This article is based on an August 2023 virtual panel, BFF Buzz: Blockchain Gaming. BFF Buzz Spaces share a high-level update on a niche’s momentary state of affairs, including imminent trends, evolving issues and public discourse at the time of recording. Listen to the full recording.
The gaming industry has long been considered an obvious first use case for blockchain technology. This idea was predicated on the assumption that gamers want to own their digital assets. Blockchain would allow not only for the ownership of in-game digital assets by the players but also for (eventual) interoperability, meaning the same digital asset, such as a sword or a skin, can be used across different games and gaming ecosystems.
At least that was the plan that attracted over $4.49 billion worth of venture capital funding into the Web3 gaming space, which accounted for 60% of total Web3 funding in 2022.
Although that funding mostly comes from a handful of VC funds that are betting heavily on the space, it is easy to see why they saw this industry as having potential to generate asymmetric returns. The size of the global gaming market was valued at $249.55 billion in 2022 and is anticipated to grow to $665.77 billion by 2030 — bigger than the size of the music and the movie industries combined. The hope, therefore, is that blockchain technology and non-fungible tokens (NFTs) can unlock new layers of this lucrative market by changing the existing ownership paradigms and shifting the power in gamer’s favor.
However, gamers remain skeptical, and both adoption and progress have been slow. Most industry observers unanimously agree on the need for Web3 games to be fun, first and foremost. The criticisms seem valid — after the grand debut of blockchain gaming in 2020 with the launch of Axie Infinity, play-to-earn incentivization has not stood the test of time. It’s safe to say the most sustainable incentive which draws players in is, in fact, the quality of the game and (surprise!) its fun factor.
But four years is a long time in the world of Web3. While seasons and economic cycles have changed, the teams with true conviction have continued building throughout this period. In August, BFF had the privilege to speak with some of these teams about the current state of play in Web3 gaming and what they are most excited about.
“I think we have come a long way since 2018 when it all started,” says Leah Callon-Butler, founder and director at Emfarsis, an advisory firm focused on Web3 gaming. “Blockchain gaming has evolved from being this oxymoron where the technology was not necessarily an obvious fit for gaming and there was a lot skepticism, to now evolving into an industry in its own right, with a lot of experimentation going on.”
She goes on to explain that the industry has shifted from its focus on play-to-earn to a whole spectrum of different concepts and games. “We now have everything from completely autonomous worlds and more technical games like Dark Forest, to blockchain “light” games that are essentially Web2 games with some elements of Web3 incorporated,” Callon-Butler says.
Taylor Barnes, social media manager at gaming platform Gala Games, agrees with the assessment: “The industry is still in this adolescence stage, we definitely have a long way to go in terms of mass adoption.”
Barnes thinks builders and industry leaders need to tackle onboarding and teach people about the utility of NFTs and how blockchain integration actually further empowers the gamer. Once we clear that first hurdle, he argues, then there is still a lot to be learned about the technical capability of Web3 gaming and protocol development specific to gaming.
The latter is something Barnes is familiar with, as Gala Games has recently launched its own Layer 1 protocol, GalaChain, and has started moving some of its NFT game items from Ethereum onto the new chain. The decision is meant to eliminate the issue of Ethereum's notorious gas fees and hence make the games more accessible.
However, it should be noted that since the recording of this virtual panel, Gala Games’ co-founders have become embroiled in mutual lawsuits filed on August 31. CEO Eric Schiermeyer alleges that his co-founder, Wright Thurston, stole $130 million in the platform’s tokens in 2021, while Thurston alleges Schiermeyer made unauthorized transactions that resulted in the loss of company assets. This legal matter is currently ongoing.
Needless to say, the growth of blockchain gaming will not be linear. Today we are seeing a spectrum with some games having their in-game assets as NFTs on-chain while other developers are focusing on blockchain-based architecture.
Another big step for the industry was gaining access to mobile gaming via the app store. Earlier this year Axie Infinity’s Origins Card game got approval to be on Apple’s App Store (in addition to the earlier rollout on Google Play Store).
“A lot of players play on mobile, so Axie finally getting on the app store and getting approved on Google Play is a huge win for distribution. It sets a precedent for a lot of other blockchain games,” says Angel Pui, global head of growth at Yield Guild Games.
The app store, of course, comes with a hefty commission tag of 30%, which ruffled a few Web3 feathers and caused controversy when it was announced, as the move created a huge barrier for the potential mass adoption of Web3 apps on mobile. It was reported that Axie, in fact, found a loophole by launching a “lite” version of the app, a move that others may follow but which does not fully solve the broader accessibility issue.
