Blockchain gaming's beginnings

From crypto-craze to decentralized fun

What follows is the next installment in a series that looks at the next 10 years in gaming. The emphasis is on the formulation of novel strategies and business model innovation. I previously laid out the 2021 Video Game Flywheel, which builds on Rise of Recurrent Revenue, The Future is User-Generated, and the Revitalization of In-Game Advertising.

This week’s topic: blockchain gaming.

Full deck available here.


To Infinity and beyond?

Early successes like Axie Infinity and Sorare have convinced some that blockchain gaming is already there. Others say not yet. An explosion of speculation and subsequent volatility in digital currency markets, a rapid influx of investment capital, and the relentless headlines about high-priced NFT transactions have the makings of what my colleague at NYU, Aswath Damodarn, calls the Big Market Delusion.

It leaves us with little nuance. You either think blockchain gaming is all hype, or the future of gaming. To make more sense of things, let’s take a step back.

Next level economics

Shifts in the way a creative industry makes money has an enormous and long-term impact on the type of entertainment it produces. One such macro-level change occurred over the past 15 years as the industry moved away from a physical product-model to one that is digital and service-based. In 2005 the global games industry generated $26 billion in revenue from boxed game sales, compared to $1 billion in digital sales. Since then product-based sales have roughly doubled to $53 billion, but service-based revenue has exploded to $127 billion.

This has had at least three implications for the way that the industry operates. First, publishers are shifting away from games as discrete commodities in favor of treating them as assets that increase in value over time. This “assetization” changes the way organizations think about developing intellectual property and related revenue models. Rather than trying to sell as many copies of a new release as possible following a frantic marketing campaign, game makers publish content gradually and build momentum more slowly.

A related second implication is that successful games are in a state of permanent beta. The success of League of Legends dwarfs even an evergreen like World of Warcraft in part because the former deploys an iterative release schedule of minor updates and sales events. The latter relies on heavily marketed content add-ons which are more cumbersome to produce and present a higher risk profile.

And third, Moses stays on the mountain. Despite their massive funding, high profile failures like Quibi and Magic Leap evidence the challenges of developing the next big thing in secrecy and excluding audiences and industry partners. Across the ecosystem entertainment and technology have begun to abhor the reliance on a single authoritative designer or author. Instead, creative firms like Supercell actively solicit input for new game designs by promoting its beta programs to audiences and inviting them into the development process. Franchises grow with their audiences.

Decentralized game publishing

A second macro-level change is more opaque but no less relevant. As the video games industry became more digital, new publishing models have emerged that redefined and redistributed the roles occupied by creators and consumers. We can identify three archetypes.

The first is that of traditional game publishing. It is the conventional way of developing, publishing, marketing, and distributing games that hinges on a centralized model. Publishers seek to sell as many units as possible at the highest possible price. Game makers rely on partnership networks with, among others, retailers and digital storefronts. In this model, content exclusivity increases a title’s perceived value and premium prices. Examples of content that springs from this model are The Legend of Zelda and Uncharted.

The networked, or distributed, model is the second and focuses on establishing recurrent revenue streams through ongoing investment. Multiplayer games distributed via a low tech client or browser ensure a publishers reaches the largest possible addressable audience. Revenue strategies revolve around socially contextual monetization (e.g., vanity items, battle passes). Data capture plays an additional important role as game makers optimize a player’s life-cycle and constantly look for ways to entice their user base to keep playing and spending. Example titles for this model include League of Legends and Pokémon Go.

With blockchain technology we are starting to see the outlines of a third, still largely nascent, model based on decentralized game publishing. Here game makers optimize for long-term use value and compromise on shared ownership of digital assets. It facilitates novel practices around user participation and provides use value through play (e.g., play to earn), collectibility, and speculation. Early examples include Axie Infinity and Gods Unchained.

Different from the networked model, decentralized game publishing vastly increases the autonomy of its playerbase. In this context, Roblox, which popularized the notion of user-generated content, remains rooted in the networked model. Even if a growing base of players creates in-game experiences for others, Roblox still relies on centralized control to determine what should and shouldn’t exist in its economy.

In the case of decentralized game publishing there is no such authority. Players are entirely free to just play the game or play with the game. Their decisions impact the overall games ecosystem, the real-world value of its different in-game assets, the volatility of its economy, and tactical demands and affordances. In playing, players alter the game’s governing ruleset beyond the reach of a controlling entity.

That sounds really exciting and would certainly explain why early investors are so enthusiastic about current successes. But where will this evolution take place and who will lead it?

