The Future of (Crypto) Gaming

https://members.delphidigital.io/reports/the-future-of-crypto-gaming

Delphi, Jul 2022

Introduction

It’s no secret by now that most gamers hate crypto. We’ve witnessed heavy community backlash around announcements such as Ubisoft Quartz and even more recently with Dr DisRespect’s Midnight Society. Video game commentators such as Asmongold, Josh Strife Hayes, and many more continue to hound the sector—often with good reason. Perhaps you’re surprised to hear a crypto-native company admit this, but we understand where the sentiment comes from and believe there are grounds for it. As a team of gamers and some of the earliest supporters of blockchain games, the dismissal of a space we care for so much caught us off guard. Initially, we assumed it was a case of people not understanding the benefits that crypto could bring to gaming. In time we’ve listened, debated, and listened some more.

After much discussion, we believe there is a lot of validity to many of the critiques surfaced. Not just towards crypto gaming, but more broadly the evolution of the game industry’s core monetization practices over time. In this post, we’ll share our insights and an evolved thesis they helped formulate. We’ll provide historical context for where we find ourselves in the games industry, share some reflections on crypto’s entrance into the arena, and frame several models for where we think crypto belongs in games. In particular, we will explore a new model called PlayFi, developed by Brooks Brown and the team at NOR. We strongly recommend watching our inaugural Disruptor’s Episode with him. We built our thesis upon many of these principles, adding in some modifications based on our experience.

Why Games

To begin with, it’s worth zooming out and developing a high-level framework for understanding why people are drawn to games. Let’s explore the concept of magic circles, first pioneered by Johan Huizinga way back in his 1938 book Homo Ludens and later expanded upon in the context of gaming by Katie Salen and Eric Zimmerman in their 2003 book Rules of Play: Fundamentals of Game Design.

The term magic circle refers to the imaginary boundary between the real world and the game. Reality, with its often unfortunate baggage and constraints, is what many people seek an escape from. A game’s magic circle can offer them this haven. Within a magic circle, seemingly mundane actions can take on extraordinary forms due to the remarkable nature of human imagination. For example, the simple act of kicking a ball into a net can be totally transformed. Perhaps that ball traveling into that net actually represents a winning goal in a World Cup Final. Suddenly, billions of people care and the moment carries with it significant, enduring meaning. The difference here is that it has happened within a magic circle, a shared illusion, that society has placed value in.

It might strike you as odd that we used a sports example in a post about video games, but they have far more in common than what sets them apart. Far back in human history, physical sport has been a dominant entertainment medium. It’s appreciated as a great source of meaning all across the world, with an ability to conjure enormous passion and tribalism at a global scale. Sports are respected as people understand the skill involved to truly excel, often having practiced the sport themselves. Moreover, they have undergone thousands of years of evolution to optimize for what people truly enjoy and love in games. The result has been a very particular model for monetizing around games, which we shall explore later.

Reverting to the magic circle, it often serves to induce a flow state⁠—a well studied psychological phenomenon which ranges far beyond gaming or sports. It’s the state that emerges in situations of high challenge and high skill. If successful in crafting a compelling magic circle, the player should be so engrossed in the experience that all other needs become negligible. The outside world should necessarily fade into the background. You, dear reader, may well have experienced that sensation of “being in the zone”. It’s what many people enjoy about video games—the true meaning of play.

It’s that last point where things begin to break down in the current generation of video games. In many cases, play is not unhindered by external interference. In fact, it has become entangled with arguably the biggest constraint that reality imposes on people—money. It’s our view that this is a large source of hostility toward crypto from mainstream gamers. Parts of the traditional gaming industry have skewed towards aggressive monetization practices that are sometimes detrimental to the player’s experience. As such, when gamers see the need to purchase NFTs to play with early crypto games, or large publishers announce plans to build in this sector, they assume it’s another money grabbing attempt and shy away from it.

The issues described above are most pronounced in competitive multiplayer titles, where the ability for some players to beat others because they paid for performance enhancement is corrosive to genuine competition. These games are often labeled as pay-to-win (P2W), and are rightly subject to backlash. With the advent of crypto, and the ability to tokenize and trade in-game assets, many critics are concerned that blockchain games will always trend in this direction. While a valid opinion, we believe this is a one dimensional view that misses many great opportunities for crypto to enhance games.

