The changing state of Crypto gaming

Since we first wrote about Axie Infinity last year as it was breaking into the mainstream, the world of Crypto gaming has gone through a whirlwind ride, experiencing multiple highs and lows (most recently the unfortunate hack of Axie’s Ronin bridge), in addition to the usual volatility in the crypto world.

Through this time, the “textbook” model of Play To Earn pioneered by Axie Infinity has also evolved – no longer is it called “play to earn”, but rather “play AND earn”, perhaps a nod to the slightly unbalanced economics that while for a time lent itself to huge user adoption, ultimately proved unsustainable.

The Metaverse, too, had its bubble moment, not just in the crypto space: Roblox and Facebook, two of the big listed, “traditional” metaverse plays, also experienced a similar tale of rise and fall. We wouldn’t be so quick to write them off, although one has to admit that they too are facing rather serious challenges to their businesses, of a very different nature.

So is Crypto gaming/NFTs dead in the water, another fad to be brushed off by the cynics in claiming “here’s another one of those crypto ponzis”? Unfortunately, this is likely to be true for a large proportion (we’re thinking 90%+) of projects out there, especially those which are copies of existing flagship projects built on the hype around their original subjects.

But the space continues to evolve: over time, we expect the wild west of unsustainably high yields for doing largely pointless actions to fade away, while a small handful of projects with well thought out models and a bit of secret sauce break away and transform into runaway successes.

Is there a way to work out which will succeed as opposed to those which are NGMI? Perhaps. But to map out the route to success, we first need to look at the origins of failure.

The challenges of Play To Earn

Logically, as the cynics rightly point out, the mechanism of Play to Earn is fallacious simply because putting low-productivity time/effort in to generate an outcome (token) which is easy to attain (because of low skill requirements) is a case of garbage in, garbage out. If the output doesn’t have a sufficiently deep sinking pool that can absorb the supply created by legions of low-skilled players (not to mention bots – if the game is so simple it requires little to no skill, then a bot can do it), that token that is “earned” is destined to have an asymptotic price of zero.

While correct in its observations, using such a view to condemn all play-to-earn economies misses an important point. The point of failure isn’t in the fact that a low-productivity action is producing an easy to obtain token. Rather, it is that this token which is obtained doesn’t have an established use case set within a broader economic set up.

Let’s use Axie Infinity itself as an example here, although to be clear, this is not meant to discount what the team at Sky Mavis have achieved for Axie. We will return to this point after the example.

In short, the problem with Axie Infinity’s first iteration was this: Players needed to own minimally 3 Axies to play. When they had these Axies, there was a game mode that was essentially PvE (“Player vs Environment” aka single player mode) meant to get new players accustomed to the game – a “tutorial” of sorts, alongside actual PvP (“Player vs Player”) battles which earned much greater rewards. Naturally, while boring, given the incentives in place, it was much more lucrative on a skills-adjusted basis for players (and bots) to play in PvE mode. The ensuing rush to capitalise on the reward tokens from gameplay (SLP) created, for a short time, a positive feedback loop within the game.

How? SLP was the token used to breed new Axies. New players required new axies to play. So as more new players wanted in, new Axies needed to be bred and supplied, hence driving up the demand for SLP and its price. As long as the rate of production of SLP < the rate of consumption of SLP, the price went up, drawing in new players, driving new demand, driving up the price… You get the gist.

This all went well until one day the equilibrium flipped: rate of production of SLP > rate of consumption of SLP, leading to the prices going down, reducing the profitability of players. Of course, the market reaction to such a change in price dynamic within a volatile market like crypto is to “HODL”, thereby delaying any correction in the player growth dynamics. Furthermore, insofar as the marginal dollar invested in getting a new team of Axies was profitable, the supply of players continued to grow even if the profitability of each incremental team was falling. It was still positive, so it kept going.

Managing these imbalances is a tricky task, and for Sky Mavis, it also happened that Axie Infinity took off in a way that was much more exponential, much sooner than expected. In some way, they were a victim of their own success: months of time and effort spent on stabilising servers and keeping the inflow of new users happy (alongside the euphoria of their token price going from $3.50 to $170 in a matter of weeks) meant much less attention paid to executing on their original plan.

