The Future of (Crypto) Gaming

Premium · JUL 20TH, 2022

Piers Kicks mediodelphi

Jeremy Parris Sonny Tsiopani

Yan Liberman, CFA,

Ryan Foo
CAIA

Crypto Unicorns Editor Pick (Featured) Nor

DISCLOSURES: THE AUTHORS OF THIS REPORT HAVE MATERIAL POSITIONS IN

BREED, AXS, ILV, RBW, YGG, & IMX. THE AUTHORS HAVE NOT PURCHASED OR
SOLD ANY TOKEN FOR WHICH THE AUTHORS HAVE MATERIAL NON-PUBLIC
INFORMATION DURING THE RESEARCH AND DRAFTING OF THIS REPORT.
DELPHI VENTURES HAS INVESTED IN NOR, AXS, YGG, BREED, IMX & RBW.
THESE STATEMENTS ARE INTENDED TO DISCLOSE ANY CONFLICT OF
INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO
PURCHASE OR SELL ANY TOKEN, OR TO USE ANY PROTOCOL. THE CONTENT
IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE
INVESTMENT DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT
ADVICE.

Table of Contents

1. Introduction
2. Why Games
3. History of Game Monetization
4. What Blockchain Brings To Games
5. The Current Generation of Crypto Games
6. Using Crypto to Monetize Around Games
7. Conclusion

Introduction

It’s no secret by now that most gamers hate crypto. We’ve witnessed heavy
community backlash around announcements such as Ubisoft Quartz and even
more recently with Dr DisRespect’s Midnight Society. Video game commentators
such as Asmongold, Josh Strife Hayes, and many more continue to hound the
sector—often with good reason. Perhaps you’re surprised to hear a crypto-native
company admit this, but we understand where the sentiment comes from and
believe there are grounds for it. As a team of gamers and some of the earliest
supporters of blockchain games, the dismissal of a space we care for so much
caught us off guard. Initially, we assumed it was a case of people not
understanding the benefits that crypto could bring to gaming. In time we’ve
listened, debated, and listened some more.

After much discussion, we believe there is a lot of validity to many of the critiques
surfaced. Not just towards crypto gaming, but more broadly the evolution of the
game industry’s core monetization practices over time. In this post, we’ll share
our insights and an evolved thesis they helped formulate. We’ll provide historical
context for where we find ourselves in the games industry, share some
reflections on crypto’s entrance into the arena, and frame several models for
where we think crypto belongs in games. In particular, we will explore a new
model called PlayFi, developed by Brooks Brown and the team at NOR. We
strongly recommend watching our inaugural Disruptor’s Episode with him. We
built our thesis upon many of these principles, adding in some modifications
based on our experience.

Why Games

To begin with, it’s worth zooming out and developing a high-level framework for
understanding why people are drawn to games. Let’s explore the concept of
magic circles, first pioneered by Johan Huizinga way back in his 1938 book
Homo Ludens and later expanded upon in the context of gaming by Katie Salen
and Eric Zimmerman in their 2003 book Rules of Play: Fundamentals of Game
Design.
The term magic circle refers to the imaginary boundary between the real world
and the game. Reality, with its often unfortunate baggage and constraints, is what
many people seek an escape from. A game’s magic circle can offer them this
haven. Within a magic circle, seemingly mundane actions can take on
extraordinary forms due to the remarkable nature of human imagination. For
example, the simple act of kicking a ball into a net can be totally transformed.
Perhaps that ball traveling into that net actually represents a winning goal in a
World Cup Final. Suddenly, billions of people care and the moment carries with it
significant, enduring meaning. The difference here is that it has happened within
a magic circle, a shared illusion, that society has placed value in.
It might strike you as odd that we used a sports example in a post about video
games, but they have far more in common than what sets them apart. Far back in
human history, physical sport has been a dominant entertainment medium. It’s
appreciated as a great source of meaning all across the world, with an ability to
conjure enormous passion and tribalism at a global scale. Sports are respected
as people understand the skill involved to truly excel, often having practiced the
sport themselves. Moreover, they have undergone thousands of years of
evolution to optimize for what people truly enjoy and love in games. The result
has been a very particular model for monetizing around games, which we shall
explore later.

