Before Bitcoin, there were GP, Gil, and Mesos. Interestingly, the earliest forms of digital currencies originated from video games. In the early 2000s, the rapidly growing virtual economies of MMORPGs such as World of Warcraft, MapleStory, and Runescape laid the foundation for a revolution in digital interactions. Players traded digital assets within the game and frequently sold them for real-world money.
These early concepts have evolved significantly with the emergence of Web3 gaming. Web3 technology, with its distinctive features, is ideally suited to power digital economies, particularly in the gaming sector.
Digital ownership: Players can genuinely own their in-game assets through NFT technology, which underpins the monetary value of these virtual goods.
Interoperability: The ability to use assets across different games and platforms enhances their utility and value, extending beyond the confines of a single game.
Trustlessness: The trustless nature of blockchain and intelligent contracts guarantees secure and transparent transactions between game developers and players and in peer-to-peer exchanges among players.
The Birth and Growth of Blockchain Games
The early experimentation with blockchain games began in 2014 with the release of Huntercoin, a game designed to test multiplayer blockchain integration and introduce the concept of "human mining," the mining of cryptocurrencies through human effort. At a time when most altcoins were simply clones of Bitcoin, Huntercoin gained initial solid support from the crypto-native community. However, the game’s lack of funding and the era's technological limitations led to its downfall, as it was eventually overrun by bots and plagued by lag. Between 2014 and 2019, players of Huntercoin collectively earned $1,282,417.
2017 CryptoKitties emerged, pushing the boundaries of blockchain gaming even further. Unlike Huntercoin, which featured a more straightforward blockchain-based premise, CryptoKitties capitalized on one of blockchain's most transformative features, non-fungible tokens (NFTs). The game allowed users to buy, breed, and trade unique virtual cats, each represented as an NFT on the Ethereum blockchain. Upon its release, CryptoKitties saw a meteoric rise in popularity. Within 12 days, the number of NFTs sold surged from 1,500 to 52,000. This success played a pivotal role in Ethereum's rise, with the value of ETH climbing from under $300 to an astonishing $1,360 by January 2018.
However, CryptoKitties became a victim of its success. Shortly after its launch, it accounted for over 25% of all Ethereum on-chain activity. The congestion on the network caused gas fees and transaction costs to skyrocket with blockchain usage. Users, including CryptoKitties players, faced fees ranging from $100 to $200 per transaction, often exceeding the value of the virtual cats they were trying to buy or sell. This created a significant issue for the game’s sustainability.
Another challenge for CryptoKitties was its inflationary model. A research study found that while player activity surged between the 10th and 18th days after launch, there was a sharp decline in engagement within the following month. This drop-off was mainly due to a few dominant players hoarding resources and controlling the in-game economy. Media attention initially fueled the game's popularity. Still, factors like an oversupply of kitties, decreasing player earnings, growing wealth disparity among players, and inherent limitations of blockchain technology contributed to its rapid decline.
The game's breeding mechanics, which allowed two Kitty NFTs to produce another, resulted in an oversupply of NFTs for sale. Consequently, the value of these digital assets plummeted to a fraction of their initial worth. This rapid rise and fall in NFT value, driven by inflationary mechanics, foreshadowed the challenges that would continue to affect Web3 gaming for years.
Axie Infinity: The Reigning King of Play-to-Earn Games
Axie Infinity has been widely regarded as the flagship of Web3 gaming. Built on the Ethereum blockchain, it enabled players to earn cryptocurrency through gameplay and the trading of its native token, $AXS, and in-game NFTs. In 2021, the game took the Web3 world by storm, attracting millions of daily active players and driving the price of $AXS to a peak of $165.37. Players in developing regions, such as the Philippines and Africa, reportedly earned more than their monthly wages in a single day. At the time, Axie was hailed as a revolutionary platform that had the potential to narrow the global wealth gap.
However, the current value of $AXS has plummeted to $6.90, reflecting a staggering decline of over 95% from its all-time high. This sharp fall in value can be attributed to the game's unsustainable tokenomics. Axie Infinity's economic model allowed tokens to be continuously generated or "mined" through gameplay, creating an inflationary environment. Simultaneously, the Axie breeding system led to an oversupply of Axies in the marketplace, mirroring the same issue seen in CryptoKitties.
Moreover, most players did not participate in the game for enjoyment but were instead driven by the prospect of profit. Millions of "scholars" rented the necessary NFTs from existing players, contributing no liquidity to the game and solely extracting value. As a result, it was only a matter of time before the liquidity dried up.
Axie Infinity paved the way for hundreds of Play-to-Earn games that flooded the Web3 space until 2021. However, most of these games suffered a similar fate, with many failing to gain traction or maintain long-term viability.
The Shift Away from the Play-to-Earn Model
The Play-to-Earn (P2E) model has been a subject of much debate. While it undoubtedly brought Web3 gaming into the limelight, its overall impact on the industry's reputation is questionable. Many P2E players have lost substantial sums of money, and some P2E games have even been accused of operating as Ponzi schemes perhaps with good reason.
However, P2E has also laid the groundwork for the future of Web3 gaming. As with any emerging field, experiments and challenges are essential to growth. Here are the key lessons that the Web3 gaming community has embraced:
1. The Game Itself Must Be Fun
The core of P2E is player incentives, rewarding participants for their engagement. However, gaming doesn't inherently need financial incentives. For decades, gamers have willingly paid for video games with no expectation of monetary return, simply for the enjoyment they experience. What P2E has shown is that attracting players purely for profit can undermine the long-term success of a game, both in terms of player retention and the stability of in-game economies.
2. Digital Economies Must Be Well-Designed
Both in Web3 and traditional gaming, in-game economies require careful management. The forces of supply and demand influence these economies, and it is up to the developers to maintain this balance. This is achieved by controlling the issuance of in-game assets alongside mechanisms for spending or "burning" them. The challenge for many game developers is that they are experts in game design, not economics or tokenomics. Managing digital economies becomes a critical development aspect when creating Web3 games with tokenized assets at their core.
Final Thoughts
Armed with these lessons, the future of Web3 gaming appears highly promising. The industry is on the verge of launching a range of high-quality games, including titles like Illuvium and Gods Unchained. Additionally, the mobile gaming market will likely surge in Web3 games, with releases such as Yeeha Games’ Oath of Peak poised to lead the way.
That said, it would be misleading to attribute the emergence of great games solely to the lessons learned from the P2E model. The development of games, especially in the Web3 space, is a resource-intensive endeavor, requiring significant time, funding, and expertise. Ultimately, the success of Web3 games will rely on the evolution of game models and the continued investment in and commitment to creating exceptional gaming experiences.
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