January 2nd, 2023: Market Updates

Top News

#1: Looking Back at 2022

Quick note: every hyperlink here points to a game deconstruction or research essay that Naavik Pro published over the past year. If you see anything you missed, make sure to check it out!

After a huge upswing of interest in NFTs and blockchain games in 2021, the industry experienced quite a rollercoaster ride in 2022, ending with a bit of a whimper. The beginning of the year already indicated some weakness as we saw the poster child of NFT gaming and P2E — Axie Infinity — slowing down and showing clear signs of unsustainability. This didn’t stop funding from pouring in, of course, as many other teams thought they could better sustain their project economies with small tweaks and other gimmicks; plus, Sky Mavis made a huge amount of money (be it sustainable or not), which kept the FOMO going for many months. The real setback kicked in during March, when Sky Mavis’ Ronin bridge got hacked; this timeline was also parallel with when heightened macro pressures started kicking in, namely rising interest rates and decreasing asset values in the face of rising inflation, war in Ukraine, and speculative asset bubbles popping.

Over 2022, venture funding stayed relatively abundant as previously raised funds still needed to deploy large amounts of capital. We saw huge pools of capital from large investors like a16z and Animoca Brands, alongside strategic ecosystem funds from blockchains like Immutable, Polygon, Avalanche, and Flow. What really took the remaining wind out of the sails of web3 was the collapse of Luna in May, followed by the even larger collapse of FTX in November. These collapses — plus the clear recognition that play-to-earn as a model needs to be left in the past — has dwindled consumer trust and interest, which will take time to revive; however, many projects were still able to raise Seed / Series A-B funding, which, if spent well, should amount to more success over the next couple years.

There were a few interesting trends across blockchain games worth noting. First, many games attempted to replicate Axie Infinity’s basic P2E model and either pivoted or realized too late that the model itself is inherently flawed. Some of these flaws (for instance, the basic fact that most players simply can’t be value extractors) unfortunately still pop up occasionally to this day, although venture interest heading into 2023 will likely wane significantly. We even saw pivots in marketing from play-to-earn to play-to-own to free-to-own; it’s doubtful the name changes are over yet.

Second, a slightly different but still ponzinomic trend of “move-to-earn” was popularized by StepN, which despite all clear warning signs, still attracted significant investment before crashing back down and losing people a lot of money. This also led to a bunch of copycat X-to-earn-style projects that thankfully didn’t take off.

A third trend was the continued success of sports games. Sorare, above all, showed the most success and sustainability potential, and went from one sport (soccer) at the start of the year to three (soccer, baseball, basketball) by the end. Even though not a game, Dapper Labs also experienced great initial success with NBA Top Shot and its expansion to NFL All Day and UFC Strike (although hype has since waned). Even Splinterlands landed a deal to develop a whole series of sports trading card games, starting with Major League Soccer.

We also saw notable initial user traction — although not necessarily heavy retention or monetization — with casual and hypercasual blockchain games. For example, Arc8 helped lead the way with its casual competitive gaming model and easy onboarding, which was followed by individual casual games like Solitaire Blitz and Trickshot Blitz and then hypercasual collections from Gameta and WAM.

It’s also worth noting that there were some interesting experiments taking advantage of unique web3 aspects such as fully on-chain games like Dark Forest and composability around vague NFTs like Loot. These projects are worthwhile to study from a technology and community standpoint, but they haven’t attracted many users.

Asia also started getting into web3 gaming development in a big way in 2022, at least behind the scenes. This heavy push was initiated in South Korea, where ironically companies can’t even release mobile web3 games domestically. Perhaps most notably, South Korean mobile developer NetMarble dove into the deep end of web3 mobile gaming, starting with adding crypto to an existing game (A3: Still Alive) while branching out to full web3 games like Golden Bros.