Market landscape

There are three relevant platforms for blockchain gaming where it can take root: PC, console, and mobile. Historically, PC gaming—especially the high-end users found on platforms like Steam—represents the vanguard in novel types of content and business models. Because of its ‘open’ nature compared to mobile and console, novel developments and innovations tend to manifest first in PC gaming and it was here that gaming first became truly digitally distributed and where new categories like MOBA and Battle Royale (both are modes of game play that leveraged the popularization of micro-transactions rather than single sale pricing).

According to Dappradar, a blockchain data provider, about two-thirds of the top blockchain games today are available on PC compared to a third on mobile, which reaches a far greater audience globally. Console gaming, despite a surge in recent unit sales for both Microsoft and Sony, is in a nascent state.

Today the platform of choice is PC, which includes browser-based (40% of total titles), local clients for Windows (16%) and Mac (6%), and Linux (3%). Mobile games represent a mainstream gaming audience but tend to be hindered by stricter platform governance. The popularization of blockchain gaming depends on whether it can successfully penetrate the mobile market. There are some signs that this may be the case: Tencent recently acquired UK developer Sumo Digital for $1.3 billion which had announced its plans to explore crypto-currencies. Finally, consoles remains a black box as ‘closed’ platform policies, accelerated acquisition of IP, and the broader push into services and subscription revenue will result in crypto gaming taking the longest to take root.

Nevertheless, incumbents and investors alike are getting their feet wet. Among the former we find several notable gaming conglomerates that have started to leverage blockchain to solve financial challenges. Eager to find ways to put their fattened cash reserves to work, global game makers turn to currency markets and seek to mitigate risk and future-proof themselves by taking positions in blockchain.

In April this year, Nexon announced the purchase of $100 million worth of bitcoins to diversify its $5 billion in cash and equivalents held in JP¥, US$ and KRW. And Microsoft expanded its “blockchain platform for royalties payments” to simplify existing complexity around compensating creatives last December. Atari went a step further by introducing its Atari Token “to be integrated as an in-game currency and offer a means of payment to individuals.” And firms like Square Enix and Ubisoft have taken strategic positions by investing in startups developing new IP.

A casual review of venture capital investments finds a combined total of at least $1.2 billion in funding over the last 24 months and the emergence of no fewer that six unicorns. Firms like Sorare (valued at $3.8 billion), Dapper Labs ($2.6 billion), Sky Mavis ($2 billion), and Forte, Animoca Brands, and Immutable ($1 billion each) seemingly managed to plug into the Next Big Thing. With access to plenty of capital, these firms have begun developing ambitious interactive experiences around shared ownership of virtual land, Pokémon-style game play, and collectibles.

However, so far, neither incumbents nor investors have managed to do away with the economics that generally make interactive entertainment a winner-takes-most ordeal, both for protocols and titles.

The most popular blockchains are WAX (36%) and BSC (35%), based on an aggregation of top titles organized by protocol. Ethereum (10%) is much less prominent despite its much higher market capitalization of $402 billion compared to $0.6 billion for WAX. A similarly skewed power curve describes the most popular blockchain games. The number one title based on users in July, Alien Worlds, has 59 times more players than the number 15, Zoo - Crypto World.

Worse, the overall quality and depth of currently available titles is still depressingly low. Despite the aspirational rhetoric found in investor decks, most games resemble something similar to the first generation of pre-Facebook social games: relatively unsophisticated game mechanics and cliched graphics are common as lots of small-fry developers quickly release undifferentiated content. What may potentially drive the success of blockchain gaming is the emergence of innovative game mechanics.

New ways to play

Blockchain technology presents both new affordances and constraints for game developers. Growth drivers center on a myriad of newly possible game play mechanics and related monetization strategies.

The ability to mint unique digital assets based on existing and new games needs little introduction. Today, digital is meaningful. A decade ago, microtransactions represented a small portion of overall sales and incurred little serious consideration. Today owning unique digital items is common because it allows players to both tailor their play experience (e.g., utility) and the representation of their digital selves in unique ways (e.g., vanity items).

A natural extension of NFTs is the emergence of secondary markets. Blockchain technology facilitates smart contracts, which allow the original creator to earn a percentage from each subsequent sale. Previously unavailable, publishers are now able to establish a revenue stream based on the trading of in-game assets.

To build their decks, collectible card game players buy booster packs that contain cards that range from common to rare. Any excess or particularly valuable cards are traded via online sites. However, these physical exchanges are ultimately complex (a buyer orders a card; a seller has to ship it) and, as a consequence, secondary market sales for physical cards have remained small and highly concentrated.

