Evolution of Web 3 Games: Reflecting on 2022 and Predictions for 2023
Introduction
I’ve been in the NFT and web 3 gaming space for 4 years now. First as a participant, then as a builder. In this time the space has changed a lot - with major events happening every month.
It’s true what they say - a year in crypto feels like 7 years in real life. The pace of development and innovation is high, and emotional rollercoasters are everywhere as the markets flip from euphoric to depressed.
The year is coming to an end, and I thought I would write-up my key learnings and takeaways for 2022, as well as some predictions for 2023.
Web3 Industry in 2022
Crypto Industry
Broad macro conditions have been poor, with slow GDP growth, widespread inflation, geopolitical instability and global energy / supply chain disruptions
Crypto markets are down bad. Crypto has taken a massive tumble, and BTC is 30% the price it was in Jan 2022.
2022 saw MAJOR hacks and insolvencies including:
Feb: Wormhole (blockchain bridge) is hacked for $325m
March: Ronin (sidechain) is hacked for $620m via phishing of employee
April: Beanstalk (algorithmic stablecoin protocol) hacked for $180m
May: UST depegs and Terra collapses, wiping an alleged $60-$200m of contagion value from the market
July: 3AC collapses (previously managed $10 billion), resulting in collapse of Celsius, Voyager and BlockFi
August: Nomad Bridge hacked for $190m
Nov: FTX goes insolvent and lose a total of $8 billion (!) in customer funds
So many “black swan” events happening in a short period of time are creating greater distrust for centralised entities and broader support for regulation
However, despite all of the above, the underlying fundamentals for 2022 remain strong:
An estimated 4.2% of the world now own cryptocurrencies
Ethereum merged successfully, meaning it transformed into an energy efficient “Proof of stake” blockchain
Number of builders in web3 are 20-100x the number of builders during the last bear market in 2018
Gaming Industry
Overall growth in gaming is massive, and revenue is forecasted to grow from $230bn to $320bn in the next 4 years (source: PWC)
2022 was a year of consolidation - the video game industry “ate itself” and many major studios were acquired, including:
Microsoft bought Activision Blizzard for $69bn
Take Two acquired Zynga for $12.7bn
Sony acquired Bungie (Halo, Destiny) for $3.6bn
Embracer bought Gearbox (Borderlands) for $1.3bn
Netflix acquires 6 studios as part of its gaming push
Roblox, Fortnite and Minecraft continue to dominate as the most popular games each with over 150m players, with Gen Z spending increasing amounts of time in the ‘metaverse’ and as they grow up with digital assets
Funding of web3 games continued to be high, with $4bn of capital deployed to blockchain gaming industry in 2022. The expectation is that games take 2-4 years to come online, so many of these games will come out in a few years
Blockchain solutions have done a major push into web3 gaming, led by Immutable X, Polygon and Solana.
All of them are in a race to aggregate quality content and achieve the necessary network effects to win
So far they have been successful in onboarding games which have received billions in funding, but a large number of highly-funded games still have not decided on their blockchain yet (source: Delphi)
Esports organisations have all taken jabs at web3, with the name of the game being experimentation:
Every major team has some sort of sponsorship deal (i.e. Fnatic & Crypto.com for $15m)
Many teams are launching their own NFTs (e.g. 100T gave out 300k for free)
Teams partnering with web3 games themselves (e.g. Guild of Guardians partners with 8 of the worlds largest esport teams)
General hatred towards “NFTs” by parts of the gaming industry continued throughout the year, particularly following the downfall of “play-to-earn” games and fall of prices leading to “I told you this was a scam” commentary
However, branding of NFTs as “Digital Collectibles” appears to show signs of life, spearheaded by Reddit which has sold over 2.3m NFT avatars under this branding
Industry Summary
In aggregate it has been a crazy year in the market. Markets are down, sentiment is low, and business models are unproven. Despite all of this, I believe the fundamentals remain strong. These include the rising adoption of crypto, massive investments into web3 gaming, and the rising number of teams building in this space.