What was the original plan? Land gameplay, a collection of other resource tokens which could be gained from other in-game tasks, a broader set of gaming loops beyond simply breeding – in short, they had a plan for a complete closed-loop ecosystem where there were natural automatic balancers for resource production/consumption, but building those bits of the ecosystem got put on the back burner in the face of strong new user demand.

Can they get back on track with that now? Probably, notwithstanding their recent unfortunate hack.

But here was the problem: for the hundreds of imitators around, they looked at Axie’s initial success and thought, “let’s copy it”. What they missed was the rest of the plan: to build a complete, closed loop economic system that is balanced internally and externally.

At the end of the day, Axie Infinity with its learnings, experiences (good and bad alike) and capital stash are perhaps still the best placed of the lot to succeed. The same unfortunately can’t be said for the majority of the others.

A replay of DeFi Food Token mania

As always, the biggest positive AND the biggest negative in crypto is its open-sourced nature. For those who remember DeFi summer of 2020, what has happened in the crypto gaming space should not come as a surprise.

DeFi summer saw first the launch of Uniswap, then came the vampire attack on liquidity from Sushiswap, and then in the spirit of the food theme, came the barrage of derivative projects: burgers, pancakes, yam, pickle etc. Some were innovative in themselves, others were mere copycats with forked code. For anyone who enjoys a bit of history, looking at the current Sushiswap contract code on Etherscan still shows that it says “Uniswap v2” on the contract name.

Of course, beyond the initial copycat behaviour, some derivatives have outshone their predecessors. Sushiswap, for one, has established itself as one of the most popular DEXes in the crypto world, with a presence across multiple chains with additional functions like their IDO platform. Sure, it was a copy of Uniswap in the beginning, but it has since evolved into something very different from its origins.

Sushi, however, is probably the exception. The multitude of copycat AMMs aiming to replicate the initial success of DeFi summer for themselves have largely disappeared into oblivion. The reason, in our view, is that these copycats copied the “breakout” version of the product, the version that captured the market’s imagination. Unfortunately, that version is typically NOT the version that is long-term sustainable.

The same seems to be happening in the crypto gaming space now: models are still being tested, and many are yet to be proven sustainable. But in the typical copycat frenzy that accompanies every new trend in crypto, the copycats raise capital fast to build clones of pioneers which are, at best, incomplete first versions of what could become a sustainable success (but isn’t yet).

The result: an obsession with growing user numbers through aggressive incentives leads to the inevitable arrival and subsequent departure of mercenary capital, raiding the incentive/grant treasuries for outsized rewards over a short time, and promptly vacating the space, leaving a trail of ruin behind.

The right approach

If you’re reading this expecting us to point to a specific approach and say “that’s the right one”, we have bad news: the reality is it’s too early to tell for sure. However, as always, we do have some ideas.

The best model that underpins a sustainable economic system is perhaps real life. Economic loops in real life are cyclical and multi-faceted. Remember the old Keynesian expression where GDP = Consumption + Government spending + Investments + (Exports – Imports)? And the balancing equations where withdrawals from the economy (Savings + Tax + Imports) = injections (Consumption + Investment + Government spending + Exports)? All of these models, dated as they may seem, speak to an underlying truth about sustainable economic systems: there must be consumption to match production, money goes in, and money goes out, and the flow of capital must be productive.

If a gaming/metaverse environment can be constructed in a way that there are not only multiple gaming loops which players can undertake to be productive in-game, but also have gaming loops that dynamically balance against each other (i.e. when one route becomes less lucrative, players are encouraged to switch strategy), then it can have a chance to thrive.

Building such an environment, however, is a daunting task in itself: it requires players to undertake rather complex logic in planning, strategizing and to some extent “playing” through a narrative or storyline.

And that’s where we think much of the crypto gaming world has missed out: a rich, credible story which not only binds the community together in collective storytelling and participating, but also rationalises a lot of the ongoing tweaks and changes that need to be made as a game evolves.

At the end of the day, if a gaming metaverse is to be a reflection of real life, then it needs to share in the realism and collective social character of reality.

Just think about the best games you’ve ever played, and things start becoming clear: whether it’s sci-fi, fantasy or military strategy, the games that players fall in love with are those with a great story, clear and balanced in-game economics (simple or otherwise) and a hint of realism.

Just enough for you to believe that the world you’re playing in could be real.

Eugene Lim