To summarize some of the points we’ve touched upon:

1. People play games as a way to escape from reality; flow state and true immersion enhance this

2. Skill-based competition can be an important driver of what makes games meaningful

3. When money impacts core gameplay it can undermine the above

We believe much of the criticism in the games industry, directed at both crypto and traditional games, stems from how games are monetized. In an ideal world one might argue that to create the most immersive game experiences, the influence of money over the core gameplay must be restricted. This isn’t to say that all forms of monetization are bad, rather that we should seek to monetize in ways that aren’t detrimental to the core game loop or true competitive play. It’s also not to say that there can’t be games where money touches the core gameplay, for there is certainly an audience for such games. In fact, many of the Delphi team enjoy such titles. It’s worth noting that these various models exist on a monetization spectrum, which can be approached in a variety of ways. As ever, there is no one-size-fits-all solution, and there’s always nuance in the infinite space of game design.

History of Game Monetization

Before we explore the current incarnation of crypto in games, it’s worth reflecting on the journey of the industry with the context provided above in mind. The videogame industry as a mainstream phenomenon has been on a long evolutionary arc since the late 1970s, when arcade play led to the first Golden Age of gaming (1978-1982). These early games oozed soul, as the public spectacle of the arcade unlocked deep competitive forces for the first time. The pursuit of a highscore slot and the ensuing glory that could be flaunted at both friend and foe was infectious. These games were skillful, fun, and followed the age-old adage that great games should be easy to learn and hard to master. Given the seemingly all-pervading nature of modern video games, it might seem counterintuitive that revenues from those early years rival those of recent times. In 1981, the video games industry had revenues of $20B. Adjusted for inflation, that’s $64B. For context, global game revenue in 2021 was $180B. Video game success despite the frictions associated with play back then was impressive. From having to carry quarters, wait in line amidst the chaos, ensure the machines worked, that the games did, or that the arcade was even open when one fancied a game of Space Invaders— would all be intolerable to the modern gamer. So beyond novelty, what was the magic behind these early games?

Brooks Brown, in his talks about NOR, emphasizes the idea of “fair play and the thrill of risk”. The core idea is that in the early days, games offered true risk. Having made your way to the front of the line in the arcade, your quarter would buy you one go with three lives. If you lost them all, you were out. There was a real incentive to ‘git gud’, as dollar value became intertwined with skill. The better players literally got more value for their money as they were able to survive longer. The greatest players had the highest order incentive in the form of the high scores, where their achievements could be immortalized—everybody understood the difficulty of achieving a spot on that scoreboard, so it commanded respect. The incentive structure drove players to want to get better by practicing more which could only be done by spending more. There was even an inflection point of skill beyond which it actually became more economical to be good at the game. Importantly, the fairness of the game was also sacrosanct. There were no cheat codes, purchasable power-ups, or other consumables to give a player an edge. These games were raw forms of competition, with essentially all variables aside from their environment within the player’s control. Users had guarantees that they could win these games on pure skill alone, unlike much of what we see in the modern era. Fair play, and the thrill of risk.

As the industry evolved, the emergence of home consoles saw players retreat out of the arcade and into the comfort of their own homes. They could now play whatever they wanted whenever they wanted, without limits. In the intervening years between the rise of the console and the advent of the internet, the public spectacle of the arcade and the competitive spirit around high scores diminished. Whereas previously these top “virtual athletes” had commanded large crowds, that energy had now dissipated. Losing all three lives and “dying” did not carry the same meaning, as players could simply respawn for free without any real-world penalty. Because losing didn’t matter as much, neither did winning. The consequences of actions had changed. As Brooks puts it, “the devaluing of risk severed the link between player skill and entertainment value”. Ultimately, game designers became more reliant on technological advancements such as better graphics and sound to distract users from this subtle but important change. Henceforth, an eternal cycle of infinite respawns from the comfort of home would be the norm. NOR’s former name was in fact Eternal Return, named after the Nietzschean threat of being doomed to such a repetitive existence.