Reverting to the magic circle, it often serves to induce a flow state⁠—a well
studied psychological phenomenon which ranges far beyond gaming or sports.
It’s the state that emerges in situations of high challenge and high skill. If
successful in crafting a compelling magic circle, the player should be so
engrossed in the experience that all other needs become negligible. The outside
world should necessarily fade into the background. You, dear reader, may well
have experienced that sensation of “being in the zone”. It’s what many people
enjoy about video games—the true meaning of play.
It’s that last point where things begin to break down in the current generation of
video games. In many cases, play is not unhindered by external interference. In
fact, it has become entangled with arguably the biggest constraint that reality
imposes on people—money. It’s our view that this is a large source of hostility
toward crypto from mainstream gamers. Parts of the traditional gaming industry
have skewed towards aggressive monetization practices that are sometimes
detrimental to the player’s experience. As such, when gamers see the need to
purchase NFTs to play with early crypto games, or large publishers announce
plans to build in this sector, they assume it’s another money grabbing attempt
and shy away from it.
The issues described above are most pronounced in competitive multiplayer
titles, where the ability for some players to beat others because they paid for
performance enhancement is corrosive to genuine competition. These games are
often labeled as pay-to-win (P2W), and are rightly subject to backlash. With the
advent of crypto, and the ability to tokenize and trade in-game assets, many
critics are concerned that blockchain games will always trend in this direction.
While a valid opinion, we believe this is a one dimensional view that misses
many great opportunities for crypto to enhance games.

To summarize some of the points we’ve touched upon:

1. People play games as a way to escape from reality; flow state and true
immersion enhance this
2. Skill-based competition can be an important driver of what makes games
meaningful
3. When money impacts core gameplay it can undermine the above

We believe much of the criticism in the games industry, directed at both crypto
and traditional games, stems from how games are monetized. In an ideal world
one might argue that to create the most immersive game experiences, the
influence of money over the core gameplay must be restricted. This isn’t to say
that all forms of monetization are bad, rather that we should seek to monetize in
ways that aren’t detrimental to the core game loop or true competitive play. It’s
also not to say that there can’t be games where money touches the core
gameplay, for there is certainly an audience for such games. In fact, many of the
Delphi team enjoy such titles. It’s worth noting that these various models exist on
a monetization spectrum, which can be approached in a variety of ways. As ever,
there is no one-size-fits-all solution, and there’s always nuance in the infinite
space of game design.

History of Game Monetization

Before we explore the current incarnation of crypto in games, it’s worth reflecting
on the journey of the industry with the context provided above in mind. The
videogame industry as a mainstream phenomenon has been on a long
evolutionary arc since the late 1970s, when arcade play led to the first Golden
Age of gaming (1978-1982). These early games oozed soul, as the public
spectacle of the arcade unlocked deep competitive forces for the first time. The
pursuit of a highscore slot and the ensuing glory that could be flaunted at both
friend and foe was infectious. These games were skillful, fun, and followed the
age-old adage that great games should be easy to learn and hard to master.
Given the seemingly all-pervading nature of modern video games, it might seem
counterintuitive that revenues from those early years rival those of recent times.
In 1981, the video games industry had revenues of $20B. Adjusted for inflation,
that’s $64B. For context, global game revenue in 2021 was $180B. Video game
success despite the frictions associated with play back then was impressive.
From having to carry quarters, wait in line amidst the chaos, ensure the machines
worked, that the games did, or that the arcade was even open when one fancied
a game of Space Invaders— would all be intolerable to the modern gamer. So
beyond novelty, what was the magic behind these early games?

Brooks Brown, in his talks about NOR, emphasizes the idea of “fair play and the
thrill of risk”. The core idea is that in the early days, games offered true risk.
Having made your way to the front of the line in the arcade, your quarter would
buy you one go with three lives. If you lost them all, you were out. There was a
real incentive to ‘git gud’, as dollar value became intertwined with skill. The better
players literally got more value for their money as they were able to survive
longer. The greatest players had the highest order incentive in the form of the
high scores, where their achievements could be immortalized—everybody
understood the difficulty of achieving a spot on that scoreboard, so it
commanded respect. The incentive structure drove players to want to get better
by practicing more which could only be done by spending more. There was even
an inflection point of skill beyond which it actually became more economical to
be good at the game. Importantly, the fairness of the game was also sacrosanct.
There were no cheat codes, purchasable power-ups, or other consumables to
give a player an edge. These games were raw forms of competition, with
essentially all variables aside from their environment within the player’s control.
Users had guarantees that they could win these games on pure skill alone, unlike
much of what we see in the modern era. Fair play, and the thrill of risk.

