50 Years of Game History and the Future of Web3 Games

Author: Sal.xyz

Compiled by: Ruohua, MarsBit

I read over 400 pages of books, academic papers, and blogs on the economic design of video games, so you don't have to!

Some of the findings will surprise you.

Note: This topic is a condensed summary of a 33-page report I published today through @glxyresearch. While I will do my best to summarize here, the full report contains all the stimulating details. Please read the full report on the following website:

Let's start with some quick facts:

● The global gaming market reached $198.4 billion in 2021

● There are 2.5 billion gamers worldwide

● Gamers play an average of 8 hours and 27 minutes per week

● Mobile games account for 50% of industry revenue (consoles 30%, PC 20%).

It turns out that many of the "killer features" touted by web3 game developers were debunked by the gaming industry decades ago. Industry insiders are skeptical of web3, not because they "don't understand." Rather, they recognize that tokenizing everything is, in itself, a foolish idea.

If you are a developer, investor, or enthusiast of web3 games, keep reading!

I will cover:

● 50 years of gaming history, highlighting past economic design experiments in video games

● The psychological motivations behind gaming

● The future of web3 games

Let's dive right in!

1978-1983: The Golden Age

● Arcades were the main stage

● Players inserted coins into machines and played until their lives ran out

● Games were designed to be easy to learn and hard to master

● This model maximized engagement and revenue for arcade operators

● Arcade companies made a lot of money, even when adjusted for inflation

● $5 billion in total revenue in 1981 = $16 billion today = 8% of today's gaming market size ($200 billion)

● High scores and leaderboards motivated players to climb the ranks in local gaming communities

1983: The Video Game Crash

● Industry profits plummeted by 40%

● Too many games, too many developers, zero quality control (sounds like cryptocurrency)

● 2,000 arcade companies closed nationwide

● Atari dumped 700,000 unsold E.T. game cartridges in a landfill

1985-2013: The Console Wars

● Nintendo kicked off this era with the NES

● They created economic features in games (coins in Super Mario, items in The Legend of Zelda)

● They were very strict about quality control by limiting third-party licenses

● They dominated early on, holding 80% market share

● Games were now sold as one-time, pre-purchased products

● Consumers could play indefinitely

● Playtime became decoupled from revenue generated by games

● This led to industry consolidation and a focus on generating clicks

Early 2000s: The Rise of Online Gaming

● A new gaming economy was established by MMORPGs (Ultima Online, Everquest, Runescape, WoW, etc.)

● Global leaderboards replaced local arcade high score boards

● Online distribution (Steam) improved the unit economics of game development

● Runescape players could make a fortune just by becoming skilled traders

● Rare items in games were the precursors to NFTs (blue party hat)

● World of Warcraft demonstrated the viability of subscription-based game business models

2010s: The Rise of Mobile Gaming

● Started with the debut of the App Store in 2008

● Ubiquitous smartphones and cheap mobile games expanded reach

● Free-to-play games became the clear path forward

● RIP portable gaming

Today: Free-to-Play Games

● Tastes have shifted, and people largely expect their games to be free

● Campaigns/story modes have fallen out of favor

● Game developers now make money through microtransactions

● Goal: Attract a large number of small fish (and dolphins), hoping to catch whales

*Pause*

We have covered the history of gaming, now we will delve into the psychology of gaming.

50 years of gaming history, highlighting past economic design experiments in video games

The psychological motivations behind gaming

● The future of web3 games

Why do we play games? It can be boiled down to three main factors:

1. Testing skills

2. Acting independently

3. Connecting with others

Let's look at an example: how Fortnite captures gaming psychology.

Testing skills --> Building abilities in combat, shooting, and strategy

Acting independently --> Fortnite's massive dynamic map encourages exploration

Connecting with others --> Cross-platform chat, high Twitch engagement

Who plays games? It turns out everyone has their own reasons, but they often fall into four types (proposed by Bartle in 1996):

● Achievers: about 10% of players

● Explorers: about 10% of players

● Socializers: about 80% of players

● Killers: about 1% of players

Games that do not consider these four types of players are simply NGMI. Most gamers are socializers, and most socializers will never spend money on games.

*Tip: Don't try to make NFTs/tokens a requirement for playing games

Game development is a delicate balance between challenge, satisfaction, and economic engagement. Recently, game developers seem to have over-optimized for economic engagement. Just look at how much the online multiplayer menu of CoD has changed over the years…

Sinks and faucets are the most important game design fundamentals for balancing game economies. Faucets distribute assets in the game, while sinks remove assets from circulation. Game designers must balance the growth of new players with the maturity of the existing player base.

Sinks and Faucets I:

● Public facilities: Al-Kharid entrance fee (Runescape)

● Casinos: Gambling mechanisms (loot boxes)

● Collectibles: Extremely expensive items

● Taxes: 2% fee on large trades in Runescape

● Consumables: Construction skills in Runescape

● Donations: Altruistic burn mechanisms

Sinks and Faucets II:

● Staking: Stake Bored Apes for $APE

● Infrastructure: STEPN's GST-GMT token exchange fees

● Mods: Charging for a modified version of a game (meta-game)

● Garbage collection: Burning valuable items discarded by players (or abandoned accounts)

Currency Disconnect

In-game currencies are decoupled from real-world value.