We also saw the creation of two notable regional blockchains: 1) Klaytn, which is being used by a number of projects, and 2) Oasys, a collaboration largely between notable Japanese game developers, which has helped drive up interest in web3 games across the region. Big Japanese publishers like Sega, Square Enix, and Bandai Namco are making clear moves into web3 gaming, and even smaller companies, such as Thirdverse (which is making a mobile web3 game based on Captain Tsubasa), are taking more interest. To be clear, not many Japanese web3 titles released this year, but South Korean developers managed to ship several games, especially on mobile and even on Steam, like Mir4.

It was also an interesting year for platforms, from mobile to web to desktop. In 2021, most web3 games were very simplistic, transaction-driven, web-only projects like Alien Worlds, Crypto Raiders, Zed Run, and Splinterlands, in large part due to the necessity of interacting with wallets through browser extensions. As web3 games looked to develop improved experiences in 2022, it became more commonplace to provide downloadable Android APKs and desktop executables. Due to unclear rules and gatekeeping, very few apps initially made it onto the iOS App Store, but eventually Apple clarified its policy, which revolved around ensuring there are no ways to work around its payment system while maintaining its 30% cut — in effect, the rules are quite restrictive but are bound to adjust in the future (for better or worse).

There were a few games like League of Kingdoms, Upland, and Skyweaver already active on iOS prior to the policy announcement whose fates remain uncertain. Valve continued its ‘no web3 games’ stance, and some games like Superior released non-web3 versions on the platform with plans to allow cross-progression via a future web3 client. Epic Games, on the other hand, took a friendlier stance regarding web3 gaming and supported titles like Blankos Block Party and Grit. Despite the lack of clarity in many areas, including legal regulation, game developers remain eager to develop for large audiences using these distribution platforms, which will continue into 2023.

Also over the past year, many brands dipped their toes into web3 / virtual worlds to try appealing to the early adopter demographic. Much of the early experimentation was in the form of basic NFT products like trading cards or collectibles, as well as presences in virtual worlds like Decentraland and The Sandbox. Mattel took things further by looking at the opportunity for next generation virtual toys as NFTs, but it’s still very early. GameStop also launched its own wallet and marketplace leveraging Immutable X. Unfortunately, this project wasn’t successful enough for the company, which has already made layoffs and cutbacks in web3 recently. Notably, some brands also managed to successfully onboard tons of users without even talking about web3, like Reddit’s avatar NFTs and Starbucks’ recent loyalty program — Odyssey. We expect that will become more common, and any web3 technology will quietly slip into the background.

There were also some notable game brands that either flopped or established anti-web3 policies. The biggest public failure for a game developer was Ubisoft’s attempt at selling NFTs for its already struggling Ghost Recon: Breakpoint game as an attempt to create collectibles referred to as “Digits.” Due to a huge audience mismatch and a lack of creating real value, the backlash caused Ubisoft to backpedal and switch its ambitions back to “research mode” (despite funding a number of web3 games). Another contentious area was private game servers that attempted to integrate web3 aspects, which resulted in no-NFT policies from Minecraft developer Mojang and Grand Theft Auto developer Rockstar.

The year ended with an ever-evolving battle between NFT marketplaces vying for dominance. Both OpenSea and Magic Eden drew large volumes over the year, with OpenSea dominating Ethereum and Magic Eden dominating Solana. Consequently, heavy funding poured into both marketplaces, which resulted in their expansions to multiple blockchains. As competition for the same customers with the same NFTs escalated, it turned into “a race to the bottom” mentality centered on not supporting royalty payments to NFT creators as a way to cut costs to NFT buyers. This has stirred up lots of noise — should royalties be made a standard? is that anti-crypto? how should “allow lists” work (if at all)? — which will continue playing out into 2023.

