Crypto Games have been heralded as the next trillion-dollar space in crypto for a while now. The words Play-to-earn (P2E) and Play and earn are being whispered, from ear to ear, promising to revolutionize not only gaming but also the very nature of how people will earn a living.
While there’s been a lot of buzz and hype echoing through the chambers of CT, it’s certainly true that crypto games can enable a trove of new mechanics and improvements to gaming: Open, trustless economies, aligned incentives, alternatives to existing extractive monetization, and more.
Some of the best talent from traditional big names like Blizzard and Ubisoft, ambitious builders & operators, and a lot of money have been coming into the space at a rapid pace to build the breakthrough crypto game. And, in the coming months & years, we’re likely to see a crypto game that does disrupt gaming.
But, we have a long way to go before we get there. In its current state, crypto gaming has lots of mountains to scale and challenges to overcome. Building a sustainable in-game economy with sound tokenomics at scale is incredibly difficult. Building a fun game is incredibly difficult. As with any stage in its infancy, we have a lot of things to figure out before crypto games can make waves.
In this article, I’ll cover
The mismatched equation between game makers & gamers
The benefits and challenges with Tokens and in-game economies
Some thoughts on token design
Future outlook and my thesis on the redefined freemium model
Let’s dive in.
The Skewed dev-gamer equation
Video games and the gaming industry have exploded over the past decades. We went from games with text only in the 1960s to playing Pac-Man in the Arcade to Steam, AAA, eSports & streamers. Now, The space has grown even larger than Hollywood, sitting at around $200B and still growing fast, at around 13%.
But while all this happened, large publishers and game studios raised their walled gardens. Games became more extractive as publishers realized they could squeeze more out of their players.
In the beginning, games would only charge a one-time price for a game. Then came an extra cost for in-game items → DLCs and new upgrades → Microtransactions, Loot boxes & Battle Passes → to even charging players to play multiplayer. It got so bad that Diablo Immortal, which came out a few months ago, costs over $500,000 to max out.
Costs for game studios have certainly gone up over the years — costs to build the game, the hours spent on development, game expectations & the number of people involved have all increased, which justify some of the increasing costs of the games.
But, what the players receive in exchange has stayed the same. Arguably the most important participant, gamers, in determining the growth & success of a game, has been left out of the equation. One of the key problems underlying traditional games is that gamers aren’t fully compensated for all the resources they spend (time, contributions, and money) on a game. Importantly, they don’t get anything in return for the time they invest into the game, despite being a critical component of a game’s success. On the contrary, due to the nature of the walled gardens, they’ve been getting less and less.
Through the fundamental problem of game studio monopolies, a lot of problems arise:
Extractive monetization methods through microtransactions and at their worst, pay-to-win
Huge barriers against smaller builders. Funds and capital are concentrated in the hands of the bigger players. Raising enough money is a herculean task for indie game makers. On top of this, game distributors like Steam take a 30% cut. Although to be fair, this is also due to the overwhelming amount of games out there. But, the fact remains that we need a better system.
Not all key participants are rewarded for their contributions. Gamers, community members, people who make custom mods, etc don’t get rewarded, even when the game becomes huge.
Community Opinions don’t always matter, especially when $$ is involved.
This is not to say traditional games bad, crypto games good. There’s a lot to appreciate, learn and take from earlier games. But there are a lot of problems, some of which can be fixed through crypto.
Crypto’s Promises
Crypto’s ethos aligns well with the problems I mentioned above. Through the power of the blockchain, crypto games aim to align the mismatched incentives.
Tokens & Game Economies
Game economies are not a new concept to games. First Person Shooters like CSGO and TF2 have robust markets for skins with community-run websites to track prices. Trading and participating in the game economy is integral for games like RuneScape and other MMORPGs.
I spent hours scouring through the auction house for an edge to make some gold and haggling over armor prices when I was 11 in this one game called Arcane legends (Looking back, that’s probably where I got obsessed with these sorts of things).
However, there’s a key difference between open economies and traditional game economies that arises from the skewed balance. Spending money in most games is a one-way street. Once it’s in, you can’t take it out and the game maker sets the exchange rate & item prices (and it’s always extractive).
It’s not that game makers can’t make the in-game economy open without crypto. It’s that they have no reason to and we haven’t seen it happen.
This is where crypto enables a powerful benefit. Through tokens and the blockchain, games are incentivized to set up an open, two-way economy. Players can exchange real money for in-game money at an exchange rate determined by supply and demand. The same is true for items. And importantly, players can withdraw money from the game.
When players are done playing, they can sell their assets and in-game currency for “real” money at the exchange rate, thereby getting back at least some of the initial investment. Through tokens, players can accrue value and monetize the time spent playing the game. This balances out the skewed equation.
Additionally, game makers are incentivized to promote this. Charging a cut on transactions and other in-game activities allows them to generate revenue. This is a far smoother method of generating revenue than the existing extractive methods.
Tokens in Games
A lot of that is far easier said than done. Until now, we haven’t seen a sound, sustainable game economy at scale. And with crypto, there’s always a new token being launched.