Benefits include: pre-installed set balance (broken income), players buying beyond expectations (sunk cost fallacy), impulse purchases (reducing mental accounting)

Illustration: Fortnite

Market Control

The degree to which the economy in games is controlled by developers:

✷ Candy Crush/Fortnite = complete market control

✷ Runescape = partial market control

✷ STEPN = free market

Notice which of these companies is (still) making money?

Impulse Purchases

When developers introduce real-world constraints (known as choke points) into the process and use in-app purchases as a quick fix, also known as pay-to-win mechanics, this has been utilized by Candy Crush, League of Legends, Mobile Strike, and many others.

Limited Impact Projects

In-game purchases have limited impact on game mechanics, a typical example = Fortnite skins.

Conversion Ability

Originally designed by Infinity Ward for CoD 4 --> Prestiging, players could display status through prestige badges.

Game developers can increase engagement with old IPs and sell map packs. Today, these are achieved through battle passes and ongoing updates.

*Pause*

Well done, having made it this far we are now entering the final phase.

50 years of gaming history, highlighting past economic design experiments in video games

The psychological motivations behind gaming

The future of web3 games

The Future of Web3 Games

What role does web3 play in gaming?

● Liquidity: Buying/selling items

● Scarcity: Items are rare

● Self-custody: Your keys, your cryptocurrency (or NFTs)

● On-chain reputation: Account-less internet, logging in with wallets

● Permanence: Blockchain is eternal

● Verifiability: Proving whether an item is real/false, proving who owns it

● Decentralized governance: Players have a voice

● Payments: Seamless integration, quick completion

● Business model innovation: Pre-sales using tokens (though this may have issues)

● Composability: Games can interact through blockchain source data

Where is today's web3 gaming? In short, very, very, very early.

GameFi tokens have dropped about 75% from their historical highs. Web3 games are built on a pile of random chains (with little integration).

Why do gaming profits fail?

Liquidity is both a blessing and a curse. The open web3 economy allows mercenary users in games like Axie to farm tokens and dump them into the market. Asset issuance (supply) exceeds asset demand (often driven by game utility).

What does a successful web3 game look like?

Sorare, an NFT-based fantasy sports game, provides some insights. NFTs are not a requirement for Sorare fantasy sports. Instead, NFTs support a higher level of competitive gameplay. We hope this model can be emulated by many other models.

What does the future of web3 gaming look like?

We have a rich history of gaming to draw from + lessons learned from early web3 gaming experiments.

Here are the key takeaways from this report:

Tokens come after, games come first. Web3 is best suited for enhancing fun games, not masquerading as the main attraction. Today's gamers are skeptical of the fundamental principles of web3 and are satisfied with the status quo. We need to demonstrate the advantages of cryptocurrency/NFTs alongside killer games to this skeptical user base.

Major game publishers are cautious about web3. This is similar to how traditional game developers were slow to embrace mobile back in '08. Smart web3 game developers will leverage this lack of competition from industry giants and wisely take advantage of this opportunity window.

Don't hold your breath to stay calm. It seems that every week, a new web3 game is built on a new blockchain ecosystem. Assume these chains cannot interoperate with each other. Currently, the main focus is on other uses of web3.

Non-transferable NFTs will be key to web3 gaming. Player achievements and unified logins through wallets can allow player histories to transcend platforms and game environments. There is a treasure trove of on-chain source data waiting to be unlocked.

Meta-games will dominate the highest tier. Imagine games built on top of other games. Sandbox is an early example that fully embraces this approach. Meta-games are key to diversifying the economy associated with ecosystem tokens, which can help absorb token issuance with organic demand.

Bridges will be a critical part of web3 gaming infrastructure. Web3 game developers are building games on dozens of competing, non-interoperable blockchains. Bridges will be a necessary condition for supporting any cross-chain interoperability (unless we are satisfied with using exchanges as bridges).

More market control = more money. Due to economic stakes, traditional game publishers are reluctant to relinquish control over game economies. A potential solution is a semi-open economy where publishers unify multiple games on a single application chain.

Tournaments are an appealing use case for NFTs/cryptocurrencies. This model works because it positions cryptocurrencies as ideal assets rather than prerequisites. As players become familiar with the game, they can choose to participate in higher-level tournaments, such as Sorare.

Not everything needs to be on-chain. Excellent web3 games will blend off-chain and on-chain digital assets. Today, most gamers do not spend money on games. Web3 will not magically change this historical precedent. Keep on-chain transactions reserved for those engaged in economic activities.

DeFi will unlock new revenue opportunities for developers. Imagine competing game studios collaborating to run liquidity pools on AMMs, sharing the fees generated from token swaps. Both developers and gamers benefit from the composable ideas of DeFi and web3.

Final Thoughts

First, create a great game, then consider the best monetization strategy consistent with killer games before adding web3 features.

Historically, the most profitable games attract players through engaging gameplay, and these games are completely free.

Over-optimizing web3 features will attract mercenary players, weakening the gaming community. A sustainable game economy will balance the supply of digital asset issuance and demand through sinks/faucets, market control, and more.

You made it! In this topic, we successfully introduced:

• 50 years of gaming history, highlighting past economic design experiments in video games
• The psychological motivations behind gaming
• The future of web3 games

Please read the full report here.