Blockchain technology promises to invigorate this activity by making it more accessible and transparent. As a result novel games become more financially viable whereas previously the gravitational pull from the networks effects of hit games prevented market entry. According to Brian David-Marshall at Interpop:

“Crypto allows you to sell the cards back. It simultaneously reduces uncertainty for the player, and offers a deeper meta game. Part of the game will revolve around knowing what cards will be good and which ones will be better following the introduction of new cards.”

It opens an additional layer that is meaningful to both players and creators.

A third affordance are NFTs that can be used and traded between different game universes, or so-called crossover items. It is, in effect, somewhat of a fantasy to bring the same unique, customized avatar to every different game you play. Imagine not just having the same username but an entirely personalized representation across games. But we have yet to see the emergence of a clear category leader, and the rapid growth spurt of the last year means that top blockchain game makers are struggling to roll out product, let alone collaborate. In an interview Sky Mavis co-founder Jeffrey Zirlin stated: 

“Right now everyone is still focused on making fun, workable products.”

Selling in-game items pre-release to raise moneyfor a project presents a fourth affordance. Tiered crowdfunding incentives easily translate into offering early investors unique digital assets. Going beyond individualized gifts and physical collectibles, blockchain facilitates the distribution of digital items and partial co-ownership of a game to early investors. It pushes what developers can do for their fans well beyond adding their names to the credits. In December 2020, Alien Worlds raised $250,000 by selling digital card packs. Three months later it raised an additional $2 million by selling its utility token Trillium.

Existing momentum seems to emerge from an echo-chamber as other crypto-based initiatives provide funding for others. Crypto-native firm Animoca Brands, for instance, led the March investment in Alien Worlds. For NFT-based crowdfunding to reach its potential it will need to attract non-endemic, generalist investors and mainstream consumers.

Closely related is virtual real estate. Selling parcels of virtual land presents an immediate revenue stream that appreciates over time as digital lots increase in value. It also offers a spatial connection between consumers and content. Decentraland, for instance, aims to facilitate the creation of “applications, distribute them to other users, and monetize them.” In effect, selling adjacent parcels using blockchain technology mimics conventional land ownership patterns where ‘districts’ guide traffic by clustering specific content categories together.

It is unclear still how, outside of benefitting from an early advantage, the literal incentive to buy virtual land to improve visibility is structurally different from paying a web 2.0 search engine or social network. As a virtual world’s popularity increases, the cost of entry will increase and prevent late-comers from access to more desirable assets and virtual locales. Consumers and content creators alike will move onto competing worlds where they, too, can be kings and queens.

By far the most popular and promising novel game mechanic to emerge from blockchain technology is play-to-earn. Simply put, players receive a monetary reward for their playtime. Their effort and success in a game can be transacted and exchanged for currency. Most notably, Axie Infinity offers a game in which players breed and battle Pokémon-like characters to upgrade their abilities. By trading their characters, players can earn crypto-currency which can then be converted to local currency.

Following the pandemic, play-to-earn has proven especially popular in South East Asia (e.g., Philippines, Indonesia) where the economy has suffered and government support remains limited. According to Axie Infinity, around 42% of its player base comes from the region, compared to 8% from North America and 8% from Latin America from countries like Venezuela and Brazil.

It remains to be seen whether play-to-earn is an income equalizer, or a fancy rehash of the gold farming phenomenon. During the rapid popularization of MMOs in the mid-2000s, a rash of sweatshops emerged around titles like World of Warcraft where low wage workers leveled up characters to sell them to, mostly, wealthier players in western economies. In addition, the rapid popularity around play-to-earn also means that newcomers are quickly priced out of the market as the cost of participation increases.

Not all that glitters is crypto

What offsets the enthusiasm and emergence of cool new ways to play is the universal observation that technology generally changes more rapidly that social behavior.

One practical limitation is that it is mostly young and affluent people that show an interest or active use of bitcoin and crypto. According to study by Gartner, people aged 18 through 34 represent the largest consumer base (>60%) that indicates a positive interest in using bitcoin to pay for goods and services. And, assuming a median household income in 2021 of $79,900, there is a clear distinction in the overall awareness of bitcoin and cryptocurrency, and the interest in their usage. Currently higher income households ($75,000 and over) are 2.4x more likely (49%) to use bitcoin, compared to households earnings $75,000 and under (20%). It indicates that in to become mainstream, cryptocurrency will have to become more accessible and cater to a broader and more diverse consumer base.

Regulation is another inhibitor of infinite growth. With increasing regularity, the Chinese government has expressed concerns and confirmed a ban on cryptocurrency transactions. Local governments in key mining locations throughout China—provinces such as Xinjiang, Yunan, and Qinghai—announced plans to close down mining operations. In the United States, the Biden administration recently outlined its plan to raise an additional $700 billion through new tax measures. The plan states that cryptocurrencies pose “a significant detection problem by facilitating illegal activity.” The Treasury Department further announced that “transactions with a fair market value of more than $10,000” must be reported to the IRS.

