Hi Everyone. Welcome back to Naavik Digest. If you missed it this past Sunday, we launched Part Two of our Axie Infinity game deconstruction. Check it out and let us know what you think on our socials.

Crypto Corner: Building a Sustainable Blockchain Game ft Gods Unchained

Chris Clay has been working on games for over two decades. He has spent the last 3 years building and operating one of the most popular and sustainable Blockchain Games in the world, Gods Unchained. Together with Alex Takei, he joins your host Nico Vereecke for a deep dive into Gods Unchained, learnings from 3 years of Web3 game building, advantages and disadvantages of using Blockchain technology, & more.

You can find us on YouTube, Spotify, Apple Podcasts, Google Podcasts, YouTube, our website, or anywhere else you listen to podcasts. Also, remember to shoot us any questions here.

#1: Is Blockchain Gaming Recession Resistant?

It appears crypto winter is upon us. “Blue chip” token prices, like Bitcoin and Ethereum, are plummeting. Protocols, once worth tens of billions of dollars, are going to zero. Several Web3 companies are laying off employees. The market and my crypto portfolio are experiencing the Trough of Disillusionment stage of Gartner’s Hype Cycle.

At the same time, multiple articles published in the last couple weeks have suggested that blockchain games are “resistant” to this broader downturn, referencing recent DappRadar reports:

“The number of game transactions and the number of daily Unique Active Wallets (“UAW”) connected to game dapps decreased only 5% from April’s levels. Still, when compared to DeFi or even NFTs, blockchain games are suffering the least. The top blockchain games continue to maintain their player base, showing real engagement atop the charts.”

For context, the “traditional” gaming industry has held up well relative to other sectors of the economy during past recessions. At a macro level, players engaged more with video games during the Great Recession that began in late 2007. According to Nielsen, average time playing video games increased from 15 hours to 18 hours per week in 2009, reaching an all-time high. Rather than reducing gameplay, Nielsen hypothesized that the recession may have accelerated playtime as “gamers look to get more value out of the games they own.”

From a monetization standpoint, the gaming industry still held its own during the downturn. This was clearly demonstrated in console sales with PS3, Xbox 360, and Nintendo Wii sales all growing between 2007 - 2009. This growth occurred without any major product releases during the period.

Hardware spending extended to console and PC game sales too, with the major publishers’ reporting strong operational performance. Activision, EA, and Take-Two all experienced higher revenue growth than the S&P 500 during the recession. Activision and EA, specifically, delivered strong results, growing at 78% and 17% two year CAGRs. It’s worth highlighting that ATVI benefited from the Blizzard acquisition in 2008.

Despite solid operational performance, the blue-chip gaming publishers’ stock prices plummeted. Only Activision outperformed the S&P 500 between 2007 to 2009.

In summary then, the most recent recession suggests that the PC and console industry are resilient to broader market downturns. However, we’d note that mobile gaming, with its greater dependence on advertising spending, may be less resistant to a recession than PC and console. Do check out Eric Seufert’s great piece on this topic.

Circling back to the original question of this essay: can blockchain games avoid the squeeze too? Let’s consider the following data points:

First, game token prices have plummeted along with the broader crypto market. The NFTI index, which consists of eight NFT – mostly gaming – project tokens, has declined 85% year-to-date compared to the DeFi Pulse Index’s 78% decrease and Ethereum’s 70% decrease.

While gaming tokens have performed no better than crypto peers, we know from our traditional gaming analysis that valuations don’t always tell the whole story. Has the blockchain gaming industry’s monetization and engagement remained on solid footing during crypto winter? For monetization, NFT projects’ transaction volumes are experiencing a rapid decline in June 2022. According to Cryptoslam, seven out of the top 10 blockchains have seen volumes fall 35%+ over the past thirty days. Ethereum and Solana, the top two blockchains and 60%+ of market share by transaction volume, have seen volumes plummet 76% and 63%, respectively, over the period. Sky Mavis’ Ronin blockchain, which facilitates Axie Infinity transactions, has seen activity decline 64% in the past 30 days. Simply put, monetization via secondary market transaction fees is plummeting.