Nate Eliason says it best:
“The primary use of a token in a crypto game should be to improve the game economy in some way that is not possible without a token”
For games, it ought to be used to align both sides (game devs & players) and create an open, two-way economy.
This is done in a couple of ways:
Create alternative monetization paths for game makers. Charging a cut on transactions involving the token incentivizes them to promote an open economy and reduce extractive monetization methods like microtransactions.
For gamers, tokens and, subsequently, an open economy, allow them to trade items, and therefore the time spent in-game, for money.
In that sense, tokens are the bridge between real money and the game.
In practice, this is a lot harder to do.
Tokens cut both ways
Implementing a solid token model has been an incredibly challenging task for crypto games so far. One key reason is how tokens are treated in crypto and how being able to trade in-game money for real money changes the user mindset.
Tokens are strongly driven by speculation in crypto. Financialization and being able to earn through game tokens transform the game from being a game to being more of an investment opportunity. The main objective becomes “playing” for profit and extracting max ROI.
This doesn’t always have to be a bad thing for the game. But without a solid token design, this attracts a user base that isn’t there to play the game. Subsequently, as the ROI drops, they leave and the game dies.
Axie is a good example to illustrate this point. The once-reigning king of crypto games has two tokens: SLP (No supply cap) and AXS (Fixed supply). Holding Axies would allow players to generate SLP.
SLP’s sole use was to create more Axies, which would give you even more SLP. Very quickly, inflation spiraled and prices crashed. And since most players were only there to make money, they left right after.
There were a couple of key issues:
Most of the players were there to make money ( the promises of p2e) and left soon after prices tanked.
Axie’s token design relied on growth outpacing inflation. Prices would rise as long as enough new players were joining in to absorb the increasing SLP supply. Once the growth slowed down, SLP began to lose value through its excess inflation.
Token Musings
Figuring out the right token model has been the biggest struggle for games so far. Here are some thoughts on the matter.
No Supply Cap Token Model
Having a single token with no supply cap as the sole token seems like an incredibly hard model to pull off. It would require carefully balanced issuance with consumption. It would require lots of sinks and burn mechanisms that do not detract from gameplay. But inherently, speculation would impact the token price. A reduced ROI would not only decrease the token price but also negatively impact the gameplay itself. And without that element of speculation, growth will prove to be challenging.
This is the model used by some popular traditional games like RuneScape. But going back to the previous section, factoring in the element of financialization that comes with crypto games, it seems like a difficult task for this model to be sustainable in crypto (at least in the short term).
2 Token Model
Another popular choice is to have 2 tokens — One with a fixed supply and one with an uncapped supply. This is what Axie did, SLP had an uncapped supply and AXS had a fixed supply. The uncapped supply token can deal with the in-game economy, while the fixed supply token can act as a store of value of the game, as it grows. This is a pretty good improvement since one token (fixed supply token) is for speculation, while the other is for the in-game economy.
However, this alone is not enough, as we’ve observed with Axie Infinity. Axie’s problem was that the fixed supply token AXS did not have any utility besides governance. There was no reason to hold it besides speculation and once that wasn’t enough, it began to dump.
For this model, having some sort of value-based utility would be important. For example, staking it to receive valuable resources.
Nate Eliason has a great piece on different token models that expands on this a lot more.
Burns & Sinks
Another key problem with Axie was that there weren’t great ways to get rid of the SLP that was being produced at a rapid rate. The Axie model worked as long as growth surpassed inflation. In practice, that’s not a sustainable model.
Traditional games have a lot of ways to remove some of the currency from the ecosystem that are worth exploring.
Utility costs: Taking a small cut every time a player engages in a common activity like going on a quest.
Special event items
Paying for premium items/benefits with the in-game currency. For example, paying for a battle pass, which typically costs real money, with in-game currency.
Mechanisms similar to staking
There are a lot of ways to do this, depending on the game and game’s genre. But finding the balance where it does not detract from the gameplay is critical.
AlienWorlds, the current #1 game by users, illustrates this well. The game caters to multiple playstyles and has different sinks for each. All the sinks together allow for a healthy amount of tokens to exit the system without impacting gameplay.
Friction & Gameplay focused rewards
Actions that reward users with tokens shouldn’t be completely predictable & straightforward. This leads to speculators and farmers focused on extracting maximum yield to repeat the same strategy to earn rewards without really playing the game. Which would also ruin the experience of those playing it.
Instead, devising reward mechanisms that are either random or not easily repeatable would help alleviate the speculator problem. Here are some ideas
A Ranking system, where only the top 10 players would get the rewards.
Lowering rewards for completing the same activity multiple times
Requiring a certain amount of progress before awarding rewards.
Rewards should be contribution focused.
I was just trying out Immortal - A new crypto chess game that uses a ranking system, where only the top players are awarded tokens and items. The more you play, learn and win, the more you get.
Additionally, the open economy model allows anyone to get in and get out without any friction. This is not always a good thing when it comes to speculators and profit seekers. Adding a layer of friction or minimum threshold to start earning rewards would help combat this.
This is something Immortal implements. The game is free to play but to play in the pool with higher rewards, you need to buy an NFT. You can either invest in an Immortal Chess NFT to get access to better prizes or play for free until you earn an NFT to get access to better prizes.
