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The Lumikai Latest: Decoding the use cases for Blockchain Gaming




Depending on who you talk to, gaming’s blockchain opportunity has been characterised by breathless hype or dismissed as a fad. The true opportunity largely remains a black box, despite valiant attempts to rationalise and demystify the space and the legion of startups it has catalysed.

In this blog, we present an easy-to-digest look at some of the tangible use cases of blockchain gaming and NFTs, the existing pain points, and how this might play out in an Indian context.


Blockchain in Gaming: A Primer

Before we look at the use cases for blockchain gaming, if you’re looking for an easy-to-digest primer explaining the core concepts behind crypto gaming we recommend this write-up by Joost van Dreunen.


First, some context: The shift into blockchain gaming was preceded by an even more seismic shift in the games industry — a move from a physical products-led industry to a digital and services-based one. This has manifested itself through three key themes:

  1. The Asset-ization of Game economies: Games are no longer single point of sale products; and have moved away from being discrete commodities to becoming assets that generate revenue over time. Mass shifts to free-2-play and in-app purchases are a testament to this.

  2. Living Games: As a result of the above, games are now in a constant state of flux, with updates being issued regularly to generate depth and new avenues for players to engage. For example, battle royale games such as PUBG, Call of Duty: Warzone, and Apex Legends, rely on a “seasons” approach to frequently introduce new maps, characters, and in-game purchases.

  3. Community-focus: Given that games (especially multiplayer) need to be in a constant state of flux and innovation, there is no greater way for developers to do this than taking feedback from the community. Studios like Supercell constantly generate insights from their beta community to help develop games.

These macro themes have led to a fundamental shift in the publishing models that have governed gaming for the last 20 or so years. As the video game industry has become primarily digital, publishing models have evolved (and new ones developed) accordingly:

  1. The Traditional Model refers to the centralized model of developing, publishing, marketing, and distributing games. Herein a publisher (or developer) relies on single points of sale and maximizes the number of units sold (at the highest possible price).

  2. The Networked Model relies on the ability of video games to establish recurrent revenue streams through the monetization of either utility items or vanity items. Such a model ensures that a video game has a near-infinite lifetime and enough depth to engage users on a frequent basis. Almost all F2P titles rely on this publishing model.

  3. Lastly, and most pertinently, is the Decentralized Model. The use of blockchain allows for the creation of (a) real-world, and (b) long-term use-value of in-game items. For example, all those hours you’ve spent farming items on RPGs, or the countless number of loot boxes opened in order to obtain that special skin in a battle royales; can now hold value outside the game. This is done using key units called Tokens, which can either be fungible (common) or non-fungible (unique- commonly known as NFTs). Since these exist on blockchains that are decentralized, these units can be traded outside of the game ecosystem, and at the same time be plugged back into a game’s economy. This is what has led to the inception of the Play-to-Earn (P2E) model (more on this later), where gamers are effectively paid for their time, energy, and skills.

Being a gaming-focused VC, we are constantly on the lookout for innovative, iterative, and disruptive trends in the space. It just so happens that NFTs have found a snug home in the gaming ecosystem, with some legitimate use-cases. At the same time, we will also provide our perspective on the ample reason for exercising caution while investing in this space.

Let’s now explore some current models and pre-empt potential future scenarios.


Use-case #1: Crypto Games and Play-2-Earn

As mentioned earlier, the use of blockchain allows for the implementation of a Play-2-Earn model, where gamers are compensated for their time, energy, and skills.

Currently, gamers have no avenue to monetize their skills outside of esports and over-the-counter wagering. P2E allows users to trade their time and in-game progress for real-world encashment. The first real versions of P2E have emerged through Crypto-based games.

Crypto games are video games that run on a decentralised cryptocurrency network and a partial or complete distributed ledger system. In simpler terms, these are video games that are built on a blockchain such as Ethereum, which allows for the ownership of in-game items. For example, if Fortnite were a crypto-based game, you could take the skins you own and cash them out in the real world. The conduit through which ownership is defined is a Non-Fungible Tokens (NFT).

According to DappRadar, blockchain games registered 754,000 Unique Active Wallets (UAW) in the quarter ended September 2021, which represented 50% of all blockchain-industry Unique Active Wallets. In-game NFTs generated $2.32 billion in sales during that same period, which represents 22% of total NFT trading industry-wide.


On the investments front, blockchain-gaming startups had raised ~$500M during the first half of 2021, but since then, that number has increased to $2.4B. Some key fundraises include SoRare ($680M from Softbank, Atomico, Bessemer, and others), Animoca Brands ($221M from Hashed, Sequoia China, Ubisoft, and others), Forte ($185M led by Griffin Gaming partners), among others. Further, Axie Infinity maker SkyMavis recently raised $152M from Andreessen Horowitz. While investor interest is heating up, the total amount raised by blockchain gaming startups still only represents a fraction of total funding in gaming- which stood at ~$40B in H1 2021 according to InvestGame.


