Why web3 gaming will fail

...and why that might be a good thing

There’s been an uptick in the positive sentiment surrounding web3 gaming and how it will be the category that brings web3 technologies to the masses. Mammoth essays, like from Colleen Sullivan and Messari, Forbes and Game7/Naavik have renewed serious interest in the topic from a more in depth academic perspective rather than the typical trading narrative threads on X which acclaim anything merely related to the idea of web3 gaming in order to pump bags. 

Why should you listen to me? I’ve been involved in crypto for a while now and specifically in web3 gaming for roughly 3 years, so I deeply understand the space. I also work at Immutable, a leading web3 gaming company, where I’ve led many strategic conversations and penned the IMX whitepaper(s). I’ve even had conversations with AAA, world class game studios about this very topic, so I know (roughly) how they feel about the space. However, a disclaimer is in order, the views presented here are solely my own compiled from hours of discussion and research, they don’t represent those of any other specific organisation or individual.

Admittedly the title of this article is a little click-baity and to be clear I’m a long term believer in web3 gaming, but I’m writing this as a way to challenge the current sentiment and to keep us all intellectually honest. My hope is that we can build a future that has substance and longevity. I’m also not a pessimist, so I’m writing this as a way to surface the problems and opportunities as a way for us to collectively address them. I aim to keep this stripped back, high level and short as ultimately I think the main premise and value proposition of web3 gaming is straightforward - better engagement and monetisation. 

What is a web3 game?

It’s always important to start with definitions for clarity. So, what is a web3 game? Essentially I see it as a game that has tokenised a meaningful amount of assets from that game world, AND that these assets are publicly available and can be accessed non-custodially. 

The important part here is that the users have control and access of their funds, otherwise it’s effectively creating an overly technically complicated web2 game, which just means a game that uses a centralised database as their source of truth.

By tokenise, I mean to mint their assets, whether it be skins, game currencies, commodities, on a publicly available blockchain, like Ethereum. The specifics of whether they’re ERC-20s, 721s or 1155s don’t really matter, just that they exist on chain and are actually used in the game.

Ultimately, I think web3 gaming is just like all new tech innovations - a how not a why. As in it’s not the reason or goal of doing something, like retaining users, it’s just the tool that enables the goal. Games are games, and like all products should focus on delivering the best experience possible for their users and to keep those users buying from them. From what I’ve seen, what web3 brings is just a new set of rails to deliver the same core game loops and experiences, but with the enhancing of certain psychological traits - more on this in a minute.

Why build a web3 game?

It all comes down to showing game designers they can make more money whilst providing the same or better game experience. I believe 3 core reasons to explore building a web3 game, which have been common themes in my research:

Better player retention and ARPU

An asset with an external, and publicly recognised market value can enhance game hooks and loops. This allows game designers to play into and augment psychological tendencies such as loss aversion and variable reward hooks to keep players invested (and paying) for longer, triggering dopamine responses more aggressively. 

This works well for games that are effectively participatory economies, like EVE, but have less proven ground in conventional game experiences. What helps is that these games have social aspects that let users show off their progress and status to others, which can either be through leaderboards, social features (like guilds) or just looking at someone’s gear.

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Better user acquisition

Through mechanisms trends such as airdrops and gamified referrals just generally, the viral aspects of a game can be enhanced. This is exacerbated further when dealing with status item speculation in games - come for the gambling, stay for the game. Think about how quickly the knowledge of BAYC NFTs spread once people speculated on their assets. If done well it can be free marketing. 

Increased game longevity thanks to modding

I actually wrote a thread on this some time ago, in short game developers with public assets on chain are now incentivised to allow and to keep modding communities healthy as they can collect perpetual royalties from their assets being reused. This is counter to what we see in most freemium game models. The more utility for their game the better it is for the developers. This does shift the developers role to also focus on community adoption as a core part of the gamers experience.

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Here are 3 other potential benefits of web3 gaming that I’ve explored but overall seem less compelling in the long run:

Enabling secondary asset sales (money transmission)

Secondary sales in games haven’t been a common experience as most secondary sale mechanisms sit in a grey area, potentially triggering money transmission laws. However, some game developers are interested in seeing what impacts they can have on their games and economies. For example, Xsolla has a powerful sales platform that seems to do everything but peer to peer sales. Tokenising assets can enable them to be freely traded whilst potentially still giving the core developers a share of any trading fees made. However this will mostly be a long tail and second order impact to a great game as most developers make most of their money from primary asset sales, and there are ways to circumvent official marketplaces where developers take a cut. Solutions can exist to limit the transfer of the assets unless approved by a central party but this may reduce the perceived value of the assets.

Better player targeting

Given all on chain interactions are public, there are talks about using this information to better track and attribute user behaviours. Given Apple’s changes to app tracking, this may be a compelling use case but this is still yet to be proven.