As the industry evolved, the emergence of home consoles saw players retreat
out of the arcade and into the comfort of their own homes. They could now play
whatever they wanted whenever they wanted, without limits. In the intervening
years between the rise of the console and the advent of the internet, the public
spectacle of the arcade and the competitive spirit around high scores
diminished. Whereas previously these top “virtual athletes” had commanded
large crowds, that energy had now dissipated. Losing all three lives and “dying”
did not carry the same meaning, as players could simply respawn for free without
any real-world penalty. Because losing didn’t matter as much, neither did
winning. The consequences of actions had changed. As Brooks puts it, “the
devaluing of risk severed the link between player skill and entertainment value”.
Ultimately, game designers became more reliant on technological advancements
such as better graphics and sound to distract users from this subtle but important
change. Henceforth, an eternal cycle of infinite respawns from the comfort of
home would be the norm. NOR’s former name was in fact Eternal Return, named
after the Nietzschean threat of being doomed to such a repetitive existence.

By the mid-1980s video games were developing at a rapid pace, with growing
production budgets creating larger titles that encompassed increasingly complex
mechanics as well as longer narratives. Instead of being in direct competition
with sports, the industry trended towards competing with film and television.
Decades on, we see this trend towards higher production-value games in full
force, with the 2019 Q4 Netflix investor letter stating “we compete with (and lose
to) ‘Fortnite’ more than HBO”.

Through the 80s, 90s and 00s, the industry was dominated by premium, AAA
games—games which you had to pay a significant upfront cost for, typically $60.
The games were distributed by CD, or cartridge, and played on PC and/or
consoles like the Sony Playstation or the Nintendo GameBoy Advance. Their
existence relied on developers who were willing to both pay a ‘passion premium’,
and sleep under desks after 100 hour crunch weeks, in order to work in games.

The ‘premium game’ business model meant that only players who (1) had the
prerequisite hardware (a console, or a gaming PC), and (2) had $60 to spend on
an individual game experience, could play these video games. While these
experiences were cherished, there was limited accessibility for video games
globally—in 2001, there were just 3.1 million sales of the best selling video game:
Pokemon Gold / Silver / Crystal. In comparison, Garena: Free Fire has over 100
times the users, with 311,250,355 monthly active users today.

In addition, value-capture for developers was limited – there was an inability to

effectively price discriminate, which meant that a player who was willing to pay
thousands of dollars for the game experience, had no meaningful way to do so.
This changed significantly with the advent of free-to-play, and mobile gaming.

Mobile gaming and the free-to-play model propelled the business of games to
dizzying new heights. Today, mobile game revenues ($85B) account for more
than PC ($40B) and console ($33B) combined. With the massive distribution
advantages of digital-first titles, the industry gravitated towards making games
free to start. This opened up games to more than 3 billion people globally, and
today the average gamer is a 35 year old woman. While games were free-to-start,
games still had to be monetized in order to be funded. The mobile era led to two
main strategies: advertising, and, most contentiously, microtransactions—which
involved charging people for perks, and advantages within those games:
convenience, time… and power relative to other players.

Whilst this would start out innocuous with most monetization happening around
cosmetics and other non-balance-impacting purchases, in many instances it
devolved. Games were being designed and developed with a behaviorist, rather
than a ludic lens in mind. The methodology that made games a venture backable
industry meant a race to the bottom. By focusing upon improving retention,
before layering in monetization, the free-to-play games industry led to a set of
behaviorist mechanics which relied upon the psychology of addiction in order to
retain and monetize players. These included appointment mechanics, and
careful use of notifications and social features to keep players constantly
checking in.

At the darker side of the spectrum, the developer would create deliberate
impediments to players, and manufacture uncomfortable situations in order to
encourage them to spend to overcome those barriers. For example, by allowing
resources to be stolen, players are encouraged to purchase shields in order to
protect their resources when they are offline. In addition, since many games
relied on ‘catching’ and monetizing big spenders (whales), a game’s success also
relied on how deep its economy was, or how much a whale could spend in these
games. For example, Diablo Immortal fans estimate one could spend up to
$600,000 to fully level up a character. Parts of the current industry skew much
more towards allowing pay-to-win, whereby the experience of the game is
deliberately worsened for non-paying players.

This can be especially corrosive in multiplayer games, where big spenders

(whales) are granted the illusion of superiority through unfair advantage. The
market has spoken, and this business model has clearly become highly attractive
to many developers. Unfortunately, some studios are too aggressive with this
model and have created significant tension with their player bases, who deem
their conduct predatory. Again, the extent to which a developer employs these
practices varies, and there are acceptable, and extreme ends of the spectrum.
Not all implementations of this model are overt, as games such as Rainbow Six:
Siege ostensibly do not have any advantage you can pay for. However, there are
more subtle manifestations such as releasing new operators that deliberately
shake up the meta and encourage users to spend. At the lightest end of the
spectrum, cosmetics prevalent in most modern games don’t grant in-game utility
but some players still argue that in competitive scenarios they can prove
advantageous.

