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The bearish macro environment and recent collapse of the Terra ecosystem have sent crypto prices tumbling into bear market territory. The GameFi community’s resilience may be tested, but let’s not forget the innovations that inspired us in the first place: Blockchain is revolutionizing the way games are being made and enjoyed, and the combo of Web3 principles with Web2 quality is coming sooner than you think.

A turning point for GameFi

In every crypto bull cycle, there are certain projects or sectors that greatly outperform the rest of the market— In 2020, it was DeFi, and in 2021, GameFi and Metaverse, largely driven by the success of Axie Infinity and Facebook rebranding to Meta, respectively. At its peak, Axie reached 2.7M Daily Active Users (DAU) and a market cap of $30B— truly an astonishing feat.

Now, faced with macro headwinds unprecedented in crypto’s lifetime, $BTC and $ETH are down about 60% from their all-time highs, and market sentiment is extremely bearish. This month, Axie’s DAU count dropped under 1M— a sign of the stress being placed on the nascent GameFi sector. The difference between this bear market and previous cycles, however, is that no one is calling this “the end” of crypto, and especially not Web3 gaming. Over $2.5B in venture capital has been raised by blockchain games as investors realize their potential to reach millions if not billions of players worldwide.

This won’t happen overnight. It can take around 2-3 years for a 150-200 person team to make one AAA title— and they don’t have to deal with relatively new and experimental blockchain technology. In the meantime, we can expect hundreds of new GameFi titles to launch over the next two years, and successful OGs like Axie will continue to push boundaries with new versions, like Axie Origin.

We are still in the earliest stages of GameFi. Like any new and fast-growing industry, there will be challenges to overcome. But in the long run, Web3 games have the potential to completely disrupt the gaming industry as we know it.

Web2 Gaming: The Status Quo

To understand how blockchain games will disrupt the gaming industry, we have to take a look at how it operates today. The most important thing to understand is that the major Web2 game publishers (Sony, Tencent, Nintendo, etc) hold all the power. They control every step in the process of making and releasing a game; they fund its development, production, marketing, and distribution. When revenue starts coming in, the publishers are the first to recoup their investment, followed by the game studio they contracted to design and create it.

Figure 1: Axie Infinity and Top 10 global Game Companies by revenue in 2021 (Source: Newzoo)

Blockchain games have introduced radically new business models. They share profits and sometimes even IP rights with players. These are changes Web2 publishers are not at all incentivized to make, so it’s no wonder why most have been reluctant to engage with blockchain tech.

And it’s not as though fans are pressuring them to make these changes either— quite the opposite: Negative sentiment around NFTs persists in the gaming community, driven mostly by a lack of understanding and the assumption that selling NFTs is just a cash-grab by publishers. This misguided outrage was on full display when Ubisoft unveiled their Quartz platform and plans to integrate “Digits” NFTs into their games.

???? To their credit, Ubisoft embraces the value that re-selling in-game items can bring to their players. Despite the initial backlash and shuttering of their first line of digits, Ubisoft still plans to integrate NFTs into future games.

The challenges for game studios

With deep pockets for funding development and global go-to-market reach, the major publishers are great at launching AAA titles, but this makes small, indie game devs small fish in a very big ocean. Making games is a huge endeavor, and fundraising is the first major hurdle.

We’ve already seen some popular gaming companies subvert the status quo. Several game studios have run crowdfunding campaigns on platforms like Kickstarters to bootstrap projects on their own. Epic Games famously released Fortnite from their own platform after rejecting Apple Store and Google Playstore fees.

Another major challenge is building a loyal community. Major publishers have carefully built up their reputations and huge global followings thanks to years of work by contracted game studios. Meanwhile, new game devs must start from zero, usually with limited resources. That’s where blockchain comes in.

Web3: a paradigm shift

Publishers will not play such an outsized role in Web3 gaming. The first wave of GameFi emerged without any support from major publishers. GameFi enables more direct and independent funding and go-to-market methods for game studios through token sales, NFT sales, scholarships, etc. This allows them to raise funding directly from VC, Gaming Guilds, and Players and Fans. Guilds, especially, are essential collaborators by providing much of the same marketing and distribution support as publishers in Web2, without the exploitive power-imbalance we see in the gaming industry today.

These new and attractive methods for game devs to bootstrap their games and maintain their creative control are already drawing a new wave of talent from Web2 into Web3 games. Some established studios have already pivoted to GameFi by cloning their already published mobile game onto the blockchain.

Figure 2: Web3 - a paradigm shift

Web3 games redistribute power from publishers into the hands of developers, similar to the way DeFi reduces reliance on banks by providing more control over personal finance.

Time to Level Up

To achieve its full potential, GameFi is evolving beyond the Play-to-Earn business model/mentality. Delivering fun and engaging experience will always be the best way to attract players and build long-lasting network effects, and this is what all Web3 games should strive towards. The promise of rewards should be used as a go-to-market tool for game studios to attract early users who try out the game and refer more players by word of mouth.

Game devs should consider reserving the best rewards for players that contribute to the growth of the game via the leaderboard, direct referrals, bug reports, and community moderators. Incentivizing positive behavior can bring several benefits for the community:

• Establishes contributors as a role models
• Encourages constructive contribution
• Discourages speculator and ‘GameFi grinder’ groups
• Attracts like-mind people

We will discuss these ideas and additional proposals for how to build better games and cultivate better communities in future articles.