The last bear market had nothing underpinning it. It was frighteningly silent. This time, we have the world’s biggest brands, brains and businesses working hard to onboard the world to digital ownership.
Blockchain should be used to create value. The question is how and when?
Why Web3 in Games?
A year in review isn’t complete without revisiting a critical question - why web3 in games? I wrote this article at the start of the year to share some thoughts on this topic and what it really means to transition from web2 to web3.
The debate & discussion around “why blockchain” has only increased since I first posted this, and many others in the space have formed their own take.
A quick recap:
2021
2021 was about the ‘play-to-earn’ mentality, where the narrative of web3 games was about financial freedom, literacy, and rewarding players for their time playing.
This kind of made sense. The “problem” blockchain was solving was that players spent $200bn each year on digital items that they didn’t actually own. Giving them ownership was equal to giving them value. Millions of people are willing to play a game and onboard into crypto if there is an opportunity to earn.
Where this idea falls down is that the business model is flawed:
Not everyone can earn - money in must equal money out
Opportunities to earn will always be exploited to the maximum
Tradability (pay to progress) can make a game less fun if not done right
2022
This quickly shifted to ‘fun-first’ in 2022, driven by a number of factors:
Hard crash of unsustainable game economies, which trained the industry to recognise “ponzi” economy designs
Inflow of talented developers from the web2 space, bringing ‘fun-first’ values
Reduction of prices & fundraising forced teams to revisit the fundamentals
Despite these, I personally feel like there has been an overcorrection towards “fun” and blockchain is being sidelined too much. The industry is moving from web3 games to web2.1 games. Some of the purpose of blockchain is being lost.
2023
Today there are two main approaches to building web3 games:
Fun-first, plus ownership: Building a great web2 game comes first. Existing players of web2 games are the target audience. Make blockchain invisible, and give players ownership only where it doesn’t interfere with the game.
Web3 makes the game more fun: Use blockchain to uniquely make the game better. Embrace web3 philosophies and innovation, such as on-chain data and decentralisation.
There isn’t any right answer, but this is a topic that is getting more and more debate.
Why blockchain in games?
I wrote and shared my personal take recently on Twitter, and also in this post
In summary, I believe that we should be using blockchain to make games better for players. To do this, we need to leverage what is unique about the blockchain vs a centralised database - which is that it’s decentralised and secure.
Decentralisation and security unlocks new business models, such as those which empower the community or align the incentives between players, creators, influencers, and streamers, etc.
In addition, blockchain means trading needs to be part of the games design. Trading should enhance the core gameplay and/or metagame. This might mean the player personas who play web3 games aren’t identical to those today. Similar to how there was no “free-to-play, power buying whale” before mobile F2P games came out. It also means that game mechanics or metagames need to be adjusted so that trading enhances the experience (rather than being added as a novelty).
At the end of the day, blockchain is costly to use. This means we need to use it to create value and make games better, rather than solving a problem that players don’t actually care about.
Perspectives on 2022
Mental models are evolving
People within the web3 space are getting smarter. The level of thinking is increasing, and podcasts, consultants and blogs are at ground zero right now for innovation. In particular, economies and sustainability were the hot topics of 2022 .
Economies & money in games aren’t solved
Despite the above, web3 economies are not solved. There have not been enough games to test out the theories. Some of the big unanswered questions include:
How can games make sure buying doesn’t ruin the fun?
Is player progression and economic sustainability at odds with each other, because progression implies they will have higher economic outputs?
How can systems design to counter bots?
What levers are useful in practice (not just on paper) in managing an economy that may be experimental or unbalanced?
How can games identify “value adders” to assign rewards to them?
How can systems be created to avoid death spirals (e.g. if players leave then prices drop, and more players leave)? How can this system also be fun?