In terms of engagement, Unique Active Wallets (a proxy of users) have also started to wobble. The moderate sequential decrease in daily UAWs, noted by DappRadar in May, has been followed by a ~25%+ decline to ~860K daily UAWs in June. One main driver of the June decline is the game Splinterlands. The game reset its reward system earlier in the month to combat botting but resulted in a 70% decrease in UAWs. So, while gaming UAWs had been hanging in over the past few months of broader crypto market fallout, engagement does appear to be declining.

Putting this analysis together, the short answer to “is blockchain gaming recession resistant” appears to be no – at least for this cycle. With the crypto pullback extending to games, I’ve read several posts contemplating what lessons can be learned and what might come next. So, I thought I’d throw my hat in the ring. Here are a few learnings / thoughts on how the industry might be able to better withstand the next crypto bear market, after spending the past 18 months going down the rabbit hole.

1. Build for contributors, not extractors. Before discussing this learning further, I’ll admit that the “make more fun games” discussion point is played out at the moment and has reached meme status. Also, I’ve never built a video game, so I’m hesitant to opine on the topic of making fun ones. What I will say is that typical metrics to gauge a game’s health (e.g., user growth, retention, and ARPU) can be misleading when a meaningful percentage of the player base is primarily interested in the extraction of value.

2. The first generation of popular blockchain games have been too reliant on these extractors. This has resulted in volatile, unsustainable economies. Venture capitalist Josh Kopelman is credited as saying “Numbers always ruin a good story.” Quantitative fundamental analysis can lead to greater accountability and discipline. In that spirit, I’ll put on my finance nerd hat and try to explain what I mean by unsustainable economies with an overly simplified example:

• Assume a game has 100 users.

• 30% of users are net extractors that withdraw $10 per day from the game.

• How much do the remaining 70% of users need to net contribute per day to payout the extractors (ignoring any marketing, live ops, etc. expenses)?

• In our simplified example (depicted below), the answer is spending a net $4.29 per day or ~$129 per month on the game.

For comparison, Fortnite has similar spender vs. non-spender activity — 70% of Fortnite users spend at least something on the game and 30% spend nothing — with an average spend of ~$85 per month. Simply put, Fortnite player spending assumptions would not sustain the extractors in our example.

In order to actually sustain our economy with $85 contributed per month, only ~20% of users can be extractors “earning” $10 per day. As a reminder, an estimated 65% - 70% of Axie Infinity users were scholars, regularly taking value out of the game’s ecosystem, at the game’s peak. In our example, if 65% of users are extractors, contributors need to pump in over $500 per month to balance the economy! It’s difficult to see this economy lasting over the long-run at scale (absent other revenue sources like advertisements, etc.), even with a fancy token design.

In summary then, blockchain game projects need to 1) attract more net contributors and 2) condition net extractors to expect a lower return, in order to sustain their economies over the long run. In the future, I would expect to see reward distribution flowing to the “best” gamers / highest net contributors versus bots / highest net extractors. Meanwhile, I expect that we’ll see investors undertaking greater quantitative analysis to sanity check stories, prior to “ape-ing in.”

• The strength of network effects and founders’ gaming experience matter. The first wave of blockchain games has embraced financial incentives and DeFi loops to jumpstart network effects. It’s not uncommon for blockchain game founders at this moment to say that one of their key goals is to “create demand for the token.” In my opinion, this is short-term thinking.

It’s tempting to see charts like the one below as a reason to create token demand. Turbo-charge your network effects with financial token incentives! But what happens when most of your users are financially motivated and leave when token prices stop going up? In other words, network effects may come quicker by raining your community with token rewards (i.e. free money). But the downside is often weaker network effects than the good old fashioned model of bootstrapping a great product that your community values irrespective of financial incentives. In the heavily edited words of Al Pacino’s character Lt. Col. Frank Slade in the movie Scent of Woman, “Makers of [games]; creators of [network effects]. Be careful what kind of [network effects] you’re producing!” Going forward, I hope we’ll see more founders prioritize building an amazing product (i.e., game) over creating demand for their token.

