Web3 games have the potential to become a significant player in the gaming industry, contributing to a substantial market share over the next decade. However, as with any developing innovation, the realm of Web3 gaming is not without its challenges. The industry has made a lot of promises and progress, but it’s important to question whether we’re on the right track. Are we heading in the right direction, and what steps must be taken to tackle challenges and fulfill the promised value in this new era?

Before we go further, let’s take a look at the current state of the market.

Current state of Web3 gaming 

Since 2021, gaming has been a major force in the Web3 space, bringing excitement, significant funding, and innovation. The investment landscape has seen a great deal of activity, as shown in the 2022 Blockchain Games Report from DappRadar. Blockchain game investments grew from US$27 million in 2019 to US$7.6 billion in 2022. 

According to DappRadar’s “State of Blockchain Gaming in Q1 2023” report, investments in blockchain gaming and metaverse projects increased by 12.95% to reach US$739 million, suggesting a hopeful future for the industry.

Source: https://dappradar.com/blog/dappradar-x-bga-games-report-2022-overview & https://dappradar.com/blog/state-of-blockchain-gaming-in-q1-2023 

The growth of Web3 gaming has exhibited a remarkable surge, experiencing an astounding 2,000% increase from 2021 to 2022. This remarkable growth has not only captured the attention of avid gamers but has also attracted a multitude of highly skilled developers, surpassing any previous records in the gaming industry.

In 2022, Web3 gaming demonstrated resilience and established itself as a significant participant in the realm of blockchain. While other sectors in Web3 experienced a slowdown, the gaming space continued its global expansion. This period witnessed continued investment in Web3 gaming, even amid what some might consider a “crypto winter.”

Gaming activity accounted for almost half of all blockchain activity across 50 networks, with 800,875 daily unique active wallets (UAW). However, this number is still relatively low compared to the billions of gamers worldwide, indicating untapped potential. It’s important to note that wallet activity alone should not be considered a measure of progress for Web3 games. 

Currently, most projects have centralized and private active user data, which falls short when compared to traditional Web2 games. Additionally, wallet activity in 2022 may include individuals leaving the industry and cashing out, so caution is advised when using it as a metric for assessing progress. Thus, it is reasonable to state that the Web3 gaming industry has not been completely abandoned.

Industry-wide challenges 

As the Web3 gaming space progresses, there is no doubt that it will continue to face challenges such as regulatory scrutiny, mixed responses within the gaming industry, and the sustainability of game token economies. 

Regulatory scrutiny 

In a June 2023 lawsuit filed against Binance, the world’s largest cryptocurrency exchange, the U.S. Securities and Exchange Commission identified three individual gaming and metaverse tokens, including Axie Infinity (AXS), The Sandbox Game (SAND), and Decentraland (MANA) as potentially falling under securities regulations. 

Nevertheless, a judge’s more recent ruling in another SEC lawsuit, against the crypto payment services platform Ripple Labs, is a development that may be favorable to the blockchain gaming industry. U.S. District Court Judge Analisa Torres’s ruling last month clarified that the XRP token is not considered a security, but this determination only applies to programmatic sales conducted on digital asset exchanges. Despite that, projects that incentivize liquidity pools, such as Axie Infinity and DeFi Kingdoms (DFK), could be affected by this definition. The treatment of tokens as investments in liquidity pools raises questions about their status as securities, as pointed out by experts. If gaming tokens are deemed securities, game developers may face fines and disclosure requirements. 

Currently, the SEC is working to establish an official categorization for tokens and NFTs. Given this situation, it’s recommended not to use tokens or NFTs as a fundraising mechanism, or to distribute tokens as incentives for holding another token — a process known as staking. Instead, a better approach is to design a distinctive NFT or token that can be freely distributed and used within the respective game, ecosystem or application.

Developers’ reticence

The Game Developer Conference’s State of the Game Industry 2023 report paints an insightful picture of game developer sentiment toward blockchain technology.

Many developers believe there could be a valuable place for blockchain technology in video games in the future. However, many also believe that some current usages are unsustainable or predatory. Around 14% of game developers are in favor of using blockchain technology in games, while 61% are opposed, and 25% are unsure. 

