Understanding the Web3 Game Ecosystem: Betting on Chain Games, We Don't Need Faster Carriages

Author: Alex

Original Title: “IOSG Weekly Brief | Crypto-gaming, We Don't Need Faster Carriages”

Why Are Traditional Games Prohibiting Player Trading?

Recently, we have had conversations with many game teams, and a common consensus we reached is that the design of token economies in games is generally very tricky. In traditional games, "nurturing" is a cornerstone for maintaining the vitality of the game. What is "nurturing"? It is allowing players to experience growth from zero to one, from nothing to something. The concept of nurturing runs through almost all successful games, from World of Warcraft to the amazing Immortal Taoists. However, allowing game designers to recreate the "nurturing" experience in blockchain games is as difficult as making track athletes run in water.

First, we need to understand how traditional game companies industrialize the production of high-quality "nurturing" experiences. If we were to describe it in one sentence, it would be: "Create countless closed parallel universes, allowing each player to enjoy themselves in their own universe."

For example, in Diablo, the protagonist starts with nothing and in ragged clothes. When the protagonist helps the townsfolk by eliminating bandits, the residents reward the protagonist with a sword, allowing them to feel the positive feedback of growth. A complete flow cycle is thus completed.

Behind this behavior, there are two indispensable elements. The first is the parallel universe: if Player A helps the residents and they no longer need Player B's help, then the game ceases to exist. The second is closure; if Player A sells the sword they obtained directly to Player B, then Player B loses the motivation to eliminate the bandits, and their "nurturing" and "flow" experiences will be severely weakened.

Therefore, in the vast majority of games, game design strictly adheres to the principles of "parallel universes" and "closed worlds." They extensively use dimensional technology and prohibit player trading. The first reason is to better capture cash flow, and the second is to ensure players' nurturing experiences.

However, these two foundational elements of game design are at odds with the "metaverse" and "blockchain."

In fact, in Diablo 3, the development team once attempted to set up an auction house that allowed players to trade equipment for dollars directly. Soon, this feature turned into a disaster. The originally rich nurturing experience of several hours was replaced by purchases of just a few dollars, and players lost their goals of leveling up. On the other hand, those players selling game equipment quickly saw their hundreds of hours of hard work equated to a few dozen dollars, and they soon left the game.

The auction house feature was hastily taken down amidst criticism and was never mentioned again.

In fact, even in the design of the leading Axie, we can see a strong contradiction between game design and blockchain. In Axie, each creature has its own level, which grows with the player's investment. However, this level cannot be recorded on the blockchain but is stored on centralized servers. When players sell their creatures to a third party, the level resets. When players buy back the creature, the level is restored. This design is not only counter-intuitive but also triggers a series of exploitative attacks that take advantage of the reset level feature. Behind such an ungraceful design, we see the fundamental incompatibility between traditional games and blockchain.

This raises my first thought. Is traditional gaming really suitable for entering the crypto space? Will blockchain games still exist in the form we recognize as games? Perhaps this "game" is not the same as that "game"?

My first thought is that perhaps all value-based nurturing experiences cannot survive well in blockchain games. What can endure should be the growth experience of players' skills and abilities. Simply put, PVP and esports games often do not rely on numerical nurturing; they are more likely to form a chemical reaction with the open economy on the blockchain. However, to make accurate predictions about the development of blockchain games, we need a deeper understanding of the essence of games. This article will not elaborate further due to space constraints.

With numerous challenges, why still bet on Crypto-gaming?

This year, the explosion of Axie attracted many entrepreneurs from the traditional gaming industry to rush into this field. Many immediately criticized the playability of Axie Infinity and confidently promised to create a game that is more fun than Axie Infinity.
This sounds somewhat ridiculous. It is akin to when the internal combustion engine-based car was just invented; although it was not fast, it attracted widespread market attention. At this time, those from the carriage companies jumped out, promising that they would also produce cars. How would they design it? By having faster horses pull the cars.

