What is a Web3 Game?
Web3 gaming or blockchain gaming refers to games that use decentralized networks to enable transparency, security, interoperability, and immutability. These games utilize blockchain technology such as cryptocurrencies, non-fungible tokens (NFTs), and smart contracts to offer players more control over their digital identities.
Web3 games allow players to buy, sell, and trade in-game assets without the need for intermediaries by recording transactions on a publicly distributed ledger. This new development in gaming has the potential to transform the gaming industry and revolutionize the way games are played and monetized.
Web3 crypto games are still in their early stages and have been misbranded as a way to get rich or earn an income playing a game. However, they’re really about redefining the gaming industry by enabling developers to create innovative gameplay experiences while giving players an opportunity to own their identities and assets within gaming worlds and across platforms.
How do Web3 games work?
Web3 games use various crypto technologies to implement new features and opportunities not possible in traditional games.
- Blockchains - Blockchain technology provides a transparent and immutable ledger of all in-game asset transactions. This means that all transactions within the game, such as purchases or trades of in-game assets, are recorded on the blockchain and cannot be altered or deleted.
- Ecosystem Tokens - Ecosystem Tokens are fungible cryptocurrencies that can be created on top of a smart contract blockchain (like Ethereum) to act as a governance token or be used as a form of "money" within the ecosystem, allowing players to purchase in-game items or access premium features. Ecosystem governance tokens can play a vital role in enabling the community to participate in decision-making processes and can give players a sense of ownership in the game.
- Non-fungible tokens (NFTs) - NFTs are unique tokens that represent ownership of a specific asset. In Web3 gaming, NFTs can be used to represent rare skins, items (such as weapons or armor), plots of land, and other cosmetic collectibles.
- Digital Wallets - Web3 games use digital wallets to store and manage various collectibles and in-game assets. Digital wallets are simply unique crypto addresses that are used to identify players and allow them to interact with the blockchain.
- Smart contracts - Smart contracts are used to manage the trading of in-game assets on decentralized marketplaces. This means that players can trade with each other without the need for intermediaries. Web3 games use smart contracts to ensure all trades are executed safely, securely, and in a trustless peer-to-peer way—this helps prevent the fraudulent activity that often occurs on gaming black markets.
Advantages of Web3 Gaming vs. Traditional Gaming
I often get asked “Why Web3 gaming?” Traditional databases are more efficient than blockchains, so what unique features does Web3 tech unlock for games that justifies using it?
The benefits of Web3 can be broken down into two categories: one for players and one for developers and publishers:
Benefits for players:
Player Ownership: Players can truly own their in-game assets—enabling them to buy, sell, and trade with other players directly, without the need for intermediaries. NFTs replicate the features of physical game assets/collectibles in a digitally native way.
Immutable Assets: In-game assets and items that are secured by a blockchain cannot be duplicated or erased—while offering transparent, verifiable supply and authenticity.
For example, in April 2023 factory workers were caught stealing thousands of the rarest Pokémon cards out of packs before they went out to stores.
Saw this on a FB group. Allegedly, printing company worker stole hits off the line and tried to offload them to a LGS.
by u/GuavaWave in PokemonTCG
Another example is when Logan Paul spent $3.5 million dollars on a box of “sealed & authenticated” first-edition Pokémon cards—only to find out after opening the box it was full of G.I Joe cards. If the cards were NFTs on a blockchain both of these incidents wouldn't be possible.
Permissionless Building: Something unique to blockchains is that they’re composable and permissionless. These distinct qualities allow third-party developers to build websites, apps, services, and experiences around the game without the need for an API.
For example, anyone could use public blockchain data to create a gaming-specific social media site that displays all your in-game assets and achievements for every Web3 game you’ve played. It could also create a followers/friends list based on players you frequently trade or play with.
Interoperability: Web3 games can be built to be compatible with other dApps (decentralized applications) such as wallets, marketplaces, and exchanges. Web3 gaming also enables greater interoperability between different games and platforms. Personally, I don’t see many gamers or developers having a desire to import assets from one game to another, but this is a minor feature that might play a larger role if a universal metaverse is ever created.