In summary, with typical S-Curve style, aspects of the industry have flipped from
user attractive to value extractive. Many of these monetization practices have
become deeply entrenched where everyone is forced to play the same game.
We’ve seen a stagnation in design at the monetization level, with the various
psychological tricks to hook people becoming more formulaic over time.
Microtransactions and pay-to-win instances can be corrosive to the concept of
the magic circle, which leads to an obfuscation of the axes that contribute to flow
state, and ultimately undermine the player experience. Crypto presents a next
step in the evolution of monetization in gaming, and in an upcoming section we’ll
explore what these early implementations have looked like.

Blockchain In Games

Before we dive into the current generation of crypto games, it’s worth recapping
some of the properties of blockchain technology that we believe are interesting
when applied to gaming. Below, we’ll break out what these merits are from the
player perspective as well as the developer’s.

For players, we see the following key benefits:

Digital property rights: in traditional games, players purchase digital items

(e.g. skins in Fortnite) that they are really just “renting” from the game
company. When game assets become NFTs, there is a new level of
assurance for the player and their achievements. If the game stops
operating, other parties can theoretically step in to honor the utility for those
assets otherwise they may still have enduring collectible value.
Secondary market liquidity: true digital ownership changes consumer
psychology, creating residual value for digital purchases within a global,
verifiable liquidity layer. Users are able to retain value from their
investments should they wish to leave an ecosystem.
Provenance: virtual goods now have rich, verifiable histories. Imagine being
able to own the exact, signed gun skin your favorite esports players used to
win the world championship.
Community governance: gamers can now participate in the direction of the
games they love via DAOs and councils (see: Illuvinati Council by Illuvium).
Value accrual: the value created across the game (or games) can
transparently accrue to an ecosystem token as more players spend time
 and money in these worlds.
On-chain reputation: a new player-centric design space is unlocked as
gamers can now build strong cross-ecosystem player profiles. We’ll explore
some uses of this in the later PlayFi section.
Web3 payment infrastructure: through the usage of crypto payment rails,
seamless payments are possible across a number of use cases such as
smart contract prize pools and tournament payouts—something that is
particularly burdensome in traditional esports.

For creators and developers, the following improvements are unlocked:

Increased monetization surface area: opportunity to more thoughtfully

monetize players vs. the free-to-play model where, on average, less than
2% of players actually purchase in-game items. The ability to monetize this
‘long tail’ of users comes from a deeper willingness to spend, driven by the
benefits for players mentioned in the previous section (e.g., digital asset
ownership, provenance, etc.). In addition, secondary market activity which
would previously be lost to peripheral gray markets can be captured.
Importantly, this should be done carefully in a non-detrimental way, as
we’ll expand on in later sections.
Enhanced economic alignment: sharing a portion of economics with
players and creators in your game economies means lower customer
acquisition costs and greater retention contributing to higher LTVs than
 traditional free-to-play games. Strong evangelical forces are also unlocked,
as users can have a stake in the game worlds they care deeply about.
Improved creator economics: with UGC games like Roblox, creators keep
just ~30% of revenues. With blockchain games, creators generally retain
much more of the value they create as well as benefit from on-chain
royalties.
Interoperability & composability: while it will take time, blockchain
technology has the potential to allow interaction across ecosystems by
leveraging existing building blocks and open source infrastructure. We
recognize the difficulty of game <> game interoperability, and see
composability with the broader web3 tech stack as a more promising
innovation.

Lastly, it would be remiss not to emphasize the very obvious improvements that
crypto has brought to the games funding landscape already. As many may be
aware, Tencent-style monopolies across the industry have created impenetrable
moats. Most aspiring game developers are drawn to building games out of raw
passion, yet quickly learn that the stagnation of the dominant business models
and the moats established by large incumbents present two options:

1. Chance several years building with predatory F2P mechanics and hope you
solve the formula of LTV > UA costs.
2. Surrender creative agency and become a cog in the machine of a large
corporation.

The AAA games industry is often critiqued for its toxic work culture with insane
hours around brutal crunch times. What’s more, the entrenched F2P model
sometimes skews so far towards value extraction it has robbed the soul of many
games. Somewhere along the way, many of these people end up having their
love for games stolen from them. At the same time, demand for talent in this
industry vastly outstrips supply. By structuring an ecosystem that allows
developers to build and define shared upside with an audience from day one, the
quantity and variety of capital available to them increases.