Circumvent platform fees

Open economies may enable developers to cut out the 30% tax levied by app store and platform owners, like Apple and Steam, but letting people purchase on chain directly from their wallets, like the MetaMask or Rainbow wallet apps may get around this. However, unless there’s a 10x better marketplace or distribution channel that comes along very soon, most serious developers will need to play nice with the channel owners, as we’ve always historically seen.

Simplifies parts of the build

Building on chain can simplify the need of running and maintaining your own database and aspects of the game state. Depending where you build it is effectively guaranteed to not go down. This however is not that important of a problem and platforms like AWS and Playfab make this pretty straightforward and cheap(er). 

Which games work best?

It seems that there’s really only three types of games that are suited to web3, which I also refer to as being ‘asset centric’, where the core gameplay requires owning or using the assets for some type of signalling purpose. These include showing others you’re a better player, more invested or have more resources - the typical things we see in the real world.

Participatory economies

• Typically includes MMORPGS and some FPS games. They have emergent properties as people can freely interact and use the assets for purposes not originally intended. They also create other secondary markets like currency and insurance markets. There is also a large trading component in these games as users level up and upgrade gear.

• Web2 Examples: EVE Online and World of Warcraft

• Web3 Examples: Space Nation and Illuvium

Trading card games

• These are asset centric games that have a real dependency on the assets to play the game. Without the cards you literally cannot participate, so from day 0 there is genuine demand for the assets in the game.

• Web2 Examples: Magic the Gathering Online and Hearthstone

• Web3 Examples: Parallel and Gods Unchained

GameFi

• These are ‘games’ that are really just DeFi protocols, or simple wagering games with a nice UI and pretty pictures. My bet is that we’ll see less of these as they rapidly drop out of fashion once there are more sophisticated game experiences live.

• These games are typically full of bots and add to the negative sentiment of the tech/ecosystem

• Example: Axie and Pixels

So why will it fail?

It boils down to this: web2 game developers don’t yet see the value proposition of what web3 technologies can bring. For them things are still going great. They’re making lots of money and gamers are still playing their games. From their perspective it does makes sense - why take on a large amount of risk (especially for the public companies) for an unknown reward, when you can arguably solve most of those problems with web2 solutions. Whilst it doesn't solve a meaningful problem for them right now web3 games open up opportunities for different monetiseation pathways and to allow certain types of games (participatory economies) to flourish more than they previously could.

I believe they’d rather see other smaller games prove this out before making the jump. If they did lean in aggressively today, they’d probably compromise on some part of the game experience that moves it more towards being a web2-like experience with a hefty walled garden - which may still work but isn’t exactly the type of web3 game I’ve defined here or that you probably have in your mind’s eye. This is a good thing though because it lets innovators today experiment with crazy ideas for us to learn from.

Games like all things in nature follow a power law distribution, and they are also very hard to build. Making a game is often described as making a movie but 10x harder. Only a handful of games end up being successful in the long run, reestablishing the leverage these successful developers have over their users as there are sparse alternatives, exacerbated when all your friends are still playing the game you’re trying to leave. The difficulty of building web3 games by itself won’t mean it fails but will make it harder for the passionate innovators and early adopters to take their game to a point where there’s a high likelihood of success. Though, if we’re just trying to prove it works in the short term this might be all we need.

Here’s a breakdown of the 10 most popular games by active users (24 hour) on Steam to give you an idea:

Here’s that same data plotted on a graph to show you the power law distribution. It’s not technically a Pareto distribution but it’s not far off.

Why is this a good thing, and what next?

This is all a classic crossing the chasm-type situation, and I believe web3 is still in its experimental phase and am optimistic. When looking at the adoption curve it’s hard to see where we are actually placed as the signals are mixed. We have games like Illuvium and Shrapnel that are aiming to do it ‘properly’ whilst retaining that early web3 energy, but we also have Ubisoft and Roblox signalling their interest but on more ambiguous time horizons, so it’s hard to gauge. Even then, it’s probably going to be their innovation labs working on these games which won’t really be on the right side of the chasm. If I were to place it, I’d say we’re still half way across the early adopters segment.

We also have a clear marketing problem where companies and even players have a negative association with web3 technology and ideas, thanks SBF and co. Once the bulk of the experimentation is done, we should transition away from ‘web3 gaming’ as a term to just gaming, again it’s just a how not a why.

If you’re a builder reading this, don’t stop experimenting, we’re on the precipice of making it work, really. Be aware of the pitfalls and use this as an opportunity to address them. For everyone else, don’t be impatient and call it all a failure if we don’t see a mainstream web3 game this year that takes off. Also, maybe prepare for a future where web3 gaming may mean something different to what it does today.