I believe blockchain games will be a completely new entity; this is a non-continuous genetic mutation. Blockchain games may look like games, but the current blockchain games are merely a patchwork of the initial competition between game genes and blockchain genes. I do not believe that Web 2.0 native game teams can truly understand and drive this evolution, just as carriage companies could not genuinely promote the innovation of internal combustion engines.
If "faster horses" represent "more fun games," then what is the "internal combustion engine"?
It is decentralized production relations.

This may sound somewhat abstract, but fortunately, in the traditional internet, we have already observed the tremendous potential released by decentralized production relations. (Web 3.0 must be decentralized, but decentralization is not necessarily Web 3.0). In my view, the product with the most decentralized spirit in the Web 2.0 era is Douyin (TikTok). Although Douyin does not have a direct token system or token economy, it has completely activated the short video creator economy through a fair content distribution mechanism and user-friendly creation tools.

What Douyin challenges are centralized content producers like HBO or iQIYI. Douyin escaped the internal competition in the content production field and conducted a dimensionality reduction attack from a higher dimension. Douyin has thoroughly activated individuals who previously lacked production and distribution capabilities and established a monstrous creator economy around them.

In contrast, why has Axie gained such substantial community support? I believe there is a very important factor that many overlook: all the revenue generated during Axie's operation is directed into the treasury, and the benefits of the treasury are rewarded to all builders (players, KOLs, guilds, teams, liquidity providers). Douyin completed the revolution of decentralized production relations through fair distribution and easy-to-use production tools, while Axie won people's hearts through token economics and DAO governance blueprint. The "techniques" are entirely different, yet the "principles" align perfectly.

How to Implement New Production Relations?

Undoubtedly, the incentive alignment in blockchain games will release a whole new level of game productivity. But what should everyone produce? In DAO-based games, should every player come together to design gameplay and collaborate on coding?

I believe it should not be like that. I have also developed games before, and I believe that games are a form of artistic expression. Just as literature needs writers and films need directors, games also require a soul figure with absolute authority to drive their production. We may have all played that party game where one person adds a sentence to write a novel; clearly, high-quality artistic content is difficult to advance through such a decentralized method.

Thinking about this may feel a bit discouraging, but don’t worry. If we carefully examine the financial statements of a traditional game company, we will find that the largest portion of the company's costs is not development but distribution. Simply put, it is publicity, promotion, and marketing. And all this work perfectly aligns with players who naturally love games. In fact, in the Web 2.0 era, there were already many streamers, content creators, esports players, game guide producers, and active members of guilds… They were all working for free out of love, attracting new players to the game. If we can use a token system to recruit them and turn them into the owners of the game, the potential is immeasurable.

On the other hand, when the combinable and splicable components in the "metaverse" mature, we may also see more people having the opportunity to become more meaningful content producers. For example, paid third-party skins, maps, mods, tournaments, game guides, etc…

The P2E advocated by Axie essentially takes the investment of new users (which was originally the profit of game companies and platforms) and returns it to the game players. However, this P2E is still just an attempt in the infant stage of paradigm shift, and there are still many technical issues. (The one-time mining hinders the formation of positive cash flow, repetitive PVE meaninglessly consumes players' energy and breeds bots/studios, how to smoothly complete the DAO transformation in 2023… etc…)

My Ideal Web3 Game Ecosystem

Let’s imagine a future where there is a person who, in response to Web3, we will call him Wang San.

Wang San is a coder at a large internet company. In his spare time, Wang San is a hardcore gamer. His favorite game is Dark Souls. In 2022, Wang San attempted to start a gaming venture; he gathered a few friends to create a roguelike + battle royale game. After burning through over a million in savings, he realized that the customer acquisition cost of over 200 yuan far exceeded the LTV of the game, and ultimately, he had to disband the team and reluctantly returned to his job.

In 2026, Wang San wanted to try again.