Probably the most popular game in crypto is Axie Infinity. Here, users battle with a team of pet Axies and level them up. The gameplay is loose, but the clear moat is the ability to trade your Axies on NFT marketplaces (such as OpeanSea). As a matter of fact, Axie Infinity has become popular in the Philippines, and earning tokens from the game has become a viable source of income for players there. There is a Decentralized Autonomous Organization (DAO) called Yield Guild Games which loans Axies to players that want to get started with the game but don’t have the funds to purchase them.

Axie Infinity

At the time of writing, Axie has generated over $2.5 billion in trading volume, surpassing the likes of NBA Topshot and Cryptopunks. The game has reached 2 million Daily Active Users (DAUs) and has generated $800 million in revenue in this quarter.



Axie Infinity Trading Volumes (DappRadar)

Another popular game in the space is Dark Forest, where one can explore different planets and collect Artifact NFTs on new planets. Being able to discover and collect these items or even win them in a battle and then trade them in decentralized marketplaces can make the game even more fun.


A discussion on blockchain-games would be incomplete without the mention of CrypoKitties. The game is centered around breeding and collecting digital cats (CryptoKitties) where each cat is one-of-a-kind and is uniquely owned by a user. The game got so popular in 2017 that it slowed down the entire Ethereum network. As of October 2018, CryptoKitties was seeing 1 million “cats” being bred, with a total transaction volume of 3.2 million. In 2018, someone paid 600 ETH (~$170,000) for Dragon, the most expensive CryptoKitty ever traded in the history of the game.



Dragon, the most expensive Crypto-Kitty ever sold

In 2016, Edward Castronova predicted that similar to the 19th century where the industrial revolution resulted in a period of creative destruction of old (agriculture) to new (factories) jobs, the information age will render low-skilled work meaningless and game playing will be a significant source of income for the low-skill workforce. Wage-playing will be the primary means by which the extreme gains of the wealthy will trickle down to the poor.


As the pandemic has ravaged economies, and unemployment hit industries like retail, travel and tourism, there are isolated user cohorts for example, 40% of Axie Infinity’s userbase is located in the Philipines, where games like the above are played by low-income groups as a source of livelihood.


Thus, Play 2 Earn as a phenomena is real and already being exhibited, however, as we point out a little later on in this article, there are a number of pain points that still exist which might prevent en masse adoption of blockchain-based games.


Use-Case #2: Legitimising (unique) in-game assets

According to a survey by Vorhaus Advisors, a third of gamers think that the prices of virtual goods can seem arbitrary and not representative of their true value/rarity. Further, 63% of gamers said that that they would spend more if the virtual goods had real-world value and could be traded or sold; with as many gamers stating that they would play more as a result of tying the value of in-game assets to the real world. One estimate pegs the size of the virtual goods market at $50B, a sizeable portion of which occurs in nebulous grey markets around the world.

What NFTs (and the blockchain) allow for is establishing ownership of in-game items through a transparent and decentralised method. This leads to a few positive consequences:

  1. With ownership established, trading and selling of assets become legitimate.

  2. The above point means that price discovery is more efficient. (For further information, we’d encourage you to read more about the economic theory of property rights)

  3. Most importantly, with value tied to the real world, in-game assets will hold that value outside of the game. Most in-game items today have no value outside of a game’s ecosystem. Time for a cliched example. Say you get your hands on a special edition Lionel Messi card on FIFA Ultimate Team (FUT). This card sells for millions in in-game currency on the FUT marketplace but has zero value outside of it. Now, if this were a special edition Lionel Messi NFT, you would have legitimate ownership of this, courtesy of the blockchain. Kind of like owning a real-life Pokemon card- but it's a football player instead of a Pokemon, and it's digital instead of physical, and there is technical trickery involved to prove that it's yours. You can, legitimately, take this NFT outside of the FIFA ecosystem and sell it to a willing buyer who can choose to do whatever they want with it. Another great example is of skins in games such as Fortnite and Call of Duty. One can own these in-game, but cannot trade them legitimately with other players. With blockchain involved, these can be traded outside of their respective ecosystems.

According to Adroit, the virtual goods market is said to grow to $190 Bn by 2025, growing at a CAGR of 22%. Most of these transactions happen in nebulous grey markets primarily because there are no legal alternatives.