The funding landscape for Web3 in general has shifted dramatically, with a 76% drop reported in VC funding for Web3 overall for Q2 this year compared to same time last year. Gaming accounted for over 30% of total Web3 VC funding raised in that period.
While the appetite for investing in Web3 gaming dampened, with many Web3 investors of yesteryear now betting heavily on artificial intelligence (AI), those with strong conviction are still in the space and sitting on dry powder.
“There is definitely still capital ready to deploy,” observes Callon-Butler. “But I think investors are being very selective and looking for projects that they feel really high conviction for. We are seeing firms doing that extra due diligence, which I think is a really good thing.” She also notes that more projects are turning to incubators and accelerator-type programs to better position themselves with investors in this challenging market.
Mariam Nusrat, the founder of no-code game maker Breshna, echoes this perspective: “The hype has died down, and the conversations have become more meaningful. If you are showing progress and traction, then it is easier to stand out to the right investors because there is less noise.”
In a weird way, Nusrat says, the bear market almost levels the playing field, particularly for diverse founders. She shares that her project has grown the number of registered users more than tenfold in the last quarter from 10,000 to 140,000, prompting inbound investor conversations and soft commitments for her Series A round.
Let's not forget that Web3 projects also have the added optionality of fundraising in an open market via both fungible and non-fungible tokens, and while right now, liquidity has left the building, there are projects out there that remain entirely self-funded.
“At Gala Games, we are completely self-funded and have never taken PE or VC funding," says Barnes. "But we've definitely been keeping a close eye on the allocation towards Web3, as that has repercussions on the entirety of the market."
So, what does the next chapter look like for blockchain gaming? The two strong themes coming through are content creation and game development tools, and the two are somewhat interlinked. Our panelists shared some predictions:
The content creation theme is twofold, with there being more need for quality content but also the space for user-generated content (UGC).
“I think the content creation, and more specifically the quality of the content, is what will ultimately bridge the gap between Web2 and Web3 gaming,” says Jumanah Shaheen, executive producer at AMGI Studios, the creator of My Pet Hooligan game.
Bridging that gap and getting more of the traditional games to adopt Web3 is what will ultimately drive the blockchain gaming industry forward. According to the 2022 Blockchain Game Alliance Member Survey, 30.3% of respondents flagged adoption by traditional gaming studios as one of the top factors that will advance blockchain gaming forward, with 26.2% of respondents saying it was the adoption by major gaming franchises that is most likely to move the dial for the industry.
Some observers believe that game creation and UGC, instead of passive play, is the next big opportunity, underpinned by a generation of content creators growing up on “snackable content” platforms like TikTok.
Although blockchain gaming itself is nascent, new frontiers are emerging. Game development tools and platforms are creeping to the top of VCs’ wishlists. Web3 game development is hard. Infrastructure for game creation leveraging blockchain technology can democratize the industry and empower global audiences. “A shift that I'm very excited about is not just the idea that people can play Web3 games, but can also make them,” says Nusrat. She describes her platform, Breshna, as the Canva of video games, where users can create their own games (including with the use of AI) and in the near future will also be able to monetize them using tokens.
Nusrat’s vision is for users to create games not just for entertainment but also for purposeful gaming, meaning games for educational, social impact or research-related use. “I think if there's an intersection of edtech, Web3 and gaming, that would be really really cool,” she says.
While exciting developments are afoot in Web3 gaming, there is a chasm of complexity between platforms that enable games with Web3 elements (such as in-game assets on-chain) and games that are fully on-chain, where both state and logic of the game live on the blockchain. Here, the progress is slow. While there is some positive traction with respect to gaming infrastructure (like Lattice’s MUD engine), the challenge of creating a platform that will allow for full on-chain game development using Solidity and smart contracts is far from solved. Significant scalability and infrastructure constraints still remain, and it might be a while before blockchain games can claim true composability and open economies.
Head to the Blockchain Gaming Alliance website if you would like to participate in the 2023 Blockchain Gaming Survey.
Liya Dashkina is a VC, contributor to a number of DAOs, Web3 consultant, chapter lead at the Australian DeFi Association and an advocate for women in Web3.
This article and all the information in it does not constitute financial advice. If you don’t want to invest money or time in Web3, you don’t have to. As always: Do your own research.