Next, the explosive demand for chipsets has left a shortage in supply. Ironically, it endows manufacturers with more power over an otherwise decentralized industry. NVIDIA, for example, recently expanding its mining limiter to RTX 3060 Ti, 3070, 3080 graphics cards. It also means that it takes longer to recoup the costs of a high-end processor. Chipsets will remain in limited supply as a result (since Ethereum is still predominantly mined on graphics), until its proposed shift to proof-of-stake over proof-of-work will cut the GPU requirements.

And, finally, following their popularization, the debate around the environmental impact of crypto-currencies has raised concern. According to a 2018 study, “cryptomining consumed more energy than mineral mining to produce an equivalent market value." Currently, the energy expenditure remains modest: Bitcoin accounts for an estimated 0.30 percent of the world’s total electricity consumption. 

A related consideration are ‘gas prices,’ referring to network transaction fees made by users to compensate for the computing energy required to process and validate transactions on the Ethereum blockchain. According to the Cambridge Center for Alternative Finance, the energy impact for Bitcoin is 72 Terawatt-hour compared to 28 for Ethereum, 0.000223 for WAX, and 0.00006 for Tezos. But as more companies and consumers adopt blockchain, the energy impact likely increases and more cost-effective protocols (e.g., Solana, Tezos) will grow in popularity among creative firms.

So where does that leave us?

The apparent irrationality of the current crypto craze is a necessarily messy stage in the evolution towards of a more stabile, decentralized future. Blockchain games are the literal playground where we experiment with, socialize, and discover the rules of a new technology.

It results in some notable comparisons. The early successes and land-grab among venture capital firms have resulted in spectacular valuations. Still valued in the same subset of small and medium-sized game makers such as Rovio with a $600 million market cap and Zynga ($9.0 billion), blockchain gaming startups have a lot more to prove.

There are also no real apex predators. A new generation of creative firms confronts a promising new technology that offers experimentation and the formulation of novel game experiences. Legacy publishers are generally disincentivized to aggressively pursue a newly emerging space for two reasons: (1) unproven technologies or platforms can dilute the value of their existing franchises and intellectual property, and (2) the absence of critical mass means that margins will be low and therefore uninteresting.

“The more "classic" game developers are still somewhat suspicious, have longer development times and don't fully understand how to monetize this new technology.”

—Robert Winkler, Concept Art House

But freedom generally comes at a cost. Without a central entity working to advance the growth and health of its ecosystem, developers will have to rely on different sources of capital (e.g., venture capital) and have fewer options with regards to platform subsidies and marketing alliances. 

The current influx of eager first-movers will change to hand-to-hand user acquisition tactics in time. This consumer vanguard that characterizes nascent markets, especially in entertainment, tends to be tech-savvy and comfortable taking risks and trying new technologies. The expected value increase in blockchain gaming comes from it breaching a broader audience. Here, barriers to entry remain high: users confront a clumsy multi-step process to create a game account, set up a specific wallet to buy crypto, and return to a game to start playing.

Already there are signs in the market that the initial growth spurt has resulted in an increasing complexity. According to Rafael Morado from Dapper Labs:

“Today, all decentralized applications that want to reach over 10,000 users simultaneously have to rely on either a L2 solution, which usually sacrifices to some degree decentralization and transparency, or on a different blockchain from ETH.”

What all this activity boils down to is one simple observation: If you build it, they might come. But who is going to build it? Combined, the highest valued blockchain gaming firms are worth $9.4 billion and currently employ fewer than 500 people. Rapid growth means aggressive hiring. Across the firms that have made headlines in the past twelve months we observe a year-over-year increase of +102% in headcount. It tells you that talent is likely to become a major bottleneck in search of the killer app.

But even if these firms manage to rely for most of their activity on the positive outcome of being a fully decentralized autonomous organization (DAO), there is no substitute yet for talent and experience. In its current state, developing for blockchain technology is much more opaque and requires specialized skillsets (e.g., in-game economists). Abundant investment money will force firms to compete on hiring experienced developers, engineers, and producers in the short term. Even as their financial resources allow for acqui-hiring, top firms find it difficult to find staff.


It will be a while before blockchain gaming reaches its full potential and manages to disrupt the broader industry for interactive entertainment. That makes it a perfect target for investors and innovative creatives. For all its novelty, blockchain gaming adheres to many of the same principles that have driven success in entertainment: insert coin, press start.