The world of crypto gaming is experiencing a revolutionary shift in mentality — don’t get caught on the wrong side.
It’s November 11, 2021. You check your portfolio and see that Axie Infinity is up. BIG TIME.
* Axie Infinity: NFT (non-fungible token) based online video game
** Past performances do not guarantee future results.
Since the TGE (Token Generation Event) event at $0.10 per AXS, a token that powers the blockchain-based game Axie Infinity, it’s now shot up to ~$160 per AXS. You frantically smack the virtual calculator and drool over your 1600x gains. Thank goodness for P2E (Play-to-earn)! Fast forward to today and if you did not exit, you’ve just given back a majority of your big time pay day. You think back to the market, and then and start contemplating the market now. What changed? Why did this pump and dump so hard? Is P2E dead? What’s next?
The Rise of P2E
Video games have taken an incredible path from where they started to where they are now, from coin operated machines to consoles to internet to cloud and now rapidly approaching the metaverse.
Along the way, we’ve seen the way games monetize and evolve as well, with varying levels of success. Below is a chart from Statista which shows the landscape in 2020 before Axie & P2E really came onto the scene.
Then came the P2E games, swooping in to generate massive revenues ...
From relatively TINY player bases (tracked through unique active wallets )…
If these statistics don’t blow your mind, let’s compare the revenue from Activision Blizzard’s Q4 2021 with details from an Activision press release. It said, “For the quarter ended December 31, 2021, Activision Blizzard’s net revenues presented in accordance with GAAP were $2.16 billion, as compared with $2.41 billion for the fourth quarter of 2020. GAAP net revenues from digital channels were $1.78 billion. GAAP operating margin was 32%. GAAP earnings per diluted share was $0.72, as compared with $0.65 for the fourth quarter of 2020. On a non-GAAP basis, Activision Blizzard’s operating margin was 45% and earnings per diluted share was $1.01, as compared with $0.76 for the fourth quarter of 2020.” 
But with HUNDREDS OF MILLIONS of users across many, many of the world’s top game franchises such as Call of Duty, Warcraft, Overwatch, Diablo, StarCraft, Candy Crush, etc.
Let’s do some napkin math.
Axie with 2.5 million players can do $350 million in a single month vs. Activision Blizzard with 100+ million players doing LESS THAN 10x in an entire quarter? Seems like the legacy gaming models have something to fear.
Instead of players shelling out cash with NO monetary return, P2E has flipped this model on its head by empowering players to earn first and foremost. In other words, players and games now have aligned incentives for the first time in the history of ever. When the players win, the game wins, and vice versa. This is the secret sauce and has revolutionized the way we think about gaming. But all is not diamonds and rainbows.
The Death of P2E
However, if we look back at the Axie charts their revenue died just as quickly as it mooned.
Why did this happen? A few reasons.
Axie changed the game of course — but they didn’t perfect their tokenomics. They had a dual token system, AXS for governance and SLP (Smooth Love Potion) for in-game currency. Those non-crypto natives can somewhat equate this to the Activision Blizzard versions of ATVI stock and in-game Gold in something like World of Warcraft.
For Axie, and every single derivative of the innovative breakthrough (tons), however, there was a fatal flaw. To pay players for playing (P2E), Axie simply printed more SLP. As players played and got stronger, they were able to earn more and more SLP. Unfortunately, players would play, earn, and then immediately sell their SLP. It makes sense because some people quit their jobs to go all in on this. But they still needed to pay rent, buy food, etc. And they couldn’t just use their SLP for this (maybe at some point).
So players were forced to sell, which drove down the price of SLP, which had 2 horrible side effects:
1. Axie had to print more SLP to make sure players were earning enough to justify playing constantly and making this in extreme cases their full-time jobs
2. Players had to sell more to keep up
Clearly a vicious cycle which led to the turbo dumping of an ever-increasing quantity of SLP which had an ever-decreasing value in the marketplace.
* SLP: the in-game digital currency of the Axie Infinity gaming metaverse
** Past performances do not guarantee future results.
Better, but Still Not Great Long-Term Incentive Structure
On top of this tokenomic flaw, the underlying game loops also left something to be desired. And let me be clear, I’m not picking on Axie in the slightest. They have literally changed the game and paved the way for the next evolution of gaming, earning, and ultimately the transfer of real value within digital worlds. We are forever in their debt. But, we cannot forget why we play games first and foremost.
TO HAVE FUN!
Humans have been playing forever. In fact, we happen to be the most sophisticated animals on the planet when it comes to engaging in play. And for good reason, there are lots of positive psychological effects.
However, when financialized to the point where games are only attractive and players are only engaged because of what they can earn (play TO earn), there does not exist a long-term incentive to play the same game. Another game will just pop up and offer players more to play their games. Kind of sounds like a mercenary independent contractor marketplace of trading time for money, right? This is the fatal flaw of play TO earn, when the fun is not valued at least as much as the earning part.
From The Ashes Come Play AND Earn
Luckily for the world, gaming, and players, a new model has risen like a phoenix to grab the baton from P2E and take the next step we desperately need.
P&E or Play And Earn
There is not a definite model to describe this like P2E, which makes it a bit ethereal, but the concept is simple to grasp and extremely powerful in practice.
The fun potential for the player must be equal to or greater than the earning potential. Period.
When games get back to prioritizing fun FIRST and earning SECOND, we take the best of hyper fun games from web2 weave it into the financially freeing aspect of web3. Fun and profitable. We will see P&E become the dominant model of the future. This doesn’t mean it will be instantly or easy, but the foundations are there.
Now it is up to games, studios, publishers, and the greater player community to come together to experiment and find out how to best make it together. Together we are strong.
1) “Activision Blizzard Announces Fourth-Quarter and 2021 Financial Results,” Activision Press Release, February 3, 2022.
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