By the mid-1980s video games were developing at a rapid pace, with growing production budgets creating larger titles that encompassed increasingly complex mechanics as well as longer narratives. Instead of being in direct competition with sports, the industry trended towards competing with film and television. Decades on, we see this trend towards higher production-value games in full force, with the 2019 Q4 Netflix investor letter stating “we compete with (and lose to) ‘Fortnite’ more than HBO”.

Through the 80s, 90s and 00s, the industry was dominated by premium, AAA games—games which you had to pay a significant upfront cost for, typically $60. The games were distributed by CD, or cartridge, and played on PC and/or consoles like the Sony Playstation or the Nintendo GameBoy Advance. Their existence relied on developers who were willing to both pay a ‘passion premium’, and sleep under desks after 100 hour crunch weeks, in order to work in games.

The ‘premium game’ business model meant that only players who (1) had the prerequisite hardware (a console, or a gaming PC), and (2) had $60 to spend on an individual game experience, could play these video games. While these experiences were cherished, there was limited accessibility for video games globally—in 2001, there were just 3.1 million sales of the best selling video game: Pokemon Gold / Silver / Crystal. In comparison, Garena: Free Fire has over 100 times the users, with 311,250,355 monthly active users today.

In addition, value-capture for developers was limited – there was an inability to effectively price discriminate, which meant that a player who was willing to pay thousands of dollars for the game experience, had no meaningful way to do so. This changed significantly with the advent of free-to-play, and mobile gaming.

Mobile gaming and the free-to-play model propelled the business of games to dizzying new heights. Today, mobile game revenues ($85B) account for more than PC ($40B) and console ($33B) combined. With the massive distribution advantages of digital-first titles, the industry gravitated towards making games free to start. This opened up games to more than 3 billion people globally, and today the average gamer is a 35 year old woman. While games were free-to-start, games still had to be monetized in order to be funded. The mobile era led to two main strategies: advertising, and, most contentiously, microtransactions—which involved charging people for perks, and advantages within those games: convenience, time… and power relative to other players.

Whilst this would start out innocuous with most monetization happening around cosmetics and other non-balance-impacting purchases, in many instances it devolved. Games were being designed and developed with a behaviorist, rather than a ludic lens in mind. The methodology that made games a venture backable industry meant a race to the bottom. By focusing upon improving retention, before layering in monetization, the free-to-play games industry led to a set of behaviorist mechanics which relied upon the psychology of addiction in order to retain and monetize players. These included appointment mechanics, and careful use of notifications and social features to keep players constantly checking in.

At the darker side of the spectrum, the developer would create deliberate impediments to players, and manufacture uncomfortable situations in order to encourage them to spend to overcome those barriers. For example, by allowing resources to be stolen, players are encouraged to purchase shields in order to protect their resources when they are offline. In addition, since many games relied on ‘catching’ and monetizing big spenders (whales), a game’s success also relied on how deep its economy was, or how much a whale could spend in these games. For example, Diablo Immortal fans estimate one could spend up to $600,000 to fully level up a character. Parts of the current industry skew much more towards allowing pay-to-win, whereby the experience of the game is deliberately worsened for non-paying players.

This can be especially corrosive in multiplayer games, where big spenders (whales) are granted the illusion of superiority through unfair advantage. The market has spoken, and this business model has clearly become highly attractive to many developers. Unfortunately, some studios are too aggressive with this model and have created significant tension with their player bases, who deem their conduct predatory. Again, the extent to which a developer employs these practices varies, and there are acceptable, and extreme ends of the spectrum. Not all implementations of this model are overt, as games such as Rainbow Six: Siege ostensibly do not have any advantage you can pay for. However, there are more subtle manifestations such as releasing new operators that deliberately shake up the meta and encourage users to spend. At the lightest end of the spectrum, cosmetics prevalent in most modern games don’t grant in-game utility but some players still argue that in competitive scenarios they can prove advantageous.

In summary, with typical S-Curve style, aspects of the industry have flipped from user attractive to value extractive. Many of these monetization practices have become deeply entrenched where everyone is forced to play the same game. We’ve seen a stagnation in design at the monetization level, with the various psychological tricks to hook people becoming more formulaic over time. Microtransactions and pay-to-win instances can be corrosive to the concept of the magic circle, which leads to an obfuscation of the axes that contribute to flow state, and ultimately undermine the player experience. Crypto presents a next step in the evolution of monetization in gaming, and in an upcoming section we’ll explore what these early implementations have looked like.