Overall, 2022 was mostly a downward slope for the web3 economy into what is definitely a crypto winter. There were many embarrassments spurred on by bad actors (rug pulls, hacks, frauds, and collapses), but the upside is that there was a lot of innovation, infrastructure building, and economic experimentation that will inform smarter decisions and more capable projects in the future. Much of the money injected into the space likely won’t see returns, but there are many unfinished, potentially high-quality games that show some promise. Of course, there is still much more to figure out in practice around building and maintaining web3 game economies and business models, and there’s more to fight for when it comes to distribution and regulatory clarity. 2023 likely won’t light the web3 gaming world on fire — again, because great games take time to build — but it should be a quieter year of resetting expectations and building the fun and sustainable projects that will define the next era of this movement.

We can’t wait to continue covering everything that will unfold across 2023 for you!

Lastly, even though the write-up above hyperlinked to many web3 deconstructions and essays Naavik published in 2022, here are the rest:

Upcoming Game Announcements

Axie Defenders of Lunacian Land, the first Axie Builders Program game, launched a beta with SLP Rewards. Link
Activision Blizzard President and COO Daniel Alegre left to join Yuga Labs as CEO and help launch The Otherside. Link
Habbo launched an alpha of its web3 game, Habbo X. Link
Echoes of Empires, a 4X space game, recently ran an alpha. Link
Wizarre launched an early access version to prepare for a full launch in 2023. Link
Mighty Action Heroes ran a brief weekend playtest for Genesis Pass holders. Link
Star Atlas launched new features for its pre-season showroom. Link
Dvision World 2.0 beta-launched its first Meta-City: Seoul. Link
Evermoon, a web3 MOBA, launched a mobile alpha on iOS and Google Play. Link
DMM.com announced Oasys as the blockchain for its first web3 game, Kanpani Girls RE:BLOOM. Link
Metaverse Game Studios announced ImmutableX as the blockchain for its web3 strategy RPG, Angelic. Link
Yuga Labs released details on its BAYC Jimmy the Monkey project. Link
Black Block released City Pass NFTs for its web3 MMO, The Sprawl. Link
Mech.com released its second land sale. Link
Tiny World launched its Tinymon system. Link
Legends of Elumia launched a public beta for NFT holders. Link
Mirandus released a playtest of Tavern Games. Link

Live Game Announcements

Spider Tanks announced economic protections under an “Honor System.” Link
Nine Chronicles announced major economic revamp plans and a mobile version for 2.0. Link
Sky Mavis announced Axie Infinity finally passed Google Play Store approval ahead of a Malaysian soft-launch and released accessories. Link
Aurory added rank-based matchmaking and reward systems. Link
StepN announced Christmas and New Years event details. Link
Drunk Robots launched Gang Wars. Link
The Sandbox began its Season’s Greetings holiday event. Link
Galaxy Fight Club announced a new game mode. Link
Sorare announced it received 585K new signups as a result of the World Cup. Link
Cometh, a simplistic DeFi game, has slowly morphed into a trading card game. Link

Funding Announcements

Anima raised $3M for an AR protocol used in apps such as the Onlybots AR digital pets. Link
Revel, “a cross between Instagram and Robinhood wrapped in social game economics,” raised $7.8M in a seed round led by Dragonfly Capital. Link
Daesung Private Equity, a Korean VC Firm , announced $83M Metaverse Fund. Link
Lamina1 launched a Layer 1 Ecosystem Rolling Fund (L1EF) on AngelList for investors and Open Metaverse builders. Link
Spain’s Ministry of Culture and Sports announced an allocation of 8M Euros for the development of the games and metaverse industry. Link

Ecosystem Updates

Futureverse announced the merging of eight different web3 companies into a single metaverse ecosystem. Link
Starbucks’ loyalty program, Odyssey, launched successfully. Link
Mysten Labs was chosen as the blockchain partner for Grand Cross: Metaworld. Link
The governor of South Korea’s Gyeongbuk Province announced plans to utilize the metaverse to strengthen its economic and other ties with Vietnam. Link
Forbes announced plans to roll out its metaverse hub in The Sandbox. Link
Epic Games announced a new metaverse-focused programming language called Verse. Link
OpenZeppelin announced a new metaverse security service, with The Sandbox as a client. Link
EU laws have forced Apple to make changes to the iOS ecosystem that may benefit web3 games. Link
Magic Eden announced a rewards program for user activity. Link
Wemade announced an expansion of its blockchain economy called WeKonomy. Link
Amazon announced a new documentary series around NFTs called NFTMe. Link
Ultra web3 gaming platform announced the seven games for its Wave 3 inclusion. Link
Big Time Studios announced the acceptance of Decentraland’s MANA token for its Open Loot ecosystem. Link