Wang San never forgot about his game, and after some time, he gained more confidence. He restarted the project and named it "Meat Pigeon Battle Royale." He wrote the game design concept into a whitepaper and posted it in a Web3 gaming community.

Soon, the whitepaper for Meat Pigeon Battle Royale sparked discussions in the community. Community members Zhang Si and Li Wu were both excited about this new gameplay design, and they began interacting with Wang San. The three of them had in-depth discussions on Discord about the innovative aspects of the gameplay and how to iterate on it. According to the descriptions on Zhang Si and Li Wu's galaxy badge NFTs, they had both participated in the early development of Axie Infinity and Illuvium. Zhang Si was one of the most popular skin creators on Axie, while Li Wu was a well-known esports player and ambassador for Illuvium.

The three hit it off. A week later, they decided to establish the DAO for Meat Pigeon Battle Royale on a DAO aggregator. Soon, more gaming enthusiasts joined the organization; some helped write code, some helped create artwork, and others assisted in designing the economic system.

About a month later, the demo for Meat Pigeon Battle Royale was completed, and they collectively decided to upload the demo to a Web3 social platform, garnering numerous NFT likes overnight. By this time, the team had over ten part-time founders. They were incredibly excited about Meat Pigeon Battle Royale, and several of them hoped to quit their jobs and devote themselves fully to game development. After discussing with the team, Wang San decided to crowdfund some money to first address the livelihood of a few core contributors.

They publicly sold 10% of the tokens for Meat Pigeon Battle Royale on a Web3 Kickstarter platform. To show their determination, they locked their tokens in the treasury controlled by the DAO through a smart contract. This is a public address, and any transactions within the address must comply with the DAO's rules, which are written into smart contracts based on voting decisions made by all token holders according to their weighted power. As the game develops, the rules will also be periodically revised through voting. Additionally, to ensure compliance, all manual transactions in the treasury that are not smart contracts must be announced 8 hours in advance, preventing malicious dumping by managers.

Due to the innovative game design and robust token model, many gaming enthusiasts responded, contributing amounts ranging from hundreds to tens of thousands. Meanwhile, several guilds, led by YGG, also participated, collectively purchasing 5% of the shares.

Once the development funds were received, aside from a small portion directly unlocked for the team to cover living expenses, the vast majority was locked in decentralized development platforms like Gitcoin. As the team expanded, more and more development costs would be paid directly to engineers and designers through Gitcoin, with all invoices and corresponding source code being documented as NFTs, subject to oversight by a Web3 auditing DAO. Of course, some anti-cheat algorithms were also developed confidentially using ZK technology. The community could see where the money went and what it did, but the specific code was encapsulated.

After a year of development, the game was launched. By this time, the DAO had hundreds of contributors (early investors who did not contribute had been voted to be bought back) and thousands of deep testing players. Everyone was working hard to promote the game within their Web3 social circles, and the game's attention skyrocketed. Three months later, the game sold NFTs worth tens of millions, and the secondary market generated over a million in fees each month. These revenues were 100% transferred to the treasury via smart contracts, and according to the DAO's rules, part of it was locked to maintain the token price, while another part was continuously distributed to contributors.

A year later, the game reached 10 million daily active users, and the Pepsi Cup Meat Pigeon World Championship successfully concluded.

In Conclusion

I now ask every project founder what they believe is the most important aspect of crypto gaming. Many people will answer that it is ownership.

I believe that ownership is merely a surface phenomenon, not the essence. For example, when I hold a stack of Zimbabwean banknotes, do I own that money? Clearly, these banknotes are more "NFT-like" than NFTs; they are unique, traceable, and even tangible. I own the rights to this money, yet the value behind it continuously escapes me due to inflation. These fiat currencies, which have strong property attributes, are even less valuable than the much-maligned Q coins of Web 2.0. Without decentralized empowerment, there is no decentralized property rights. NFTs that lack decentralized empowerment ultimately cannot escape the fate of Zimbabwean currency.

We hope to see more entrepreneurs step up to build a truly decentralized creator economy together.