Benefits for developers and publishers:
Secondary Market Sales: Allows developers to monetize digital scarcity, which means that in-game assets can be made unique, rare, and valuable. CS:GO skins are the closest example of traditional gaming implementing this monetization strategy—but it falls short of what Web3 technology can do.
The first issue with the CS:GO skin market is if you use the official Steam marketplace it’s a one way trip, Value (the company that owns Steam) cannot allow you to cash out your money. If you sell $200k worth of skins it effectively becomes “store credit”. The only thing you can do with that $200k is spend it on buying Steam games.
The second issue is most players don’t even use the official Steam marketplace because of it’s limitations—which means Steam doesn’t collect it’s 13% royalty fees on most sales. Most sales happen on black market sites like Buff Market because they allow you to cash out using Alipay. I believe they are operating illegally since they custody your funds and facilitate trading without complying with financial regulations.
The third issue is CS:GO skin trading sites have been hacked many times, one of the most popular black market sites had $6 million worth of skins stolen from players. There are also CS:GO skin scams on almost a daily basis—some even are able to advertise their scams by streaming on Twitch. Black markets lead to hacks, scams, and a loss of trust. An official NFT marketplace where players can go to buy, sell, or trade their skins using smart contracts would eliminate these issues and allow Value to collect trading fees.
Reward Dedicated Players: Allows developers to monetize rewarding high ranking players or tournament winners with rare in-game items that have real world value. Since developers can enforce royalties on secondary market sales using NFTs, this is a win-win for both players and developers. Having such high-value rewards can not only be a strong motivator for existing players to play more hours but it can also serve as a powerful UA tool.
Improved User Acquisition: The introduction of Web3 technology enables developers to create unique incentives for UA. While some of these early experiments have failed (Play-to-Earn), others have had huge success. Yuga Labs’ Dookey Dash rewarded players who achieved the top in-game scores with exclusive NFTs. Videos of the event received millions of views and attracted many traditional gamers and eSports stars to play the game. In the end, Kyle Jackson, a Fortnite player who goes by “Mongraal,” got 1st place and was rewarded with the rank 1 NFT. He then sold it for $1.6m. Yuga Labs made about $2.2m on purchased in-game power-ups for the event plus royalties on close to 37,000 ETH (~$61m) of trading volume.
Running ROI-positive UA campaigns has become much harder since new tracking and advertising policies are being enforced. These new policies are hurting mobile games especially hard since they rely on targeting “whales” that account for the vast majority of their revenue. NFT ownership data could be a solution that can help publishers gain the insights they need to create stronger look-alike personas based on wallet history and target user acquisition in ways we couldn't in Web2.
Fund Raising: Developers are able to pre-sell in-game assets for starting capital to build a game without having to sell equity early on. The ability to bootstrap development by selling NFTs or tokens is a game changer and can also create a strong community of early supporters who can help with organic user growth.
Types of Web3 Gaming Models:
Traditional game monetization is often exploitative and detrimental to the core player experience. Game developers are incentivized to make previous purchases less relevant or desirable, so players will pay for new in-game items, loot boxes, or microtransactions.
Developers are also disincentivized to make desirable characters, items, or skins earnable through skillful or dedicated gameplay because that would make players less likely to spend money in the game’s store.
In Pay-to-Win games developers are constantly releasing new items, characters, or monsters that are more powerful making previously powerful ones obsolete (known as power creep).
Card games like Hearthstone are even worse, when they release new card sets you are forced to spend hundreds of dollars buying the new card packs because you can’t even use the older cards you purchased in the PvP modes.
In Free-to-Play cosmetic only games that monetize through selling in-game skins—the developers typically don’t allow you to sell or trade the skins you buy since they can’t effectively monetize secondary sales.
Developers are also disincentivized to create rare or exclusive skins since that would only limit how much money they can make on primary sales.