Blockchain In Games

Before we dive into the current generation of crypto games, it’s worth recapping some of the properties of blockchain technology that we believe are interesting when applied to gaming. Below, we’ll break out what these merits are from the player perspective as well as the developer’s.

For players, we see the following key benefits:

• Digital property rights: in traditional games, players purchase digital items (e.g. skins in Fortnite) that they are really just “renting” from the game company. When game assets become NFTs, there is a new level of assurance for the player and their achievements. If the game stops operating, other parties can theoretically step in to honor the utility for those assets otherwise they may still have enduring collectible value.

• Secondary market liquidity: true digital ownership changes consumer psychology, creating residual value for digital purchases within a global, verifiable liquidity layer. Users are able to retain value from their investments should they wish to leave an ecosystem.

• Provenance: virtual goods now have rich, verifiable histories. Imagine being able to own the exact, signed gun skin your favorite esports players used to win the world championship.

• Community governance: gamers can now participate in the direction of the games they love via DAOs and councils (see: Illuvinati Council by Illuvium).

• Value accrual: the value created across the game (or games) can transparently accrue to an ecosystem token as more players spend time and money in these worlds.

• On-chain reputation: a new player-centric design space is unlocked as gamers can now build strong cross-ecosystem player profiles. We’ll explore some uses of this in the later PlayFi section.

• Web3 payment infrastructure: through the usage of crypto payment rails, seamless payments are possible across a number of use cases such as smart contract prize pools and tournament payouts—something that is particularly burdensome in traditional esports.

For creators and developers, the following improvements are unlocked:

• Increased monetization surface area: opportunity to more thoughtfully monetize players vs. the free-to-play model where, on average, less than 2% of players actually purchase in-game items. The ability to monetize this ‘long tail’ of users comes from a deeper willingness to spend, driven by the benefits for players mentioned in the previous section (e.g., digital asset ownership, provenance, etc.). In addition, secondary market activity which would previously be lost to peripheral gray markets can be captured. Importantly, this should be done carefully in a non-detrimental way, as we’ll expand on in later sections.

• Enhanced economic alignment: sharing a portion of economics with players and creators in your game economies means lower customer acquisition costs and greater retention contributing to higher LTVs than traditional free-to-play games. Strong evangelical forces are also unlocked, as users can have a stake in the game worlds they care deeply about.

• Improved creator economics: with UGC games like Roblox, creators keep just ~30% of revenues. With blockchain games, creators generally retain much more of the value they create as well as benefit from on-chain royalties.

• Interoperability & composability: while it will take time, blockchain technology has the potential to allow interaction across ecosystems by leveraging existing building blocks and open source infrastructure. We recognize the difficulty of game <> game interoperability, and see composability with the broader web3 tech stack as a more promising innovation.

Lastly, it would be remiss not to emphasize the very obvious improvements that crypto has brought to the games funding landscape already. As many may be aware, Tencent-style monopolies across the industry have created impenetrable moats. Most aspiring game developers are drawn to building games out of raw passion, yet quickly learn that the stagnation of the dominant business models and the moats established by large incumbents present two options:

1. Chance several years building with predatory F2P mechanics and hope you solve the formula of LTV > UA costs.

2. Surrender creative agency and become a cog in the machine of a large corporation.

The AAA games industry is often critiqued for its toxic work culture with insane hours around brutal crunch times. What’s more, the entrenched F2P model sometimes skews so far towards value extraction it has robbed the soul of many games. Somewhere along the way, many of these people end up having their love for games stolen from them. At the same time, demand for talent in this industry vastly outstrips supply. By structuring an ecosystem that allows developers to build and define shared upside with an audience from day one, the quantity and variety of capital available to them increases.

In the typical F2P arena, it’s not uncommon for the marketing budget to equal the development budget as tedious UA costs make it extremely difficult to rise above the noise. In the crypto model, this marketing budget can be deployed in incentive design to bootstrap an economy. Many of the best games in the world are born in organic, grassroots communities, not R&D labs at multi-billion dollar gaming behemoths. In the same way the creator economy opens up the universe of people that can even pursue their interests, the same is happening with game developers.