Source: Adroit

This really opens up the world of in-game assets and items to an array of legitimate monetisation opportunities. The benefits of which can be attributed to developers, creators, and (most importantly) the players. This leads to the next use case.


Use-case #3: In-game marketplaces

Steam has a community marketplace where players can buy and sell in-game items. The marketplace is centralized, with Steam collecting 5% commission on every transaction (from the buyer). On top of this, specific games might charge a few points, for example, Dota 2 takes an additional 10% for items sold. Steam also caps user wallet balances to $2,000 and the price of single item to $1,800.

Steam Community Market for Dota 2

The centralized nature of this marketplace means that Steam can only handle so many transactions, in terms of volume and value. This leads to the imposition of caps, which ultimately lead to frictions in transactions. Decentralized marketplaces can solve for this. Firstly, the fact that they are decentralized means that there is no single point of failure (and as long as there are network effects, scale of transactions is not a problem). Secondly, transaction fees are significantly reduced due to improved efficiency aiding price discovery and settlement. And lastly, with infrastructure (such as Ethereum) in place, developers do not need to build a separate marketplace out merely integrate with an existing one.

Due to rarity or utility, certain in-game items have seen tremendous appreciation in value. For example, a Dota 2 pink war dog courier sold in a third-party marketplace for $38,000. Magic: The Gathering’s coveted Black Lotus card sold for $166,100. There is certainly a demand, and a willingness to pay, for in-game items. NFTs and decentralized marketplaces could be an efficient way to enable that.


Use-case #4: Digital Collectibles and CCGs

Contrary to popular belief, not every gaming genre works for NFTs. Certain formats should lend themselves well to the use of the blockchain and NFTs, none more so than Card Collectible Games (CCGs). Games such as Hearthstone, Gwent, Magic:The Gathering have massive and loyal user-bases. A large part of playing CCGs involves collecting and trading cards which should lend well to the application of NFTs and blockchains.


CCGs such as Gods Unchained and SkyWeaver have already implemented NFTs in-game so that cards are freely tradable. They also allow users to earn cards as they level-up in game. Players that did not purchase packs of cards are still able to improve upon the game’s default decks. It’s an exciting feeling knowing that the earned cards have real world value and can be sold or traded for other cards. Gods Unchained also lets users earn tokens for when they win a match or refer their friend. The tokens themselves unlock rare in-game items and are also freely tradable.



God's Unchained

Digital collectibles have use cases that extend beyond gaming. A good example is NBA Top Shot which allows users to buy, trade, and sell officially licensed NBA NFTs on its platform.



NBA TopShots

Use-case #5: Dare We Say It…..The Metaverse

In the words of Piers Kicks, the Metaverse is a persistent, live, digital universe that affords individuals a sense of agency, social presence, and shared spatial awareness, along with the ability to participate in an extensive virtual economy with profound societal impact.

Now, some elements (such as social, live, and community) are showing up in games today already. For example, players on Animal Crossing: New Horizon, are finding ways to augment the game experience through community-organized activities and tools. These include free weed-pulling services from virtual samaritans; along with custom-designed items from fashion icons like Marc Jacobs and 100Thieves. These behaviours give us a cursory glance into how community economics will play out in games of the future.

Animal Crossing: New Horizons

To find out more about the Metaverse, we’d highly recommend Piers Kicks’ blogposts.

However, most definitions of Metaverse sound like dystopian nightmares and feel like the imperialist dreams of corporate, digital colonisers. For one minute, if we do choose to suspend our apprehension and assume that the Metaverse is a digital social world, then an economic system needs to be established.


For this economic component to flourish (like any other economic system) there have to shared standards and protocols which is what blockchains provide. By extension, NFTs provide elegant solutions to the problems of digital scarcity and uniqueness, digital property rights, and large-scale coordination. This will allow for the seamless movement and transfer of a virtual good, an integral component of the metaverse.


With the economic engine solved through common protocols and infrastructure, the remaining components of the metaverse of Content, Culture, and Mediums should self-propagate. Theoretically, this might be the next big revolution since the advent of Fordism and the Internet. However, a number of things need to be solved for in order to ensure en masse adoption of the metaverse, not the least of which are infrastructure, devices, access and most importantly- the intent.


Components of the Metaverse

The Indian Context

While governmental policies have flip-flopped between being neutral to hostile; investments in platforms such as WazirX and CoinDCX have boomed. In November 2019, Binance (the world’s largest crypto exchange by trade volumes) acquired WazirX. Coinbase recently announced its Q1 2021 earnings at $1.8 Bn which is more than all of their 2020 revenue. WazirX crossed $2 Bn in trading volume in Feb 2021. At the time of writing, crypto exchanges in the country have surpassed Zerodha (India’s leading brokerage firm) in terms of user base.