New Web3 gaming models enhance the economic alignment between players and developers by sharing value with players. This allows players to sell their in-game assets to other players while a portion of the sale goes back to the developers.
Monetization models that include royalties on in-game assets incentivizes developers to build for the long term, optimize for player enjoyment, and allows them to avoid power creep. By focusing on building the best player experience possible you’ll create die heart super fans and maximize the value of the game’s assets and royalty revenue simultaneously.
Play-to-Earn (P2E)
The selling point of Play-to-Earn (P2E) games was that you’ll be able to earn money simply playing a game. On paper, this idea sounded great.
Developers could use in-game assets (NFTs or tokens) to reward players for playing the game. It seemed like a win-win situation, developers didn't have to directly pay for user acquisition and players get to have fun while also making money.
There are three main issues I see with this business model that ultimately caused it to fail:
- Because players could earn in-game assets simply by playing the game, it was flooded with low-income farmers and bots—it was nearly impossible for real players to earn any meaningful money playing the game. What’s even worse is speculators drove prices up, making assets needed to play the game unaffordable for real players. In the end only speculators and value extracting farmers were left in the ecosystem.
- The user acquisition strategy was to give out assets to anyone who played the game which meant you needed a large group of investors to keep buying and holding these farmed assets. Once investors tried to exit their positions without a larger group of new investors ready to buy in, the game’s economy ended up collapsing like a ponzi scheme.
- Since the user acquisition strategy revolved around new investors continually buying in-game assets, the developers had to focus on making the game a financial vehicle first and a game second. This resulted in little to no real players because the games just weren't fun to play.
After reviewing early Play-to-Earn experiments, I learned that it’s impossible to create a sustainable game that gives players assets simply for clicking buttons.
Thankfully there are three new variations to the Play-To-Earn model that some games are testing:
- Play-and-Earn (P&E) - Some games have decided to move towards a “fun first” approach. They still reward players who farm in-game assets but now focus on making the game fun to play first. This solves the third issue I mentioned above but doesn't fix the first two.
- Play-and-Own (P&O) - This approach involves rewarding gameplay with digital collectibles (NFTs) while having no tokens. When paired with the “fun first” game design, Play-and-Own can solve the third issue and help to solve the second but the first issue I covered above will still significantly harm the player experience.
- Win-to-Earn (W2E) - This approach involves only rewarding players for winning and demonstrating skill. Win-to-Earn is the variation of Play-To-Earn that I personally think will end up being successful—with this model, players only get rewarded for winning, completing difficult achievements, or being in the top percentile of ranked players. This model paired with quality gameplay can solve all three of the issues I outlined above.
Free-to-Own (F2O)
This is an interesting new model where developers give out NFTs via free mints, these NFTs will be in-game assets which the developers earn royalties on secondary market sales. While this sounds great for players I question the viability of the business model—completely getting rid of primary market sales likely means the revenue a game studio earns will be much lower than traditional models, making it hard to see how they would be able to compete on content quality.
The Web3 gaming startup Limit Break is developing a game called DigiDaigaku, which uses a Free-to-Own model. They Freely delivered NFT assets that will act as generators that create future NFTs for in-game use. The idea behind this model is that initial holders become invested in expanding a project’s reach and are not motivated to sell since they don’t have any buy-in costs to recoup. I don’t really have enough information or data to analyze but it will be an interesting experiment to watch.
Pay-to-Own (P2O)
Pay-to-Own is a Web3 gaming model that I coined and think will be the most successful for games looking to produce a high-quality game for a mass-scale audience.
Pay-to-Own is essentially an improved version of the traditional Free-to-Play (Freemium) model—it uses NFTs and blockchain technology to sell in-game assets directly to players and then effectively monetize secondary sales of those assets.
The Pay-To-Own model can be used by both cosmetic only games (where in-game assets do not affect gameplay) and Pay-to-Win games (where in-game assets give players an advantage in winning).
The game studio would still sell their in-game assets through a shop or lootboxes (to generate primary market sales)—but they would be NFTs that can be bought and sold on a secondary marketplace that enforces royalties on every sale.