The Current Generation of Crypto Games

Crypto gaming took the space by storm in 2021 but has since lost some of its allure as engagement has trailed off. Before we outline why we think that’s been the case, we should start by clarifying what exactly got people so excited by them in the first place. Albeit imperfect, this model has many benefits over traditional games. As mentioned previously, crypto unlocks digital property rights, verifiable secondary market liquidity, community governance, shared ownership structures, and significantly enhanced funding options for developers. The downside is that, with the tokenization of most to all in-game assets, the economies become considerably more difficult to manage. It’s actually most difficult early-on, which would seem counterintuitive, because the games launch in stages meaning large portions of the game and the economy may not be functional. This tends to cause considerable growth in the supply side of the economy without having the requisite offsetting demand to absorb that growth. In this case, demand comes in the form of utility for these resources. Game developers will often create many levers they can adjust to help maintain balance in the economy, but without the full functionality of the game in place, their levers are limited. This combination of liquidity in all parts of the economy coupled with game loops that aren’t fully built out tends to cause an overheating of the economy. At the start, the initial scarcity of all resources in the game combined with pure financial speculation from non-players helps keep demand on pace with supply. This dynamic creates an enticing setup for purely extractive participants to enter. These participants exacerbate the imbalance we discussed earlier because they join early on, creating even more demand for both consumable yielding assets and the consumables they produce. As the supply of assets rapidly increases, it’s not met with the appropriate level of demand that would exist in a more built out economy. As prices start to come down from the supply glut, the extractive in-game participants and purely speculative market participants then also leave. This furthers the mismatch between supply and demand because of the demand destruction that takes place during their exit, leaving the economy in a hole that it must gradually climb out of. One potential solution is to limit the transferability of consumable items in the early days of the game, until more components of the game and economy are built out. They wouldn’t be on-chain, they’d just be linked to the account that generated those resources. This curbs the potential for economies to overheat before they’re capable of handling that level of supply. This also tempers prices of assets in early days because the game wouldn’t have open yield generating assets whose prices are temporarily driven to astronomical prices by speculative extractors. The asset price spikes caused by these extractors also ends up being a barrier for adoption for those with genuine interests. This lack of transferability would only be temporary, and at a certain point in the future they could be claimed on-chain.

Another solution would be to limit the economic relevance or lifespan of these consumable in-game items or assets. By setting expectations early on with players that these assets won’t generate ROI into perpetuity, teams will be in a better position to manage and tune their economy. An example would be setting up a seasonal reset for the economy (see: Diablo II ladder, Path of Exile seasons, or wipes in Escape from Tarkov), having resources that expire, or building in lifecycles (creation, decay, and potential destruction) into in-game assets. Nonetheless, thus far the introduction of a monetary component to the game itself has resulted in it trending towards the dominant motivator. As such, the gameplay of these early titles has suffered on two fronts: 1) the primary incentive of the bulk of the player base is the expectation of financial reward rather than play and 2) the core competitive circuit has been subject to pay-to-win mechanics as whales can spend their way to success.

In 2019, Delphi helped design AXS, the in-game governance token for Axie Infinity. The idea was relatively simple yet still novel for its time – reward gamers for actually playing the game. That way the gamers who spent the most time playing in the world would ultimately be given governance powers over it, something gamers of traditional titles openly crave. At the time, Axie Infinity had very few players, but we saw promise in the project Sky Mavis was embarking on—enough to purchase 5 Mystic Axies for 473.5 ETH in 2020. It’s important to note that nobody in the community at the time truly anticipated the virality and dominance of the earn dimension. The ‘Play-2-Earn’ name was retroactively applied. Perhaps, given the scale of the demand for earning money in video games, as evidenced by real-money trade (RMT) gray markets around most major video games, this should have been more obvious. The emergence of the scholarship model, in which investors would breed assets in order to loan them to new entrants in exchange for a portion of the revenues they earn, was by incident rather than design. Nonetheless, we ultimately arrived at a situation where the majority of the player population was net value extractive, new user growth stalled, and the in-game economy fell into a downturn.