Sustainability of game token economies

After speaking to tens of game designers and economists, the concept of developing sustainable token economies poses extreme challenges when introducing an open and free economy. Game development should prioritize designing solutions for highly utilized digital currencies and digital collectibles versus launching NFTs and tokens before having a product.

While it may be acceptable to mint NFTs at the beginning to bootstrap a community through engagement and novelty similar to how games today launch on Kickstarter, game developers should first establish a game, then test digital versions of tokens, designing them to be sustainable for blockchain-based, free economies. This means, existing digital currencies and collectibles can not simply be ported to the blockchain due to the incompatibility of being designed in a closed economy versus an open and free one.

Mixed support by gaming companies

Despite these challenges, there have also been positive developments. The Epic Games Store has already introduced several Web3 games into its marketplace, such as Blankos Block Party, Defimons and Gods Unchained. 

After 20 years of being founded and then an additional six years of iterating on the concept of Fortnite, Epic Games released its battle royale mode, which attracted over 400 million users and led the company to launch the Epic Games Store to begin taking market share as a distribution platform. 

In June 2022, Epic formally shared its position on Web3 games compared to Steam, and despite initial skepticism from some traditional gamers, Epic Games remains committed to exploring the possibilities of Web3 gaming experiences. This is obvious when we see games like Gods Unchained doing well on their platform. Since it was launched on Epic Games, GODS, the currency used in Gods Unchained, has rallied 50% from its lowest point in June 2023.

But not all companies are equally enthusiastic. Sega, one of the biggest game developers in Japan, recently stepped back from its announcement to advance in Web3 gaming, with a senior executive stating, “The action in play-to-earn games is boring. What’s the point if games are no fun?” This viewpoint may be tied to the slower pace of success in the Web3 gaming industry, with the most successful title, Axie Infinity, attracting only a few million users. This is a modest figure when traditional gaming studios expect tens of millions of dedicated players to consider a game successful.

The Web3 gaming industry needs more people dedicating their time and skills to improve and innovate in this space. It’s disheartening to see people leaving this promising field. Nevertheless, we at Earn Alliance remain bullish that there are developers who continue to build and release new games in this sector.

Overcoming obstacles

There are many things the Web3 gaming industry can do, to navigate the headwinds. 

Web3 game developers should focus more on developing high-quality gameplay content that provides genuinely fun experiences for players. Cloning similar gameplay content mechanisms does not guarantee the same success as their predecessors.

Also, it’s important to remember that creating content for a game is a time-consuming process that can take years. For example, EatMe.IO underwent three recreations before achieving 10 million-plus downloads, and the creators of Angry Birds encountered financial challenges before launching its blockbuster game.

Beyond creating entertaining games, it’s crucial not to overly incentivize users. Even in gaming competitions, where rewards are common, the primary motivation for players should stem from the sense of fun they derive from the game, rather than from external incentives.

Games that offer something new, fresh, and unique to the table invoke a deep magical sense to the users. This feeling of “fun” comes from the game’s originality, and people often share this genuine joy with others, drawing them into the experience. That’s why it’s crucial to innovate and introduce niche experiences that haven’t had a chance to reach a wide audience.

As such, exploring and unlocking the potential of Web3 gaming requires considerable commitment. While Web3 gaming may not seem thrilling at the moment, it’s essential to remember that it’s still in its infancy, brimming with potential. The right blend of good gameplay content and effective use of blockchain technology will undoubtedly unlock this potential.

Learning for the future 

Web3 games have immense potential to become a significant player in the gaming market, poised to contribute to a substantial market share in the coming decade. While facing challenges and uncertainties, it’s also important to note that the industry has made significant progress since its very recent birth and has attracted enthusiastic gamers. It is crucial to critically examine this very new industry’s trajectory and take the necessary steps to fulfill its promise.

By prioritizing fair and user-centered approaches to gameplay and fostering a player-first mindset, we can create a more enjoyable and valuable gaming experience for all. As the Web3 gaming space continues to evolve, embracing positive change, navigating regulatory challenges, and doing the hard work to develop fresh and fun gaming experiences will pave the way for a vibrant future in this new realm.