Similarly, several early blockchain game teams have lacked prior game experience. I’ll still root for these projects to be successful. But in order to maximize chances of success, I anticipate that we’ll see projects (and investors) prioritize game development expertise when forming founding teams in the future. As my gigabrain colleague Lars Doucet summarized well in a recent Twitter thread: “More nerds, less ponzi pls.”

• Prioritize security and trust first and foremost. Proponents of blockchain gaming often talk about NFTs providing users with ownership for the first time. But I’d push back on this. I’d argue that trust is perhaps the key value proposition of Web3. And as a result, security is critical and not all blockchains are equal in this regard.

From a technical standpoint, publishers and Big Tech companies can provide gamers the same ownership and token to fiat off-ramps on their centralized servers (if they really want to and choose to take on the regulatory/legal hurdles). In my opinion, the value of blockchain’s system architecture – when truly decentralized – is that users don’t have to trust or receive permission from any one entity / corporation to transact and own their digital assets. As a result, many of the key issues addressed by decentralized blockchains ultimately boil down to trust.

At the same time, users need to be able to trust that their blockchain assets are secure. Unfortunately, there are numerous examples of NFT ecosystems and communities getting hacked, with the most notable being Sky Mavis’ Ronin $600+ million exploit. Looking ahead, I expect teams to prioritize security when choosing where to build. The blockchains that have sacrificed security for scalability will suffer.

Despite the “FUD”-ish tone of this essay, I’m still super excited about the potential of digital asset ownership in games. For starters, the video gaming market is already massive – valued at $300 billion with 3 billion gamers. There are compelling demographic tailwinds with Gen Z rating gaming their favorite entertainment activity. And a large grey market for virtual items (estimated at $5 billion) already exists where participants monetize digital ownership despite the inherent risks. Meanwhile, there are several examples of gaming executives leaving to pursue blockchain gaming projects. And billions of dollars are being invested to support these new companies. In my opinion, many of the ingredients – market size, talent, and capital — are there.

Despite the various remaining adoption barriers (e.g., impending regulation, attracting more net contributors, etc.) that still must be overcome, I’m optimistic that the lessons from this cycle will be internalized and eventually lead to a stronger industry in the future. That said, the journey out of the Trough of Disillusionment to greater mass market adoption will likely take a while. In the meantime, I look forward to learning and figuring things out alongside this community. (Written by Jimmy Stone)

#2: Deconstructing Dark Forest

This is the introduction to a full game deconstruction of Dark Forest, written by Anthony Pecorella. Sign up to Naavik Pro to read the full write-up and much more of our premium research library.

For this deconstruction, we asked our subscribers to vote on the next topic they wanted to see. A bit to our surprise, the top vote-getter was not Crabada, with its 50k Twitter followers and eye-watering play-to-earn entry fee of over 3,000 USD. Neither was it CyBall, with its $1.8M seed round and 90k Discord members. Nor even Sunflower Farmers — the relaunch of a game that effectively crashed the Polygon chain with nearly half a million users in one week.

Instead, the top vote-getter was a game whose recent 14-day round had fewer total active players than Axie Infinity had every second. A game that lacks any play-to-earn elements and that has no currency tokens, no land sales, NFTs of only minimal importance, and no real monetization. A game that doesn’t even have any investors, instead raising money only through grants and donations.

The game that piqued our readership’s curiosity was Dark Forest, a fully on-chain massively-multiplayer 4X strategy game that is pushing limits and exploring the boundaries of blockchain gaming.

Dark Forest is a result of what started as an undergraduate project for MIT student Brian Gu, who eventually took a leave to work on it. It was envisioned as a way to explore a new set of “zero-knowledge” technologies. The earliest version from 2019 had a playfield shaped like a one-dimensional ring, which was eventually expanded out into a two-dimensional map, gradually transforming into the game we see today.