This is an area I may explore more in the future, for now here are some of my thoughts on:
Poor understanding of audience
In general there has been poor understanding of users in web3 gaming.
Existing knowledge on player personas, demographics, spend, retention, engagement, etc are all untested in web3. In addition, there are ‘new’ persona groups such as investors, earners and community members which aren’t very well researched or understood.
There are also a large number of companies building “platforms” or “tools” for web3 game developers. It’s unlikely they have a good understanding of their audience, as this audience (web3 game developers) barely exists yet.
Beginning of the Alphas
Many games came to the market in 2022 - releasing demos and closed alphas. These games include Guild of Guardians, Illuvium, Bigtime, Embersword and so on.
However, most games are still in development, set to launch in 2023 or beyond. This is to be expected given that it takes years to build a good game, and there is a time delay between raising capital, hiring talent and launching a game.
Death of Guilds
2022 saw massive changes in the business models of almost every guild. All of them have moved on from the original business model as ‘play-to-earn’ extractors towards ecosystem builders. Guilds are now changing to add value to the ecosystem instead of extracting value, something that I wrote about 9 months ago.
Slow adoption by platforms
This year we began to see the incumbents make moves in web3. Epic Games have allowed multiple games onto their store, and seem to be taking a liberal and experimental approach. Apple has officially allowed NFTs to be used in the App Store, although only if they can take their 30% fee.
Adoption has been positive but is slow, with no signs of any meaningful disruption to these publishing giants.
Mainstream sentiment wanes
The negative sentiment towards NFTs and crypto has somewhat maintained flat throughout the year. There haven’t been any breakthroughs at all this year. The most important constituent are trusted brands and voices (e.g. influencers, AAA gaming studios, etc), and all of them have been hesitate to push education and awareness of blockchain.
More broadly, major hacks, scams and the collapse of FTX have probably made crypto even more intimidating that it was previously, and it will take some time to build trust again with a large audience.
No metaverse
It’s too early for the metaverse. It’s too early for interoperability. This year we saw very little progress on these topics, with key problems including technical integrations and incentive alignment not yet solved.
Expertise is accruing
Major efforts have been made by all web3 studios to hire top talent from the gaming industry. This year we’ve seen many gaming veterans enter the space, bringing with them years of insights. This has added a much needed balance to the space, and I believe the industry now has a pretty decent balance of web 3 and web2 perspectives and voices.
Predictions for 2023
Industry
The public sentiment towards NFTs and web3 games will slowly shift, spearheaded by mainstream ‘figureheads’. We will see all games upgrade their branding - using “digital collectibles” instead of NFTs, avoiding ‘X-to-Y- terminology such as play to own, and emphasising gameplay over ownership.
Web3 community growth becomes the next superpower. We will see a shift away from thought leadership on “how to build sustainable economies” (too oversaturated) towards specifics about “how to grow communities”. Those who have the best understanding of users and can leverage on-chain / off-chain data will have a huge advantage. Web3 UA (using tokens and NFTs) will become a highly sought after skillset.
Teams building platforms and tools won’t make significant traction in 2022. Web3 games are currently focused on content innovation and solving problems that they might not even know exist yet. The industry is not yet ready for a tools first approach, as 99% of these won’t solve a critical problem.
Asia will rapidly innovate on web3 gaming in 2023, mostly ‘silent’ to the west but with strong liveops and GTM on each of their launches.
Fundraising will continue to take a backseat. Raising money without a product or signs of traction will be hard in 2023 unless you are an established founder.
Game development
Many major games will launch in 2023. At least one of these will do reasonably well, but we won’t see industry wide success yet. In addition, games which do well will attract more builders and content to their blockchain of choice, resulting in network effects for the next cycles of games (e.g. whether that’s IMX, Polygon, or something else)
Developers will realise that unit economies of web3 games are less profitable than their web2 counterparts. Development costs are higher. Revenue is lower because web3 is about sharing value and because secondary trading cannibalises primary sales. The developer mindset will shift towards using tokens for rapid growth & innovation, rather than just NFTs as a business model.