Pay-to-Own has a few advantages over Free-to-Play (Freemium):
- Swrve found that the top 0.15% of gamers account for 50% of all in-game spending. These players are known as “whales”, some of them spend upwards of $1m+ per year on in-game assets. The Pay-to-Own model is more effective at monetizing whales because they would be able to buy rare and exclusive in-game assets at much higher prices. A perfect example is CSGO skins—some of these rare skins sell for $400k+ on the blackmarket, if they were NFTs (with a 15% royalty) the game publisher would capture a $60,000 fee every time one of these traded hands on the secondary market.
- Players will be more willing to buy in-game assets and pay a higher purchase price if they know they can resell them later (potentially for a profit) if they no longer want the asset or if they quit playing the game.
- Improves alignment between developers and players, since developers are earning revenue from previously released assets there isn't a constant need to flood the game with new in-game assets that cause power creep.
- Win-Win for both players and developers, Pay-to-Own can increase revenue for developers while also improving the player experience compared to the traditional monetization models.
GameFi
GameFi is the fusion of gaming with decentralized finance (DeFi) and represents the financialization of a video game.
Blockchain technology and smart contracts enable these types of games to live fully on-chain—giving them several benefits to traditional financialized games:
- Transparent game logic and state are auditable on the blockchain
- Immutable smart contracts means the game will always be accessible forever on the blockchain
- Don’t have to trust a centralized entity with your assets or KYC information
- Allows for player-driven governance of the game based on open principles
I believe GameFi games will likely use a Pay-to-Earn model where players pay a buy-in to play and compete with others for rewards, these types of games can include luck, skill, or a combination of both. The most famous example game that uses this model is Poker.
The game developer makes money because the economic system of the game results in a net loss for players as a whole. Just like in poker, players put in “X” amount of dollars, the game developer keeps or burns “Y” amount of dollars, and players can win [$X-$Y].
This type of model is very attractive to game developers for two main reasons:
- Financialized games with the ability to win or make a lot of money typically have an extremely high average revenue per user (ARPU).
- These types of games are normally self-sustainable and require little to no maintenance, biz dev, tech support, or new content from the core team.
There are also two main issues with this type of model:
- Only Appeals to a small niche of players. Most gamers might like the idea of playing their favorite game for a living, but as soon as real money is involved, it becomes stressful and no longer as fun. It is worth mentioning that from a developer's perspective, a smaller player base should be more than offset by the extremely high average revenue per user (ARPU).
- Games with a Pay-to-Earn model tend to have an increasing skill level over time. Since players are able to earn money through skill they put a lot of effort into becoming good and players that aren’t able to win often enough to make a profit will churn out—thus making the skill level of the game exponentially increase. The ever increasing barrier to entry for new players will also reduce growth over time.
Ultimately the best business model will depend on what type of game the developers are trying to make and what type of player persona they’re looking to attract.
Personally, I’m excited to see mass-market games use a combination of Pay-to-Own and Win-to-Earn to not only allow players to trade their in-game assets but also give them opportunities to earn rare and valuable assets through achievements and attaining high ranks.
Web3 Gaming DAOs
Web3 Gaming DAOs are a new and innovative way of developing gaming communities, providing players with ownership and decision-making opportunities.
Typically, these web3 gaming DAOs grant governance tokens that provide players with voting rights and a say in the development of the game, as well as a sense of ownership within the ecosystem. These tokens also function as a form of currency that can be used to purchase in-game items or access premium features.
The main issue I see with web3 gaming DAOs is game development is extremely difficult; it’s both an art and a science.
Over 10,000 games get published each year on Steam alone, and the vast majority of them fail. In order to build a successful video game you need very talented experts making the important decisions—having a group of token holders control the decision-making for a game is a surefire path to failure.
Where I think gaming DAOs and governance tokens can play a role is in providing high-quality community feedback, players that hold the game’s governance token are inherently more dedicated to the game and should filter out a lot of noise when trying to get community feedback, run surveys/polls, or when asking for suggestions on new features or content.
