in the context of a game.
Some innovations that can help to keep up with the blockspace demanded by games are Avalanche subnets, zero-knowledge proofs and rollups on Ethereum, as well as newer layer 1s such as Aptos and Sui.
Avalanche subnets allow developers to deploy their own layer 1 blockchain with particular specifications while borrowing a subset of validators from the Avalanche network to maintain security and decentralization. This architecture has been adopted by several games, resulting in decreased fees and increased transaction volume.
Another promising development for scalability comes from zero-knowledge proofs, which have the potential to rapidly scale the Ethereum network. Polygon is currently leading the charge in this area, as they are in the final stages of testnet before publicly deploying to mainnet and allowing for development. This is particularly relevant for the growing NFT community and games that are starting to build on their platform.
Sui blockchain, developed by Mysten Labs, is another source of innovation for blockchain scalability that comes from the novel transaction-batching method, which allows for the parallelization of blockchain transactions based on their purpose. Early testnet returns suggest that the network will scale to support 120k transactions per second, which is necessary to support blockchain gaming in the future. However, as it is a new technology, it remains to be seen if it will actually serve this use case.
Challenges around technical barriers to entry
One of the core principles of blockchain technology is accessibility, and web3 gaming should not be an exception. However, many games require expensive consoles or powerful gaming PCs that many people cannot afford. In order to create inclusive, decentralized gaming communities that everyone can benefit from, it is important to make web3 gaming as accessible as possible.
A major focus has been placed on mobile gaming with roughly 86.4% of the world's population owning a smartphone. This makes mobile applications a great avenue for reaching a wider audience. However, the development of decentralized mobile applications is facing significant challenges. These include the restrictions imposed by the iOS app store, which requires developers to give up 30% of their revenue, as well as the limited availability of effective software development kits (SDKs) for mobile development compared to those available for web development.
A web3 phone designed specifically for decentralized technology could eliminate technical barriers to entry by providing built-in support for web3 browsers, wallets, and dApps, making it easier to access the web3 ecosystem. It could also have powerful hardware and built-in security features, making web3 gaming more accessible and secure. Furthermore, such a phone could have built-in security features to safeguard users' assets, a major concern in web3 gaming.
Among the ones developing a solution to this problem are Solana Labs, with its SAGA phone, and EthereumOS.
Challenges surrounding regulatory uncertainty
Regulatory uncertainty remains a significant challenge for web3 gaming developers. Without clear guidelines, developers may be hesitant to invest time and resources into building web3 games, as they may be unsure of whether their efforts will be met with legal or financial repercussions.
Additionally, it can be difficult for players and investors to trust the web3 gaming industry and know that their assets and investments are protected.
Possible solutions
The key to a successful model is rewarding early adopters who support development through buying in-game tokens, while maintaining competitiveness for new users who want to enjoy the game without a major handicap. A combination of whitelists for long-time players for new item offerings, increased drop rates of items for people who hold and stake tokens, and scaling item frequency to the number of active players are all general ideas that could be used to approach this.
Opportunity for new streamers
The popularity of games relies on the support of popular streamers, who typically play a subset of popular games that people want to watch. To attract more players to web3 games, it's crucial to partner with well-known streamers and introduce their subscribers to this new category of games. With the help of blockchain technology, there’s a more equitable way of rewarding content creators for their contributions to the success of web3 games.
Long-term view of web3 gaming
The benefits of decentralized models, such as true ownership of digital assets and fairness in gameplay, are becoming more accessible, and as technology continues to scale to support the blockspace demanded by games, it is very likely that more people will transition to web3 gaming.
Over three billion people play video games, and the market is set to be worth over $250 billion by 2025. As the gaming industry continues to grow, we will see that web3 gaming continues to occupy a greater percentage of market share every year.
Despite the recent downturn, the metaverse token market capitalization is over $10 billion, and with many games set to release in 2023 and beyond, the industry is poised for growth.
Conclusion
While there are several roadblocks that are currently inhibiting the path to mass adoption of web3 gaming, the potential benefits justify the funding and the development it will take to solve them.
The use of blockchains in the gaming industry ensures that all actions taken in the game, as well as its source code, are transparent and verifiable. Web3 technology can enable true digital ownership of assets, providing real value to in-game items and assets. It also has the potential to generate innovative revenue models for developers, users, and early adopters.
The next decade will witness industry disruption through technological advancements within blockchain, and the gaming industry will be no exception to this rule.