There will continue to be a shift towards custodial wallets and invisible crypto on-ramps as a solution to onboarding ‘mainstream gamers’. None of these will be frictionless in 2022, but we will begin to see promising use cases which replicate the Reddit avatars example but for games.
Reward distribution in web3 games will begin to shift to becoming retroactive rather than proactive. This will become necessary so developers can allocate value proportionally to those who add the most value (rather than defining reward rules upfront and letting the rules get exploited).
Innovation
Interoperability won’t be a thing yet. Neither will the metaverse. We may begin to see some early experiments, but these will be led by a single studio rather than true interoperability.
Decentralised identies will see its first experimentation. POAPs and soulbound tokens used to denote community membership, achievement or access to games.
DAOs won’t be able to solve coordination problems in 2023. But when they do, it will take the form of gaming. Contribution will become gamified, participation will be celebrated and rewarded (both financially and socially), and it will become easy to onboard via a ‘tutorial’. Curation will still be centralised, as major IPs only hold value when their brand is consistent.
We will see the first example of a chaotic and unpredictable game economy. A game where it’s not possible to figure out ROI (even for the developer!) and where prices have no correlation with fun. Unsustainable yet sustainable.
Onchain games will continue to evolve as a niche but innovative area within web3 gaming. Scalable L2s will power this shift, while the debate of “why blockchain” will cause others to push more game mechanics on chain as an innovation. These on chain games will target a brand new crypto persona and likely be risk-based, although for 2022 won’t be designed with sufficient ‘gamification’ to be sustainable.
Policy & regulation
We will see in-app player-to-player trading in a blockchain game. This will be via Apple, and they will charge a 30% fee. Players will be able to never leave the app to trade NFTs. Some players will bypass this via the website, but Apple will be OK with it.
Regulators continue to crackdown on tokens as a security, but will be pre-occupied by DeFi tokens rather than making an example of games. Games will increasingly take pre-emptive action to abide by the rules, and we will see US users in particular being excluded from various opportunities (as already trending by the likes of RTFKT, Yugalabs and DyDx)
All in all, my prediction is that the thesis of 2023 will be about value creation. Blockchain will be used to create value in games, and we will see developers shifting towards this mentality and early games being released which demonstrate it’s potential. That’s how we go from a $300m industry to a $3bn industry.
PS: My predictions last year were at least 50% wrong. Looking back on them, I was probably too bullish. Will be fun to revisit this one in a year!
Conclusion
Thank you for getting this far!
It’s been a crazy 2022 - I’ve learned a lot and had loads of fun. It’s hard to believe it’s been 5 years since I first discovered blockchain and NFTs, and that I’ve written 15 posts on web3 gaming just this year.
The end of the year is a time of reflection, so I thought I would also share why I write this Substack. It’s a simple passion project. I do it to share ideas with the hope that the entire web3 gaming industry can grow, innovate and move forward. I’m only really interested in writing unique content which is not only strategic but also pragmatic - taking in a wide range of factors that goes into web3 games.
I feel there are still too many ‘theory crafters’ and not enough ‘doers’ creating content - I hope this tips the scale a little bit.
If you want to help motivate me to write more please just give this a like and subscribe, and share with others who would be interested!
All the best for 2023! 🎅🎊🥳🎉
Disclaimer: These are only my own opinions and ideas.
About me: Lifelong gamer and crypto native degen. Background in startups and consulting. Founded and building Guild of Guardians - a mobile, squad based RPG by Immutable with ~1 million players on the waitlist. I’m passionate about pushing the entire web3 gaming industry forward by sharing strategic yet practical perspectives. Find me on Twitter.
Great work
Very interesting overview and thoughts about the incoming year. Thanks!