To further exacerbate the earn-centricity of this cohort of crypto games, we saw the emergence of guilds who sought to professionalize and industrialize the scholarship model. Pioneered by Yield Guild, these organizations paired users with assets en masse unlocking economic opportunities for large populations. It’s worth emphasizing the true impact of this for thousands of people in countries like the Philippines, where during COVID play-to-earn games were quite literally life-changing for many. In 2021, we saw $512M of public and private market funding for guilds. Much of this money has been allocated for investment in in-game assets, as well as venture investments in games themselves. Due to this wall of buying pressure, we’ve seen the majority of fast-follow games engaging this trend and looking to accommodate similar mechanics. Arguably, the sector might have kick-started an incentive loop in game and economy design without sufficient thought as to whether or not this is the optimal path to pursue. We believe that guilds existing primarily to coordinate resource extraction in games have strayed somewhat from the original vision of what they could be, and we’ll address what a path forward looks like in a later section. Unfortunately, as is often the case with crypto, it seems that many of the “players” in the current crypto gaming space are mercenary in nature. Just like yield farming, users appear to be attracted to where the incentives are strongest instead of a genuine passion for the games on offer. Not only does this result in developers essentially overpaying for their early audience, it can also be detrimental to the experience of genuine players. The over-emphasis of the earn component in these early titles has ultimately led to the obfuscation of organic player demand.

That said, we continue to believe that there will be significant demand for financialized games that opt to put much of their economy on-chain (fingers crossed for the World of Warcraft auction house one day). These games lead to a new form of gameplay, where skill & advanced knowledge of the in-game meta can create alpha within the context of a game economy, and lead to financial rewards for dedicated and savvy players. We are proud supporters of many such games and have been very encouraged to see the progress made with titles such as Crypto Unicorns. Through a combination of economic monitoring, careful / diligent design, and continual live service development, these economies can be better calibrated, and also create a rewarding experience with a player-driven economy.

For these financialized games, it’s of crucial importance that the portion of players who are net value extractive is smaller than those that are happy to pay for entertainment. Ideally, the value extractors provide something useful or interesting for the paying player. We see this first generation of crypto games as an extension of what is already working in traditional gaming, although with certain new characteristics that make it attractive.

It’s important developers of blockchain games have a clear understanding of what and who they are building for. We are of the view that many developers are taking the decision to open up their economies too lightly, without full appreciation for the complexity involved in effectively navigating this path. At Delphi, we continue to spend time analyzing how the existing models should evolve, as well as looking at new models as we shall explore.

Using Crypto to Monetize Around Games

Another model the Delphi Gaming team has been exploring in depth lately is called PlayFi, as pioneered by NOR. We think this model is uniquely well-suited to esports and competitive titles, and Delphi will be actively supporting projects working on these ideas moving forwards. In order to best explain it, it’s worth revising the concept of the magic circle in games. That flow state of true player agency and freedom, unspoiled by surrounding forces vying for the human’s attention, is why great games stand the test of time. There is a reason that the Delphi summer retreat’s gaming tournament revolved around a 20 year old game (Super Smash Bros). There is an elegance and purity to games that have refused to compromise on these core principles. Furthermore, games that follow this model appear to have immunized themselves from the ephemerality of our contemporary digital environment. Counter Strike, for example, remains strong in its position as one of the greatest competitive shooter titles ever, whilst many others have risen and fallen around it. As we shall see, much of this can be informed by how traditional sports works—a model that has flourished across millennia.

In the pro sports model, almost without exception, the core game mechanics are stunningly basic and highly accessible. In soccer, for example, the objective is literally: put ball in net. The game has certain fixed parameters; a certain height for the crossbar, a certain width between the posts, and the ball is a particular size and weight. As Brooks says, “The nature of any ideal game is that every throw, play, or choice operates on well defined things – a constellation of them if you’ve done it right.“

Furthermore, there is usually very broad accessibility. Any prospective player mustn’t go far to find a ball and a goal… more often than not, sports are easy to learn, hard to master. Player agency is significant, as difficulty is usually self-directed. One can choose to practice penalties, free kicks, and corners by themselves. The introduction of further challenge via satellite opposition is similarly straightforward – perhaps a 1v1 exercise which gradually introduces more of the game’s rules (fouls, tackles, blocked shots etc). This scales to different team sizes and formats, all the way up to the most common incarnation of the beautiful game. At a certain threshold of seriousness, players might like to invoke governing officials that enforce the rules in more organized, competitive scenarios. At any point in these many derivative configurations of soccer, players might like to introduce betting which raises the stakes and amplifies the competitive spirit.