Gaming DAOs and governance tokens can also help with community-driven user-generated content and mods. The game’s tokens can be used to incentivize players to participate in the ecosystem by rewarding them for their contributions—this could include anything from bug reporting, QA testing, or organizing events.
Web3 Gaming Guilds
Web3 Gaming Guilds are a specific type of gaming DAO that function similarly to investment clubs, where members pool resources and work together to lend in-game assets (normally NFTs) to lower-income members, also known as "scholars," to enable them to access and farm specific Play-to-Earn games. This helps to lower the barriers to entry for players who may not have the financial resources to invest significant amounts of money to participate in Play-to-Earn gaming.
Once these players have access to the game, they can complete in-game tasks and acquire tokens or NFTs, which are then added to the guild's treasury. These earnings, also known as "yields", are distributed among the members proportionally according to the rules outlined in the guild's DAO smart contract.
This business model made gaming guilds extractors that would ultimately be paying low-income farmers or bot operators to extract in-game assets they could sell to make money.
Guilds are now changing their business model to add value to the ecosystem instead of just extracting value, by acting as incubators, accelerators, or marketing organizations.
The Challenges and Risks of Web3 Gaming
Friction and poor UI/UX
Web3 is well known for its high friction onboarding process and clunky UI/UX. Any Web2 marketer can tell you that games and dApps won’t be able to reach mass adoption if users have to go through the current Web3 user flow.
Here are a few data points that show how essential low friction and good UI/UX is for user acquisition:
- A study by AppsFlyer found that reducing the number of steps required to make an in-app purchase can increase conversion rates by up to 30%.
- A case study by VWO, showed that removing a single step from the onboarding process led to a 12% increase in conversions. This example highlights the impact of streamlining user flows and reducing friction.
- I’ve personally seen adding social logins boost signups by over 20% for clients I’ve worked with. Scandiweb published their results after adding frictionless social logins—they saw a surge in user logins and new registrations of +195.1%.
The good news is friction and usability aren't that hard of problems to solve. ERC-4337 is just one of many solutions being developed to help founders create a clean and seamless user experience through account abstraction.
It allows traditional wallets to function like smart contracts that can be programmed with custom capabilities:
- Smart Accounts - Removes the need for users to have to create their own crypto wallet so developers can externally manage users wallets.
- Wallet Recovery - Users will be able to recover their wallets with similar methods to Web2 accounts (no seed phrase required).
- Bundled Txns & Pre-approvals - Instead of having to sign multiple times for one transaction, it could be all done in one signature and the user can pre-approve for the whole session.
- Sponsored Transactions - Allows developers to cover the gas costs (or charge a fee in USDC) for users—removing the need for players to buy tokens to play.
I’m envisioning a future where onboarding into a new game could actually be lower friction than traditional games by only requiring a one-click login with your Web3 gaming wallet.
Marketplace’s making royalties optional
NFT marketplace competition has resulted in a race to the bottom with most opting to make paying creator royalties optional or removing them altogether. While this may be an issue for some games that already launched their NFTs—new projects can use some of the new NFT standards that are being created.
One example is the new ImmutableX has already implemented enforceable royalties via its application-specific Layer-2 solution where whitelists and blacklists can stop marketplaces or dApps from circumventing royalties.
Another example is LimitBreak’s ERC721C which gives developers the option to control which smart contracts can interact with their NFTs. This will allow developers to permanently block any exchange or smart contract with no work arounds.
Do gamers hate NFTs?
Over the past few years we’ve seen a few big name gaming studios announce they’re adding NFTs into their games—these announcements were met with a sizable backlash of gamers that seem to dislike NFTs.
I believe this comes from a place of the average gamer not really understanding what NFTs are, they only read the headlines of how NFTs have been used for scams and pump-and-dumps.
I also suspect they know the hassle they would have to go through in order to interact with NFTs/blockchain. They don’t realize that NFTs are simply a technology that can be used to enable them to buy, sell, and trade their in-game digital collectibles.
