Starting as a little-known form of entertainment, gaming has become a generation-defining pass time worldwide. Conquering its way up the entertainment sector, gaming has become a vast, diverse, profitable industry. It’s no surprise that more than 3 billion people of different age groups enjoy gaming worldwide. As with all sectors, to keep the interest and attention of the crowd, gaming is naturally evolving and incorporating itself into other areas, the latest of those being the financial world. Web3 games, sometimes known as play-to-earn or NFT games, have been the product of this transformation. While having been around for several years, play-to-earn games give way to some questions.
In part 1 of this 2-part article, we aim to clarify and provide a fundamental explanation of Web3 games, discussing the underlying technologies that have made them possible.
The technology behind it all
The fundamental technology lying beneath all NFT and Web3 games is, of course, the blockchain. A distributed and decentralised database shared among massive networks of devices, the blockchain collects, groups, and holds data in set blocks. When filled, these blocks have a specific data capacity and are chained together and placed in the blockchain. The data already recorded in the blocks cannot be edited, guaranteeing the reliability of the information. Moreover, all transactions and deals performed on the blockchain are recorded in ledgers and available for public viewing. Additionally, the blockchain allows its users to use smart contracts, which are programs that automatically carry out operations when set conditions are met. Due to its nature, the blockchain has been widely used to host cryptocurrencies, digital assets, Web3 games, etc.
Non-fungible tokens, commonly known as NFTs, are digital assets held on the blockchain. Each of these tokens or items is, as the name implies, non-fungible, meaning that each item is unique and has a specific identifying code on the blockchain.
Due to the nature of the blockchain, NFTs, or at least their smart contracts, are permanent. Once minted and published in the blockchain, they will stay there permanently.
NFTs include but are not limited to digital art, music, videos, in-game entities, or pretty much any other similar digital assets. Popular on the Ethereum blockchain, they have seen the most popularity in the digital art market. However, the NFT trade has reached a staggering $17 billion in 2021 and is expected to grow by $147 billion by 2026. Finally and most importantly, all NFTs can be traded for other NFTs or sold for cryptocurrencies, meaning they hold real-life value and give people actual ownership of their digital assets.
In this series, we will dive into how NFTs and blockchain technology has the opportunity to reshape gaming.
Web3 gaming is a new genre or evolution of gaming that exists exclusively on the blockchain. The defining characteristic of Web3 games is that in-game items, cosmetics, avatars, characters, and pretty much any digital content can be represented as an NFT, giving the participant actual ownership of their in-game assets. Users obtain resources by progressing in the game and are unrestricted in their ability to trade with others. The existence of free trading means that web3 games have economies that are more real and vibrant than traditional games. These simple changes have a profound impact on web3 economy design.
Web2 vs. Web3, the key differences
As mentioned above, the apparent discrepancy between Web3 games and their traditional counterparts is the existence of a digital asset that players genuinely own. Let’s break down some of the implications stemming from this.
The first point worthy of emphasising is the concept of true ownership. The idea of ‘ownership’ stems from the bundle of rights associated with a claim. One inalienable right you have over your digital asset is the right to buy and sell the digital asset at a price you determine. Unlike traditional games, where your digital goods may be held on a private server without any ability for you to interact with them, blockchain assets exist in a decentralised and permissionless environment.
This means that developers do not solely determine their value; the entire community has a say. By turning digital assets into NFTs, Web3 games have given their players true ownership of their items. The pay-off for playing and staying invested in the game directly translates to value the player can see in real life.
By giving players ownership over their assets, a free market for assets naturally arises, and unlike traditional games, the participants in the market expand much beyond just players. Rather, speculators, investors, earners, and entrepreneurs also participate in this market with their goals and motivations. While many traditional players mainly seek fun, other participants may seek to profit. Suppose a developer can strike the right balance between these two classes. In that case, this expands the game’s vibrancy and allows designers to create meaningful experiences for a larger group of individuals. Web3 economy will cater to a large population of participants by being more open.
It may sound strange, but the incentives that drive developers in Web2 and Web3 games are entirely different. Let’s consider a traditional Web2 game with a standard monetisation system. As a player, you can purchase currency or items for a set amount of real-life money. The price may change depending on discounts or how far you have progressed, but whatever the mechanism, the incentive for the game studio remains the same. They seek to monetize as much as possible from the player. From a financial perspective, a zero-sum transaction occurs between the player’s bank account and the developer’s. It does not matter if the player’s churn rate skyrockets or the game becomes a pay-to-win as long as the studio maximises profits.
Web3 developers, on the other hand, are incentivised to create a stable economy that promotes trade between players and attracts new players. This is because the value of a web3 business is mainly derived from the value of digital assets. As the community shapes this value via market forces, the developer must give adequate regard to the community. NFT game studios are motivated to make their games as fun and engaging as possible to retain their players. They are also motivated to ensure that those players who own digital assets continue to hold those digital assets. The majority of value flows between players while the developer takes a cut of this value to fund future development. The more players the game has and the higher the market value of its assets, the more the studio benefits.