In the typical F2P arena, it’s not uncommon for the marketing budget to equal the
development budget as tedious UA costs make it extremely difficult to rise above
the noise. In the crypto model, this marketing budget can be deployed in
incentive design to bootstrap an economy. Many of the best games in the world
are born in organic, grassroots communities, not R&D labs at multi-billion dollar
gaming behemoths. In the same way the creator economy opens up the universe
of people that can even pursue their interests, the same is happening with game
developers.

The Current Generation of Crypto Games

Crypto gaming took the space by storm in 2021 but has since lost some of its
allure as engagement has trailed off. Before we outline why we think that’s been
the case, we should start by clarifying what exactly got people so excited by
them in the first place. Albeit imperfect, this model has many benefits over
traditional games. As mentioned previously, crypto unlocks digital property rights,
verifiable secondary market liquidity, community governance, shared ownership
structures, and significantly enhanced funding options for developers. The
downside is that, with the tokenization of most to all in-game assets, the
economies become considerably more difficult to manage. It’s actually most
difficult early-on, which would seem counterintuitive, because the games launch
in stages meaning large portions of the game and the economy may not be
functional. This tends to cause considerable growth in the supply side of the
economy without having the requisite offsetting demand to absorb that growth.
In this case, demand comes in the form of utility for these resources. Game
developers will often create many levers they can adjust to help maintain
balance in the economy, but without the full functionality of the game in place,
their levers are limited.

This combination of liquidity in all parts of the economy coupled with game loops
that aren’t fully built out tends to cause an overheating of the economy. At the
start, the initial scarcity of all resources in the game combined with pure financial
speculation from non-players helps keep demand on pace with supply. This
dynamic creates an enticing setup for purely extractive participants to enter.
These participants exacerbate the imbalance we discussed earlier because they
join early on, creating even more demand for both consumable yielding assets
and the consumables they produce. As the supply of assets rapidly increases, it’s
not met with the appropriate level of demand that would exist in a more built out
economy. As prices start to come down from the supply glut, the extractive in-
game participants and purely speculative market participants then also leave.
This furthers the mismatch between supply and demand because of the demand
destruction that takes place during their exit, leaving the economy in a hole that it
must gradually climb out of.

One potential solution is to limit the transferability of consumable items in the

early days of the game, until more components of the game and economy are
built out. They wouldn’t be on-chain, they’d just be linked to the account that
generated those resources. This curbs the potential for economies to overheat
before they’re capable of handling that level of supply. This also tempers prices
of assets in early days because the game wouldn’t have open yield generating
assets whose prices are temporarily driven to astronomical prices by speculative
extractors. The asset price spikes caused by these extractors also ends up being
a barrier for adoption for those with genuine interests. This lack of transferability
would only be temporary, and at a certain point in the future they could be
claimed on-chain.

Another solution would be to limit the economic relevance or lifespan of these

consumable in-game items or assets. By setting expectations early on with
players that these assets won’t generate ROI into perpetuity, teams will be in a
better position to manage and tune their economy. An example would be setting
up a seasonal reset for the economy (see: Diablo II ladder, Path of Exile seasons,
or wipes in Escape from Tarkov), having resources that expire, or building in
lifecycles (creation, decay, and potential destruction) into in-game assets.

Nonetheless, thus far the introduction of a monetary component to the game

itself has resulted in it trending towards the dominant motivator. As such, the
gameplay of these early titles has suffered on two fronts: 1) the primary incentive
of the bulk of the player base is the expectation of financial reward rather than
play and 2) the core competitive circuit has been subject to pay-to-win
mechanics as whales can spend their way to success.
In 2019, Delphi helped design AXS, the in-game governance token for Axie
Infinity. The idea was relatively simple yet still novel for its time – reward gamers
for actually playing the game. That way the gamers who spent the most time
playing in the world would ultimately be given governance powers over it,
something gamers of traditional titles openly crave. At the time, Axie Infinity had
very few players, but we saw promise in the project Sky Mavis was embarking
on—enough to purchase 5 Mystic Axies for 473.5 ETH in 2020. It’s important to
note that nobody in the community at the time truly anticipated the virality and
dominance of the earn dimension. The ‘Play-2-Earn’ name was retroactively
applied. Perhaps, given the scale of the demand for earning money in video
games, as evidenced by real-money trade (RMT) gray markets around most
major video games, this should have been more obvious. The emergence of the
scholarship model, in which investors would breed assets in order to loan them
to new entrants in exchange for a portion of the revenues they earn, was by
incident rather than design. Nonetheless, we ultimately arrived at a situation
where the majority of the player population was net value extractive, new user
growth stalled, and the in-game economy fell into a downturn.