Importantly, as these scenarios become more competitive, the more skilled the players become and by extension the overall difficulty rises. As the level increases, so does the surface area for monetization. These experiences are scarce. There are only so many players in the world that can compete at this level, at the very top of a vast talent pool, and thus they are meaningful. As such, we see a dramatic expansion of opportunity for participation beyond the core game in the form of coaches, fans, commentators, analysts, scouts, prediction markets, merchandise, collectibles, and so on. As Brooks puts it: “This elegant correlation between increased difficulty of the game and increased economic opportunities/participation in the game is at the root of the pro-sports model, and at the root of PlayFi”.

In essence, we can view the monetization model of sports as revolving exclusively around meta-games. These meta-games act much like a derivative to a purely skill-based game. Metadata can be thought of as data that describes other data. Metagames, by extension, can be thought of as a derivative game that either describes, or is rooted in, the core game. Importantly, the market games are kept distinct from the core competitive loop.

Soccer, at its core, is not a market game⁠—it’s a game of skill on the field. Its path to monetization starts with people caring for the sport itself, then taking metadata from the most meaningful games, and playing metagames with it.

In the video game context, having acknowledged that the core magic circle of the game must remain intact, one might wonder how we accomodate a larger audience that might not have a burning interest in personally reaching the top echelons of a given title. After all, there are myriad user archetypes in modern games from whales with a desire to spend, speculators who’d like to bet on the top gamers, and more casual enthusiasts who enjoy the title in other ways. As we explored in the end of the first section, if untamed, money will always trend towards the dominant motivator. As such, the first port of call is to separate out the market games from the core game loop itself. This way, we can begin to define independent magic circles that harmonize but don’t interfere with one another. Nobody is tricked into playing the other’s game.

As with the pro sports model, scarcity of experience matters. Both in terms of skill level, but also in terms of cadence of competition. In soccer, Ronaldo will only set foot on that pitch once a week. The constraints on how often these competitive situations arise further contributes to their meaning generation. With NOR, the pioneer implementation of PlayFi, scarcity of experience and true risk are driven by permadeath tournaments. In each of these games, the players themselves are the NFTs which are permanently burned should they lose. They own their data and their metadata entirely, and benefit directly from its usage in the economy around the core game. The objective of the PlayFi model is to encourage users beyond the core competitors to play metagames with metadata. In theory, the more people care about the game, the more gets spent directly on metagames. By maximizing meaning generation and competition in the core game, we are able to maximize revenues through peripheral monetization around it. Furthermore, we retain the distribution advantages of the free-to-play model, as players are able to play for free, and we can effectively price discriminate for those who are willing to spend more on metagames. We also avoid the drawbacks of pay-to-win.

At the heart of this framework lies skill-based competition, which requires tournament systems to function. NFTs are a foundational technology that allow us to tokenize any unique digital item⁠—including tournament entries as tickets. For example, let’s look at the bracket below which has a total of 8 entry-level slots. Each of these starting points could be sold in a primary auction, and then trade freely on the secondary market without impacting the core gameplay. The smart contracts representing the prize pool might take 50% of all revenues generated (in addition to sponsors), further contributing to the appeal of the competition.

Whilst some of this may sound similar to certain modern esports, we cannot stress enough what a significant step up the web3 infusion brings. Ultimately, crypto is primarily going to serve as the backend accounting engine that facilitates ticketing, payments, player NFT contracts (on-chain reputation), automated tournament bounty smart contracts, and so on. Crypto unlocks new transparency around player profiles, a deep liquidity layer facilitating seamless payments, and new ways for people to bet without navigating burdensome infrastructure. Furthermore, many properties of crypto technology such as digital provenance unlock a new way to think about the digital realm. How much would you pay for the gloves from the Ali-Fraizer fight? Now, how much would you pay for a cosmetic minted off an esports championship you care deeply about?