Content Worth Consuming

Messari Crypto Theses 2023 (Messari) – “Last year, I thought ‘Web3’ was a good all-encompassing term that captured cryptocurrencies (Bitcoin and stablecoins), smart contract computing (Ethereum and other Layer 1’s), decentralized infrastructure networks (video, storage, sensors), non-fungible tokens (digital identity and property rights), decentralized finance (financial services to swap and collateralize crypto assets), the metaverse (the digital commons built in game-like environments), and community governance constructs (decentralized autonomous organizations). We’re down 80% since then. Ever since we pivoted to the Web3 moniker, there’s been industry-wide carnage. So, I recommend we retire the term. We need to get ‘Back to Crypto’ in 2023.” Link
Big Ideas in Tech for 2023: An a16z Omnibus (a16z) – “We’re on the cusp of unlocking a new generation of web3-native games that will be fun, broadly appealing, and uniquely enabled by blockchain technologies. It usually takes a few tries for developers to learn to build on new platforms. Take mobile games — Pokémon Go was one of the first true mobile-native games, enabled through features unique to smartphones, such as GPS and the integrated camera. Yet, its prototype, Ingress, didn’t launch until five years after the release of the iPhone in 2007. We can’t rush the product cycle. I believe we’ll see the first web3-native games emerge in the coming years, perhaps sooner than we think.” Link
Regulating Crypto: How we move forward as an industry from here (Coinbase) – “TL;DR: One of the most common questions I get asked by folks in the regulatory governance and policy communities is, what exactly does regulatory clarity look like. In this blog, I outline a realistic blueprint to ensure we have regulatory clarity for centralized actors and a level playing field across exchanges, while preserving the decentralized crypto innovations that will bring enormous benefits to the world.” Link
Blockchain Gaming Report 2022 (LoneWolf’s Newsletter) – “Platforms like Xterio want to publish first-party games and have the economies of their games interact with one game ecosystem token called XTER. Even Animoca Brands with its REVV token and Joyride Games with its RALLY token are exploring game ecosystem tokens. Further, companies like Rooniverse are exploring a one-token economy, while Crabada has already experimented with a 3-token model. 2-token models are already quite common in blockchain games. While all these are considering one-, two-, or three-token models, companies like Mythical Games are questioning the existence of tokens altogether. This shows how these upcoming projects are experimenting with different economic models to attract players and challenge traditional practices to be better.” Link
GAM3 Awards Winners of 2022 (Playtoearn) – “In the GAM3 Awards of 2022, multiple web3 games and content creators were elected by the community as the best projects in one or more categories. The winners will share funds from a 1,000,000 prize pool. This is possible thanks to contributions, services, and grant partners like Immutable X and Blockchain Game Alliance. Polkastarter Gaming organized the whole event. More than 100 web3 projects encouraged their communities to vote for their projects in the GAM3 Awards of 2022 contest. This resulted in over 40,000 community members voting on their favorite projects and content creators, with a total of 250,000 votes across the 16 different categories.” Link
The Games Market in 2022: The Year in Numbers (NewZoo) – “While blockchain games and game-related NFTs experienced a similarly spectacular 2021, the severe correction in the crypto market and fears of a global recession have led to public interest and coin valuations substantially waning throughout 2022. Moreover, this past year exposed some fundamental flaws in the play-to-earn business model. It highlighted how creating a fun experience where players willingly spend is essential for others to be able to earn.” Link