In terms of blockchain infrastructure, legacy organizations have started to relook at the use cases. NITI Aayog (the Indian government’s think-tank) released a whitepaper highlighting a very positive view towards blockchain technology. Fifteen of India’s top banks have joined forces in a coalition called the Indian Banks’ Blockchain Infrastructure Company (IBBIC) to explore use-cases.


The NFT segment in the country is still very young. WazirX launched its NFT marketplace in June 2021, the first of a kind for South Asian creators. It set the record for one of the fastest NFT sales in the world when an artwork by Ritviz and Santanu Hazarika sold for ~$400 within 10 seconds of going live. Since its launch, the WazirX marketplace has sold ~160 NFTs. Bollywood stars such as Amitabh Bachchan and Salman Khan are dabbling in the space with their own NFTs. Investments are slowly picking up, with Hyype recently raising from Elevation, and Polygon investing in Colexion. Chingari recently raised a $19M round to launch its own $GARI coin.

WazirX NFT Marketplace


On the blockchain and NFT gaming front, things are still more nascent. Polygon recently launched Polygon Studios to fund and develop Web 3.0 based games.

However, some caution must be exercised.


Key Pain Points

In spite of all the hype, we do believe that there are quite a few significant pain points that might prevent en masse adoption of blockchain and its implementations in gaming and NFTs:

  • Game mechanics and quality: As compared to traditional game titles of today, there is certainly room for improvement when it comes to quality and mechanics in blockchain games. Current iterations rely on very basic mechanics such as farming or trading cards. Though early signs of innovation are visible in titles such as Star Atlas.

  • Isolated user-cohorts: So far, the appeal of blockchain games has been isolated to very specific geographies or demographics. For example, 40% of Axie Infinity’s userbase is located in the Philipines, where it is played by low-income groups as a source of livelihood. On the other end of the spectrum, adoption has been prevalent in crypto-native communities in countries such as the US and Germany. Blockchain games registered 754,000 Unique Active Wallets (UAW) in the quarter ended September 2021; compare that to 100M+ DAU’s of Supercell games.

  • Structural barrier to entry: A significant barrier to entry is the time and energy commitment required to even get started on blockchain games. For example, Axie Infinity requires multiple steps involving setting up MetaMask and Ronin wallets, buying ETH, and depositing those in a Ronin bridge. To that end, the first-time user experience (FTUE) is disjointed and time-consuming.

  • Financial barrier to entry: Yet another significant barrier to entry is the financial cost of getting started. For example, getting started on Axie Infinity can cost anywhere between $1400–$1600 (see the economics of axie infinity) depending on the price of the SLP token and ETH. Our sense is that these prices will have to normalize in the long-run to induce en masse adoption.

  • Founders and teams: Teams building blockchain games require some very unique skillsets which lie at the confluence of decentralized tech and game development. Outside of web 3.0 expertise, teams have to be well-versed in elements such as game design, mechanics, loops, level-balancing, etc. This is especially pertinent as the demand for more innovative and high-quality blockchain games rises.

  • Environmental concerns: Most proof-of-work blockchains (such as Bitcoin and Ethereum) consume exorbitant amounts of energy. Annually, Bitcoin’s energy consumption is comparable to the energy consumption of Thailand with an e-waste footprint equivalent to that of the Netherlands. Similarly, a single Ethereum transaction consumes energy equivalent to that of an average US household over 6 days. While only 10% of blockchain games are built on Ethereum, these 10% also happen to be the ones with the highest transaction sizes and volumes (eg. Axie Infinity and Illuvium). Some improvements are underway however, Binance Coin (BSC)- the second most popular blockchain for games- has moved to a proof-of-stake model, which in theory should reduce energy consumption.


Summary:

The promise of new technology and lure of new paradigms are seductive. Gaming industry veterans have seen this before. The craze of social facebook games, the promise of VR, the esports gold rush and now the NFT promise-land - the signal to noise to ratio is high and there are billions of dollars are stake.

“Only when the tide goes out do you discover who has been swimming naked.” -Warren Buffet

In our view, blockchain has tremendous theoretical power to reshape the architecture of gaming, whilst creating entirely new opportunities and business models that are equitable, transparent, and digitally persistent. India’s blockchain gaming opportunity is in its infancy, and while we’ve identified a few macro use cases above, the truly transformational value will likely be a combination of some identified spaces native to the technology with genuine use cases beyond pure speculation; provided the above key pain points are addressed for it to be more than a pipeline dream.


Until then, the key as always, for frontier markets, comes down to execution in the right space, unique consumer insight and solid founder experience.

If you have a clear and unique vision for the application of blockchain in gaming, we would love to chat!

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