A rich tapestry of our digital experience now exists, where fans can collect items from meaningful moments in esports history. The exciting thing about building this in crypto is being able to unlock open source infrastructure that can be used across the industry for many applications. All esports-styled games should be able to plug into the same set of standards, some of which Delphi hopes to contribute to. Once all data, metadata, and infrastructure is consolidated in a single place, we open up the ability for 3rd parties to come in and develop their own metagames around these games. It’s difficult to imagine many of the more popular downstream applications this will lead to, but we are excited to see what emergent behavior and gameplay is unlocked. Once the technological foundation is laid, we believe the users will drive creativity in their respective ecosystems as they have always done. It took time to converge on the optimal metagames for pro sports, and we expect the same to be true of PlayFi.

As it stands in play-and-earn gaming, the tokenization of gameplay assets both 1) adds a startup cost (i.e. friction) because a player needs an NFT to play and 2) because the in-game assets are NFTs that have secondary market liquidity, pay-to-win mechanics have also crept in dampening competitive play. With the PlayFi model, one of the first changes is not requiring users to own an NFT to play the game. In other words, just let it be like any other regular video game. Importantly, that doesn’t mean there can’t and won’t be NFTs. Scarce, unique digital assets still have their uses as we alluded to earlier, but how these assets enter the game matters. For example, I might still be rewarded with a digital collectible, but it should have meaning to me within the context of the game. Furthermore, because all monetization can happen external to the game, we are able to mitigate many of the distribution frictions associated with crypto games in traditional app stores.

What’s interesting about these components is that they don’t necessarily conflict with the current generation of P2E games and guilds. In fact, these primitives can be used to enhance them. For example, games like Axie could have free-to-play, mini-game modes that are purely skill based, where NFTs are awarded to tournament champions as true badges of honor. This would also lower friction for new player adoption.

Guilds like YGG can continue to grow their business beyond providing player liquidity to bootstrap new game ecosystems, and now leverage player NFT profiles to attract talent into their guild, as a traditional esports team might. They can then enter them in tournaments to win prize pools, earning them a yield for their efforts.

Whilst unproven, we believe PlayFi has the ingredients needed to drive esports into its golden era and unlock its true potential as a heavy weight of global entertainment. We will be actively supporting projects such as NOR working on infrastructure in this domain.

Conclusion

The last 12+ months have been monumental for crypto gaming, and despite various growing pains we are more excited than ever to play a part in its evolution. It’s important to stress once again how early this sector is, making it difficult to be certain which models will win out over time. As proponents of the space, it’s important that we periodically challenge our assumptions and try to picture novel ways these technologies can improve games for both players and developers. We believe this is a great time for developers looking at this sector to reflect on the complexity involved with open economies, and how susceptible to over-financialization these games can be. It’s our hope that the path laid out with PlayFi prompts some further ideas about how crypto might improve games and their monetization. The only way we are going to turn the tide on mainstream perceptions is by building experiences that show the power of this technology. That improve the experience.

Importantly, there are many other models we believe to be especially suited to crypto that we haven’t touched on in depth here. For example, platforms focused on user-generated content are well-suited to incorporating crypto. The ability to program royalties that flow across derivative creations from 3rd party developers is very promising. There is a world in which this can get granular enough to allow designers who create specific assets to participate in the economics of its usage in multiple worlds. We are especially encouraged by projects such as Webaverse in this domain, which has built an open source game engine that is entirely browser-based. Furthermore, we remain excited by the prospect of on-chain gaming. Whilst the road ahead is long, we believe that in time one of the greatest drivers of innovation will be building native to this new medium. We’re excited to monitor teams like Lattice, Topology, and Matchbox DAO in pioneering this sector, although we think we are many years away from these ideas having broad appeal. Many of the greatest game experiences ever came out of the modding community, and on-chain gaming allows for true composability in a way other approaches don’t.

Lastly, as ever, if you are building infrastructure, games, or other experiences with a unique angle in this sector we would love to talk to you. We are particularly interested in teams that might be working on some of the supporting PlayFi primitives described above. We have big plans for Delphi’s gaming unit, and will continue to dedicate resources from all of our divisions to this ecosystem until it is driven firmly into the mainstream.

The Delphi Gaming team