To further exacerbate the earn-centricity of this cohort of crypto games, we saw

the emergence of guilds who sought to professionalize and industrialize the
scholarship model. Pioneered by Yield Guild, these organizations paired users
with assets en masse unlocking economic opportunities for large populations. It’s
worth emphasizing the true impact of this for thousands of people in countries
like the Philippines, where during COVID play-to-earn games were quite literally
life-changing for many. In 2021, we saw $512M of public and private market
funding for guilds. Much of this money has been allocated for investment in in-
game assets, as well as venture investments in games themselves. Due to this
wall of buying pressure, we’ve seen the majority of fast-follow games engaging
this trend and looking to accommodate similar mechanics. Arguably, the sector
might have kick-started an incentive loop in game and economy design without
sufficient thought as to whether or not this is the optimal path to pursue. We
believe that guilds existing primarily to coordinate resource extraction in games
have strayed somewhat from the original vision of what they could be, and we’ll
address what a path forward looks like in a later section. Unfortunately, as is
often the case with crypto, it seems that many of the “players” in the current
crypto gaming space are mercenary in nature. Just like yield farming, users
appear to be attracted to where the incentives are strongest instead of a genuine
passion for the games on offer. Not only does this result in developers essentially
overpaying for their early audience, it can also be detrimental to the experience
of genuine players. The over-emphasis of the earn component in these early titles
has ultimately led to the obfuscation of organic player demand.

That said, we continue to believe that there will be significant demand for
financialized games that opt to put much of their economy on-chain (fingers
crossed for the World of Warcraft auction house one day). These games lead to a
new form of gameplay, where skill & advanced knowledge of the in-game meta
can create alpha within the context of a game economy, and lead to financial
rewards for dedicated and savvy players. We are proud supporters of many such
games and have been very encouraged to see the progress made with titles such
as Crypto Unicorns. Through a combination of economic monitoring, careful /
diligent design, and continual live service development, these economies can be
better calibrated, and also create a rewarding experience with a player-driven
economy.

For these financialized games, it’s of crucial importance that the portion of
players who are net value extractive is smaller than those that are happy to pay
for entertainment. Ideally, the value extractors provide something useful or
interesting for the paying player. We see this first generation of crypto games as
an extension of what is already working in traditional gaming, although with
certain new characteristics that make it attractive.

It’s important developers of blockchain games have a clear understanding of

what and who they are building for. We are of the view that many developers are
taking the decision to open up their economies too lightly, without full
appreciation for the complexity involved in effectively navigating this path. At
Delphi, we continue to spend time analyzing how the existing models should
evolve, as well as looking at new models as we shall explore.

Using Crypto to Monetize Around Games

Another model the Delphi Gaming team has been exploring in depth lately is
called PlayFi, as pioneered by NOR. We think this model is uniquely well-suited
to esports and competitive titles, and Delphi will be actively supporting projects
working on these ideas moving forwards. In order to best explain it, it’s worth
revising the concept of the magic circle in games. That flow state of true player
agency and freedom, unspoiled by surrounding forces vying for the human’s
attention, is why great games stand the test of time. There is a reason that the
Delphi summer retreat’s gaming tournament revolved around a 20 year old
game (Super Smash Bros). There is an elegance and purity to games that have
refused to compromise on these core principles. Furthermore, games that follow
this model appear to have immunized themselves from the ephemerality of our
contemporary digital environment. Counter Strike, for example, remains strong in
its position as one of the greatest competitive shooter titles ever, whilst many
others have risen and fallen around it. As we shall see, much of this can be
informed by how traditional sports works—a model that has flourished across
millennia.
In the pro sports model, almost without exception, the core game mechanics are
stunningly basic and highly accessible. In soccer, for example, the objective is
literally: put ball in net. The game has certain fixed parameters; a certain height
for the crossbar, a certain width between the posts, and the ball is a particular
size and weight. As Brooks says, “ The nature of any ideal game is that every
throw, play, or choice operates on well defined things – a constellation of them if
you’ve done it right.“

Furthermore, there is usually very broad accessibility. Any prospective player

mustn’t go far to find a ball and a goal… more often than not, sports are easy to
learn, hard to master. Player agency is significant, as difficulty is usually self-
directed. One can choose to practice penalties, free kicks, and corners by
themselves. The introduction of further challenge via satellite opposition is
similarly straightforward – perhaps a 1v1 exercise which gradually introduces
more of the game’s rules (fouls, tackles, blocked shots etc). This scales to
different team sizes and formats, all the way up to the most common incarnation
of the beautiful game. At a certain threshold of seriousness, players might like to
invoke governing officials that enforce the rules in more organized, competitive
scenarios. At any point in these many derivative configurations of soccer, players
might like to introduce betting which raises the stakes and amplifies the
competitive spirit.

