The following is an exclusive contribution to CoinDesk’s 2018 Year in Review.
2018 year in review
Games frequently function an experimental playground for brand spanking new technology.
Since the launch of CryptoKitties – a digital cat-breeding game built on ethereum – roughly a year ago, games have provided a digitally native playground for early adopters to experiment with the unique benefits of open protocols. Currently, most of the highest dapps by transaction volume are games.
While there’s tons of early excitement within the blockchain gaming space, there’s some rightful skepticism. Tony Sheng’s post on why Fortnite probably won’t embrace the blockchain any time soon sparked an excellent discussion about how the tech fundamentally changes in-game economies.
At its core, his post argues that incumbents within the gaming industry likely won’t embrace blockchain because true digital scarcity breaks their existing business models. His post dives deep into the economic incentives that cause games to shut their economy.
I quibbled with a number of these, but accept as true with the high-level conclusion that:
“If games bring crypto to the masses, they’re going to have different business models.”
Blockchain represents a fundamental business model shift: from value extraction in closed ecosystems to value capture in open ecosystems. the matter is that, while incumbents have found out the way to extract value in closed ecosystems (restrictive monetary policies, locks on transfers, fees, etc.), new entrants have yet to work out the way to capture value in open ecosystems.
This post is meant to explore potential business models for an open gaming ecosystem. We’ll begin by exploring the prevailing business models for early blockchain games.
Weeding the signal from the noise
The Bull Run in crypto made it difficult to weed signal from noise within the tech’s gaming sub-sector. inflation created a deep-pocketed community of ether-rich early adopters to interact in early dapps.
Enter CryptoKitties: a digital cat breeding game and therefore the first mainstream-oriented blockchain gaming experience. CryptoKitties was incredibly exciting to the tech community (myself included).
The fact that you simply “really owned your kitties” and will make ETH flipping them sparked a viral loop and culminated within the infamous kitty bubble of 2017. At the height , cats sold for many thousands of dollars apiece.
The noise: vertically integrated digital scarcity
It’s worth taking a better check out CryptoKitties.
Because little gaming infrastructure existed on ethereum, CryptoKitties built everything themselves. that they had their own website, their own artwork, their own on-chain breeding mechanic, and their own marketplace.
At launch, CryptoKitties was a totally vertically integrated game that used smart contracts as its database. The CryptoKitties business model was actually highly traditional: they sold generation 0 kitties and took a 3.75% cut whenever a kitty was sold or sired.
As many critics later acknowledged , CryptoKitties could have built an equivalent game on centralized infrastructure. they might have provided the precise same user experience on their website (they could even still take ether if they wanted to preserve the painful UX), and easily stored the kitties during a SQL database.
A non-crypto-knowledgable user wouldn’t know the difference.
The CryptoKitties experience is what I’ll call “vertically integrated digital scarcity,” and it’s likely a reason that none of the CryptoKitties clones got any traction. To mainstream users, they were just hard-to-use games.
The signal: unbundling
I’d argue that the important signal with CryptoKitties lay beyond the initial user experience: it had been the ever-so-slight unbundling of the sport .
The logic layer for CryptoKitties now existed on a sensible contract whose address and ASCII text file was viewable to the general public , and will be called by anyone with an ethereum address. Now, any ethereum developer could build an ever-so-primitive “layer two experience” on top of the sport .
Want to write down a bot that snipes under-valued kitties? There’s an open API for that. Want to write down a kitty explorer site to let users browse recent sales? Just watch the events on the smart contract.
These experiences didn’t need to be complex. In fact, the primary layer two experience was simply the existence of Etherscan, the smart contract explorer nearly all ethereum users have grown to depend upon . Techie power users could attend Etherscan and skim directly from the CryptoKitty smart contract to examine their kitties.
A novel layer two experience was KittyHats, a group of ERC20 tokens that allowed you to decorate your kitties. In theory, KittyHats drove up the worth of individual kitties because now there was another thing you’ll do with them — but it had been difficult to live this impact and therefore the experience was relatively isolated (it required downloading a chrome extension and accessorizing on a separate website).
Perhaps – had the CryptoKitties team embraced KittyHats more fully by showing their accessories “natively” on the CryptoKitties website – KittyHats could have pioneered the primary layer two business model.
Marketplaces were another layer-two experience. I co-founded OpenSea with the thought that a generic layer two experience around trading games might contribute.
But it’s worth noting that OpenSea also did not capture or contribute significant value to the CryptoKitties ecosystem. At the time, it simply didn’t provide enough additional liquidity to be interesting.
The problem with layer two is it’s just super immature, and you would like to squint to ascertain it at work. It’s unclear what proportion value CryptoKitties has captured from layer two experiences and it’s unclear how layer two experiences can capture value.
Nevertheless, i feel dismissing layer two and focusing simply on “true digital scarcity” or “true ownership” is missing the forest for the trees. Layer two is what drives digital scarcity and true ownership.
In the same way that the colourful ecosystem of exchanges and consumer experiences around bitcoin, ether, and ERC20 drove liquidity for the assets, the ecosystem created by layer two experiences are going to be what drives consumer excitement and confidence in digitally scarce assets.
What might work
In this new world of open protocols, what business models could work?
Incentives to create layer two experiences
One might be a compelling layer one gaming experience, designed from the start with shared incentives to create layer two experiences. Decentraland is arguably the foremost ambitious attempt at this model. The Decentraland team is building an ecosystem of games, and plan to capture value from this ecosystem through the appreciation of the MANA token.
The reason this could be appealing is that layer two experiences could fundamentally shift the economics of a game. A game has typically been limited to the audiences that the creators build for.
Games like Roblox and Second Life expand these audiences through user-generated content and in-game programming languages, but they’re still limited to what are often inbuilt a closed environment. Games occasionally partner to create layer two experiences, but they’re highly coordinated and permissioned efforts.
As an example of how this might play out, take EVE Online, a massively multiplayer online space role-playing game. EVE Online has many characteristics of a blockchain game. Famously, the sport runs entirely on one server, which isn’t tampered with (kind of sort of a blockchain), so free market economics reign and regularly cause drama.
But the amount of individuals who want to play a hardcore space simulation isn’t that prime , therefore the audience is usually limited. Now, imagine EVE Online but built on an open protocol. Third-party developers with no connection to the sport might build mining expeditions, weird magical planets, secondary markets that facilitate bartering— all of which tie back to the first economy.
The audience of the sport could expand dramatically: purely financially-motivated traders might enter the ecosystem, also as casual gamers who enjoy only specific layer two experiences that branch off the first game economy.
Why might third-party developers flock to create on the game? If there’s A) enough of a network effect round the original game, B) a simple thanks to connect their experience, and C) a way for capturing value in layer two, this is able to be a no brainer .
Why it’d not work
A valid criticism is that each one of this is often far too difficult on existing technology. It’s hard to counter this argument; timing is usually really hard. However, it’s going to happen faster than we expect .
For one, blockchain bootstraps off existing internet infrastructure. With great front=end libraries, mature back=nd web frameworks and B2D services galore, it’s easier than ever to deploy traditional web applications so as to power hybrid decentralized / centralized dapps.
Additionally, blockchain relies totally on software innovation (which tends to maneuver tons faster than hardware).
It’s likely an ideal environment for little tinkerers to experiment. it’ll be exciting to ascertain the developments over subsequent year that push the space forward.
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