This combined with the ranking system adds a good layer of friction. Even if you buy an NFT, there’s no guarantee that you’ll earn rewards (you’d still need to place high on the leaderboards). So to earn rewards, you’d have to play the game.
Different models for different Genres
An important point to identify is that different game genres have different affinities for in-game economies.
For MMORPGs, in-game economies are commonplace. Even in the traditional world, most of them have in-game economies that are integral to the gameplay. Players are accustomed to the fact that they need to trade, strategize and allocate resources. Adding more complex economic mechanics would likely work here.
But for other types of games, trading and collecting resources may detract from what the player is looking for. In these cases, a simpler model may be more fruitful. For example, a competitive FPS game like Valorant could benefit from a simple rank-based reward system. Trying to insert complex economies for every game appears to be a counterproductive strategy.
Going Forward
Crypto Gaming is in a very exciting stage. At the moment, there are a lot of challenges and problems.
Most games aren’t fun
Token models need to be improved
The problem of speculators and pure profit seekers needs to be addressed
There’s a lot of friction for most players. You need a wallet, funds, bridge them over if needed, buy the required NFTs, and sign transactions for small things.
The Mainstream perception of crypto games is not great
Retaining a player base has proved to be very tough
Maintaining an economy with a large player base is a nightmare
The list goes on
But, I feel quite optimistic about the future of the space. Looking at some of the newer projects and trends, a lot is being improved upon. A lot of smart, passionate people are tackling these difficult problems and progress is being made!
Before I conclude, I want to touch upon some key areas and trends worth noting:
Player retention is happening
Slowly but surely, certain games like AlienWorlds and SplinterLands are able to retain a player base, despite the bear market and tanking token prices.
AlienWorlds ( the current #1 game by users) is averaging ~250K daily active users and SplinterLands (#2 game) is averaging around ~80k daily active users. In fact, Alienworlds did not face a meaningful decline over the bear market and instead is experiencing slight growth.
After looking into both of these games, I would attribute this to a couple of factors:
Both games are simple to understand, easy to set up and play (low friction)
The cost of entry is low (Free to play in the case of Alienworlds and $10 for Splinterlands)
Both games involve relatively robust economy designs. Burns & sinks for AlienWorlds are relatively seamless and do not detract from the gameplay experience
Leveraging DAOs and communities to gamify crypto elements. The core concept of AlienWorlds is to mine the native token TLM, work with your faction (DAO) and make strategic decisions. It involves a lot of familiar core crypto elements like staking, governance & DAO participation, but it’s done in a fun and seamless way.
They’ve been able to carve out a community for themselves that actually enjoys playing the game.
Casual Games & Redefined Freemium
Requiring a $5K NFT before you can even play the game is a losing strategy and thankfully that’s changing. A space that I see picking up a lot of traction is what I’m calling redefined freemium.
In your traditional freemium games, the game is free to play. Paying a fee unlocks new features or gets rid of annoying ads.
I believe crypto will redefine this genre. A free-to- play model is the best for user acquisition. But if there are tokens and play and earn elements, the question that arises is how will it be sustainable, given that users are playing for free?
This is where I believe we’ll see changes to the traditional freemium structure. Games can charge users a fee or require an NFT to unlock the token reward aspect. Some games might allow players to earn the “premium” rewards aspect through gameplay.
The freemium model is incredibly popular, just about every casual, hyper-casual and mobile game runs some variant of it. But the redefined freemium model is inherently more attractive given its play-and-earn model. Once the initial model is proven, it follows that a lot of these games will switch over to this model. And I believe this will be an incredibly hot space within crypto games.
Casual and hyper-casual mobile games make up more than half of the total video game market share. Their appeal is in their simplicity. These games are easy to understand, simple and appealing to just about everyone.
Going back to the chess game Immortal, this is exactly what I like about it. The core game is simple and appeals to a range of people — it’s just chess. I chanced upon the game and decided to try it out. It took about 2 minutes to get set up and it was just regular chess, with an added play and earn element that wasn’t necessarily central to the gameplay. If I wasn’t interested in earning crypto, I could ignore it and my experience would be nearly identical.
I believe that this model of simple, popular pre-existing games and more casual, mobile games adopting crypto elements is where we will see huge growth first. They’re easy to make (relative to a more expansive game) and fun to play.
I believe that one of these games stands an equal, if not greater chance of being the breakthrough crypto game, compared to AAA-quality titles.
And that’s it!
Thanks for reading this rather long piece! I’d love to hear your thoughts on this.
For more, check out my Twitter (@Cov_Duk).
P.S. Some of the stats/info in this article is a little outdated, it’ll be updated soon.
Interesting article! Have you checked out Nexon's web3 plans? I think they have a pretty good understanding of blockchain technology and blockchain gaming. It also addresses some of the problems you've highlighted in your article, especially the part where you mention that 'not all key participants are rewarded for their contributions'
I wrote a quick summary about it, would love to get your thoughts on it https://foundingtitan.substack.com/p/nexon-is-developing-a-game-that-suits