Importantly, as these scenarios become more competitive, the more skilled the
players become and by extension the overall difficulty rises. As the level
increases, so does the surface area for monetization. These experiences are
scarce. There are only so many players in the world that can compete at this
level, at the very top of a vast talent pool, and thus they are meaningful. As such,
we see a dramatic expansion of opportunity for participation beyond the core
game in the form of coaches, fans, commentators, analysts, scouts, prediction
markets, merchandise, collectibles, and so on. As Brooks puts it: “This elegant
correlation between increased difficulty of the game and increased economic
opportunities/participation in the game is at the root of the pro-sports model, and
at the root of PlayFi”.

In essence, we can view the monetization model of sports as revolving

exclusively around meta-games. These meta-games act much like a derivative to
a purely skill-based game. Metadata can be thought of as data that describes
other data. Metagames, by extension, can be thought of as a derivative game that
either describes, or is rooted in, the core game. Importantly, the market games
are kept distinct from the core competitive loop.

Soccer, at its core, is not a market game⁠—it’s a game of skill on the field. Its path
to monetization starts with people caring for the sport itself, then taking metadata
from the most meaningful games, and playing metagames with it.
In the video game context, having acknowledged that the core magic circle of the
game must remain intact, one might wonder how we accomodate a larger
audience that might not have a burning interest in personally reaching the top
echelons of a given title. After all, there are myriad user archetypes in modern
games from whales with a desire to spend, speculators who’d like to bet on the
top gamers, and more casual enthusiasts who enjoy the title in other ways. As we
explored in the end of the first section, if untamed, money will always trend
towards the dominant motivator. As such, the first port of call is to separate out
the market games from the core game loop itself. This way, we can begin to
define independent magic circles that harmonize but don’t interfere with one
another. Nobody is tricked into playing the other’s game.
As with the pro sports model, scarcity of experience matters. Both in terms of skill
level, but also in terms of cadence of competition. In soccer, Ronaldo will only set
foot on that pitch once a week. The constraints on how often these competitive
situations arise further contributes to their meaning generation. With NOR, the
pioneer implementation of PlayFi, scarcity of experience and true risk are driven
by permadeath tournaments. In each of these games, the players themselves
are the NFTs which are permanently burned should they lose. They own their
data and their metadata entirely, and benefit directly from its usage in the
economy around the core game. The objective of the PlayFi model is to
encourage users beyond the core competitors to play metagames with
metadata. In theory, the more people care about the game, the more gets spent
directly on metagames. By maximizing meaning generation and competition in
the core game, we are able to maximize revenues through peripheral
monetization around it. Furthermore, we retain the distribution advantages of the
free-to-play model, as players are able to play for free, and we can effectively
price discriminate for those who are willing to spend more on metagames. We
also avoid the drawbacks of pay-to-win.

At the heart of this framework lies skill-based competition, which requires

tournament systems to function. NFTs are a foundational technology that allow
us to tokenize any unique digital item⁠—including tournament entries as tickets.
For example, let’s look at the bracket below which has a total of 8 entry-level
slots. Each of these starting points could be sold in a primary auction, and then
trade freely on the secondary market without impacting the core gameplay. The
smart contracts representing the prize pool might take 50% of all revenues
generated (in addition to sponsors), further contributing to the appeal of the
competition.

