The crypto world has experienced a rough couple of months, with the space witnessing the most recent collapse of what was the second largest crypto exchange FTX, in addition to the prior fall of leading crypto hedge funds like Three Arrows Capital as well as the dramatic crash of TerraUSD and Luna with the onset of the ongoing crypto winter. With the market experiencing a US$2 trillion ($2.8 trillion) loss in value from November 2021 to end-September this year according to data by CoinMarketCap, businesses and investors in the crypto space have been sent into a deep spiral.
The blockchain gaming sector, which has been gaining popularity in line with the then crypto boom, has a fair share of troubles on its plate as well. Whispers of the unsustainability of play-to-earn (P2E) games have long permeated the space, with player numbers having stagnated for a time as compared to its beginning stages. As such, the arrival of the crypto winter only sent a chilling reminder to many players in the sector that there is work to be done for the continued survival of the industry.
This is something that Justin Hulog, chief studio officer at Immutable, an Australia-based non-fungible token (NFT) gaming platform, has long noticed in the blockchain gaming world. “To be fair, I actually have a lot of respect for the earliest P2E games in 2017 (such as CryptoKitties and Axie Infinity). In many ways, they started the first prototypes for people to get engaged with these models,” says Hulog in an interview with The Edge Singapore.
“However, the earliest versions of P2E games were overly focused on unsustainable value extraction,” he explains, where the main motivation of players was not primarily to play the games, but to earn from it.
“As a result, in order for many of these games to continue to be able to pay these players, it requires new players coming in and putting in more money into the games,” says Hulog. “Ultimately, that is not is a healthy or viable way of thinking to manage the [gaming] economy for the long term.”
Axie Infinity is an “idle battle” game where players can collect pets released in March 2018, while CryptoKitties is a game that allows players to collect and trade dynamic valued cats released in November 2017.
Typically, players are able to earn from US$200 to US$300 ($276 to $414) a month from playing a P2E game, according to the co-founder of blockchain gaming studio Nyan Heroes, Wendy Ayche.
Meanwhile, a research report by DappRadar released on July 12 found that the total number of players across the P2E sector worldwide exceeded 1.2 million in March, with a total of US$2 billion observed to be pumped into the global blockchain games industry for 2Q2022, in line with investments in the previous quarter.
A necessary stress-test
The unsustainability of earliest versions of P2E gaming has come with certain consequences, where a lot of the P2E games that had business models that were too good to be true ultimately ran out of money, explains Hulog. “A vicious cycle started where several of these games were less able to get more players, resulting in players churning out because the value was dropping. Many of those companies are not around anymore because those games have crashed.”
Most notably, Hulog shares that some NFTs exchanged in P2E gaming have clearly lost their value, taking another dive in the most recent crypto crash, which has affected the economic health of the ecosystem at large. “The value of some of these NFTs has since been halved or even quartered in light of recent developments, which has not been good for the space,” he says.
Within the renowned crypto P2E game Axie Infinity, the NFT price floor for in-game “pets” or Axies, which was once worth as high as US$340, fell to as low as US$6 in July. The price of Axie Infinity’s in-game currency, also known as Smooth Love Potion, which was at 35 US cents in July 2021, traded as low as 0.3 US cents as at Nov 3, according to data from CoinMarketCap. NFTs for another gaming platform StepN, which has a similar business model to Axie Infinity, also fell to US$90 in July from a high of US$1,400 in April.
Yet, Hulog claims that the recent crypto winter may well be a blessing in disguise, as a “stress-test” on many P2E games to observe which players are working in good faith and to sieve out players that are building an unsustainable model.
“Now, people are more about smaller, more sustainable transactions [in the P2E gaming ecosystem], instead of inflating the value of assets in-game,” he says.
At this juncture, Hulog shares that his team at Immutable has noticed that more high-quality builders are now entering the space. “Many of these developers worked mainly in the Web 2.0 space [first], and it is interesting to see more large companies and large brands entering the P2E gaming space as well,” Hulog says, sharing that Immutable has worked with brands such as Marvel and Disney recently to launch early collectibles in their games.
Immutable develops games that allow players to buy in-game items in the form of NFTs, which they can then trade without gas fees — transaction fees paid to network validators for their services to the blockchain — on the Ethereum-based ImmutableX trading platform. The company secured US$200 million in Series C financing led by Temasek earlier in March, with investments from leading blockchain game and venture capital company Animoca Brands and technology company Tencent, bringing its valuation to US$2.5 billion.
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“Although our tokens did suffer in the initial stage of the recent crypto market drop, they have recently recovered and gone back up again, as people have once again gotten more interested in the P2E gaming market and wider crypto industry again,” says Hulog, on how Immutable’s existing games have been faring since the recent crash. “We’ve bucked the trend in a lot of ways in terms of holding more value in our tokens and our entities, though crypto continues to be a very volatile industry.”
Moving to ‘play-and-earn’
In a bid to re-ignite the hype and approach towards P2E games that may very well be fizzling out, several other industry leaders have acknowledged their desire to re-challenge existing structures and innovate more in the space.
“We’re experimenting, and I think it is important to be transparent about that as well,” says co-founder and COO of Axie Infinity Aleksander Leonard Larsen on “The Dawn of Web3 Gaming” panel on Sept 28 at the Token2049 Singapore 2022 Conference. He encourages the ongoing discussion of “true product market fit” in the gaming sphere, and shares how his team at Axie Infinity attempts to best cater to avid gamers and their evolving needs and desires over time.
“The end-goal will likely be to design a unique way of tracing tokens used in the game and then rewarding the right kind of behaviour, which has always been the intention of the token,” notes Larsen.
Axie Infinity is one of the most popular and prominent P2E games, reporting over 2.7 million active users at its peak earlier in January. The game is touted as a leader in the blockchain gaming space, having hit a US$3 billion equity valuation earlier in October 2021.
Piers Kicks, partner at digital asset research company Delphi Digital, who was on the same panel, also adds to Larsen’s point on how the space is particularly accepting of changes and ways to improve right now. That being said, he advises those in the space to always “err on the side of caution” when proceeding with developments.
“The purer the narrative, the easier for people to [achieve it],” says Kicks, explaining how it might be beneficial for gameplay to be designed in a more meaningful way such that the value and skills that players bring can be constructively optimised back into the ecosystem. “Only then will the full potential of in-game rewards be unlocked and more prohibition of mercenary ways in the space be in place,” he says.
“That being said, the playbook is definitely not quite written, and at this stage we’re still sort of figuring all this stuff out,” Kicks reiterates.
Moving forward, Hulog asserts that it is key to set player expectations appropriately, together with changing the language that addresses P2E games.
“I think the industry is moving away from ‘play-to-earn’ games, and understanding them as ‘play-and-earn’ games,” says Hulog. “Players must first want to play the games for leisure and/or entertainment purposes, instead of first or solely prioritising reaping monetary rewards from the games.”
Hulog explains that the approach towards a P2E game in fact should not be that different from that of any other regular video game, in order to ensure the sustainability of the ecosystem.
“The primary driving force of players should always be to achieve certain fundamentally intangible things [that might not be able to be cashed out] in the game, such as skins, ranks and titles or weapons they desire,” he shares. “Just like how players are first investing their time in the game, they should be prepared to ‘lose’ in some aspects [monetarily] while gaining through the purchases they wish to hold.”
“If you go into playing P2E games to become a millionaire, that’s the wrong frame of mind,” Hulog adds. “You should play the game, for the game, and not just for the tokens.”