Also important for Dark Forest is the 0xPARC Foundation (pronounced “zero-eks park”, a play on the famous Xerox PARC), created by tech pioneer Justin Glibert to help support and grow innovation on decentralized platforms. 0xPARC, which is a Public Benefit Corporation entirely funded by grants and donations, is now the owner of the Dark Forest IP and manages the game’s production.

Lattice, an entity related to 0xPARC, is a gaming-focused group that is run by Ludens, with whom we spoke to in order to learn more about the project. One of the big questions we had for him was what their goal in creating this game is. His answer was intriguing: to change the narrative from thinking that “Ethereum is a computer in service of a digital currency” to “Ethereum is a digital currency in service of a world computer.”

The Dark Forest team looks at blockchain technology in a different way than other blockchain gaming teams, seeing it as a vast, distributed computer that has the ability to create “credible commitments.” In other words, it is a machine that has verifiable and predictable behavior and is not dependent on any private entity to continue to function. Dark Forest is the team’s first exploration into what such a computer might be able to do.

This essay will explore how the game works, how the team uses bleeding edge technology to both put an entire game on-chain and enable a cryptographic “fog of war,” how Dark Forest enables a new type of UGC with digital physics, and what other teams can learn from the game’s innovations.

This research essay was originally posted on Naavik Pro - the #1 research portal for blockchain and F2P games! We serve both investors and developers with our premium research. Make us your remote games research department today!

Content Worth Consuming

Game Culture of Collecting (The Ontological Geek): This essay is worth revisiting in context of all the new developments in gaming since. “The cost of modernization has driven people into cities where we earn increasingly isolated livings. A person feels as alone in their car crawling along in gridlocked traffic as they do on a crowded subway, headphones serving as a seal against the noise and the crowds. These and other daily necessities of city living result in our living distinct and disconnected lives, in which personal relationships suffer and are replaced with the alluring simplicity of surrounding ourselves with objects ‑both physical and virtual. Video games fit this behavior neatly. Like Narcissus — who stared at his reflection for an eternity until he became a flower — gamers practice a form of self-obsession by proxy. We spend hours focusing on improving our virtual avatars and accumulating in-game possessions. This is reflected in all stages of play, from character creation, to armor upgrades, to in-game collectibles. As we build our avatars, we in turn build ourselves. If, as members of consumerist societies, we are urged to define ourselves by our possessions, it only follows that we interpret the possessions of our in-game avatars as extensions of our own identities.” Link

The Purpose of Play to Earn Rewards (MetaPortal): "In our recent research piece on value accrual in play to earn economies, we analyzed value accrual per capita as a core monetization KPI. In the process, we found some interesting data on the Axie economy which gave us: 1)A new perspective on the soft-currency rewards in crypto gaming economies, 2) New metrics that can be tracked across other projects (provided appropriate data disclosure from teams), and 3) Further conviction around sustainability and the necessity of the development of new economic models.” Link

Innovative Monetization Features (GameRefinery): “In the report, we reveal which innovative monetization features are proving a hit with players and why, as well as how they're being utilized with best-use examples from games in the mobile market. Our latest report provides valuable insights into innovative monetization features, covering the ever-evolving Battle Pass to new types of gachas and the latest developments in IAP offers.” Link

Play Everywhere: Connecting with Mobile Gamers on TikTok: “ The global gaming community is massive, and judging by the amount of gaming-related content on the platform, many of these gamers can be found on TikTok. In fact, the top 100 gaming-related hashtags on TikTok receive more than 40 billion video views per month, according to internal company data. TikTok's gaming community is also ready to spend. According to a recent survey, 65% of US TikTok users have made an in-app purchase within the last 3-6 months”. Link

What Happens to F2P Mobile Gaming During a Recession: Another old one worth revisiting: “When people talk about mobile gaming’s perceived resiliency to recessions, they tend to conflate two ideas: that gaming is seen as recession proof and that the broader App Economy has seen engagement increases during the quarantine. In order to consider how the mobile gaming vertical will fare during a recession, I think it’s important to 1) parse apart differences in monetization within the App Economy between the quarantine and the recession and 2) parse apart the differences between the console / handheld gaming and mobile gaming verticals.” Link

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