I ran a study that found 84.2% of gamers actually want to be able to buy, sell, and trade the skins/cosmetics they buy for games. If you're interested in the data you can read my NFTs in Gaming study here.
Reddit’s hugely successful NFT project has proved my point, they offered a seamless buying process where you could even buy their NFTs with a credit card.
Reddit also used the term “Digital Collectibles” instead of NFTs and never used any crypto jargon in their marketing.
Using this strategy Reddit was able to sell over 2.3 million NFT profile pictures to the masses making it one of the most successful NFT drops of all time.
Scams, fraud, and theft of game assets
There will always be scammers and fraudsters looking to take advantage of unsophisticated users, web2 games have issues with them as well in the WoW gold selling market, CSGO skin market, and pretty much any other market where there is value to be had.
With that being said I believe Web3 tech has the ability to make scamming players much harder than in web2. The introduction of smart accounts and trusted marketplaces that use open and transparent smart contracts could eliminate the risks of players getting scammed on third-party black market websites.
The new NFT token standards can also completely prevent hacks and scams by only allowing their NFTs to interact with or be transferred by whitelisted smart contracts. Not only does this stop players assets from being stolen, hacked, or scammed but it also stops marketplaces from circumventing royalties.
Regulatory Risks
The legal and regulatory environment surrounding the board crypto market is still unclear and evolving. I personally think that NFTs and Web3 gaming are unlikely to face heavy regulatory burdens but I’m not a lawyer and you should consult with blockchain legal experts if you plan to invest or build in the space.
With that being said I personally believe that since players are self-custodying their own assets and trading peer-to-peer using the blockchain—Web3 game developers should not be considered a broker-dealer, money transmitter, or financial institution in the same way a Web2 game would be if they allowed for centralized real money buying, selling, and trading of game assets.
The Top 7 Best Web3 Games
The Web3 gaming space is entering a new phase with some high-quality games close to release. Here are the most promising games I’m following:
- DEADROP - A vertical extraction shooter built on Polygon’s ETH L2, playable on Windows, PS, and Xbox.
- Illuvium - An RPG with monster collecting and autobattling built on Immutable-X’s ETH L2, playable on Windows and MAC.
- WildCard - A real-time strategy MOBA built on Polygon’s ETH L2, playable on Windows.
- BigTime - An online multiplayer RPG built on Ethereum, playable on Windows.
- EmberSword - A free-to-play MMORPG built on Immutable-X’s and Polygon’s ETH L2, playable on Windows.
- Heroes of Mavia - A base-building and defense game built on Arbitrum’s ETH L2, playable on iOS/Android.
- Shrapnel - An extraction looter shooter built on Avalanche, playable on Windows and MAC.
If you want to see an updated list of games ranked by popularity score, you can use our Web3 games discovery platform.
The Future of Web3 Gaming
The business model for video games has evolved tremendously over the past few decades, from the early pay-to-play titles to the most recent Free-to-Play freemium games—both of which have their strengths and downsides.
Pay-to-Play is great for aligning the desires of players with the profits of developers, but its downside is that it forces players to pay for the entire game upfront without even knowing if they will enjoy it. It also ultimately limits how big the game can get.
Free-to-Play (freemium) games are great because they let players try a game out with very little barrier to entry, resulting in a much bigger player base, but their major downside is that maximizing profit is always at odds with the players' desires. Developers are often having to choose between making more money or improving the player experience.
I believe the future of Web3 gaming is exciting and promising because it offers new business models that align the incentives for developers with the desires of their player base.
So, what's the future of Web3 crypto gaming? Here are some predictions:
I think we’ll see at least a few successful games come out of the $4.49 billion that was raised by Web3 gaming studios in 2022.
I think it’s unlikely that Web3 games will completely replace traditional games, but over time, I believe most games will incorporate some aspects of Web3 tech.
If there’s one use case that will drive hundreds of millions of people into the Web3 ecosystem, it’ll be gaming.