Whilst some of this may sound similar to certain modern esports, we cannot
stress enough what a significant step up the web3 infusion brings. Ultimately,
crypto is primarily going to serve as the backend accounting engine that
facilitates ticketing, payments, player NFT contracts (on-chain reputation),
automated tournament bounty smart contracts, and so on. Crypto unlocks new
transparency around player profiles, a deep liquidity layer facilitating seamless
payments, and new ways for people to bet without navigating burdensome
infrastructure. Furthermore, many properties of crypto technology such as digital
provenance unlock a new way to think about the digital realm. How much would
you pay for the gloves from the Ali-Fraizer fight? Now, how much would you pay
for a cosmetic minted off an esports championship you care deeply about?
A rich tapestry of our digital experience now exists, where fans can collect items
from meaningful moments in esports history. The exciting thing about building
this in crypto is being able to unlock open source infrastructure that can be used
across the industry for many applications. All esports-styled games should be
able to plug into the same set of standards, some of which Delphi hopes to
contribute to. Once all data, metadata, and infrastructure is consolidated in a
single place, we open up the ability for 3rd parties to come in and develop their
own metagames around these games. It’s difficult to imagine many of the more
popular downstream applications this will lead to, but we are excited to see what
emergent behavior and gameplay is unlocked. Once the technological
foundation is laid, we believe the users will drive creativity in their respective
ecosystems as they have always done. It took time to converge on the optimal
metagames for pro sports, and we expect the same to be true of PlayFi.
As it stands in play-and-earn gaming, the tokenization of gameplay assets both 1)
adds a startup cost (i.e. friction) because a player needs an NFT to play and 2)
because the in-game assets are NFTs that have secondary market liquidity, pay-
to-win mechanics have also crept in dampening competitive play. With the
PlayFi model, one of the first changes is not requiring users to own an NFT to
play the game. In other words, just let it be like any other regular video game.
Importantly, that doesn’t mean there can’t and won’t be NFTs. Scarce, unique
digital assets still have their uses as we alluded to earlier, but how these assets
enter the game matters. For example, I might still be rewarded with a digital
collectible, but it should have meaning to me within the context of the game.
Furthermore, because all monetization can happen external to the game, we are
able to mitigate many of the distribution frictions associated with crypto games
in traditional app stores.

What’s interesting about these components is that they don’t necessarily conflict
with the current generation of P2E games and guilds. In fact, these primitives
can be used to enhance them. For example, games like Axie could have free-to-
play, mini-game modes that are purely skill based, where NFTs are awarded to
tournament champions as true badges of honor. This would also lower friction for
new player adoption.

Guilds like YGG can continue to grow their business beyond providing player
liquidity to bootstrap new game ecosystems, and now leverage player NFT
profiles to attract talent into their guild, as a traditional esports team might. They
can then enter them in tournaments to win prize pools, earning them a yield for
their efforts.

Whilst unproven, we believe PlayFi has the ingredients needed to drive esports
into its golden era and unlock its true potential as a heavy weight of global
entertainment. We will be actively supporting projects such as NOR working on
infrastructure in this domain.

Conclusion

The last 12+ months have been monumental for crypto gaming, and despite
various growing pains we are more excited than ever to play a part in its
evolution. It’s important to stress once again how early this sector is, making it
difficult to be certain which models will win out over time. As proponents of the
space, it’s important that we periodically challenge our assumptions and try to
picture novel ways these technologies can improve games for both players and
developers. We believe this is a great time for developers looking at this sector to
reflect on the complexity involved with open economies, and how susceptible to
over-financialization these games can be. It’s our hope that the path laid out with
PlayFi prompts some further ideas about how crypto might improve games and
their monetization. The only way we are going to turn the tide on mainstream
perceptions is by building experiences that show the power of this technology.
That improve the experience.

Importantly, there are many other models we believe to be especially suited to

crypto that we haven’t touched on in depth here. For example, platforms focused
on user-generated content are well-suited to incorporating crypto. The ability to
program royalties that flow across derivative creations from 3rd party developers
is very promising. There is a world in which this can get granular enough to allow
designers who create specific assets to participate in the economics of its usage
in multiple worlds. We are especially encouraged by projects such as Webaverse
in this domain, which has built an open source game engine that is entirely
browser-based. Furthermore, we remain excited by the prospect of on-chain
gaming. Whilst the road ahead is long, we believe that in time one of the greatest
drivers of innovation will be building native to this new medium. We’re excited to
monitor teams like Lattice, Topology, and Matchbox DAO in pioneering this
sector, although we think we are many years away from these ideas having
broad appeal. Many of the greatest game experiences ever came out of the
modding community, and on-chain gaming allows for true composability in a way
other approaches don’t.

Lastly, as ever, if you are building infrastructure, games, or other experiences with
a unique angle in this sector we would love to talk to you. We are particularly
interested in teams that might be working on some of the supporting PlayFi
primitives described above. We have big plans for Delphi’s gaming unit, and will
continue to dedicate resources from all of our divisions to this ecosystem until it
is driven firmly into the mainstream.

The Delphi Gaming team

[email protected]

delphi-374-976a19