In the last 12 months, we’ve experienced a much-needed shakeup in web3 gaming brought on by the crypto winter and macroeconomic downturn, with both speculative and retail investors pulling back, precipitating the expected realisation that many Play to Earn models were unsustainable, excessively inflationary and purely dependent on new users for growth. Now that the space is less “frothy”, we’re starting to see less opportunistic cash grabs and more genuine teams with game development experience experimenting with new ideas and models for web3 gaming, focusing on how web3 elements bring something new, innovative and fun to the gameplay and game experience, and moving away from relying on earning mechanics as a user acquisition tool and attracting an unhealthy proportion of speculative investors and players purely motivated by earning.
That said, the cash grabs, ponzinomic games and games with poorly designed token economies haven’t entirely gone away, so much rigour is still needed to sift the good from the bad. From a venture investing perspective, I think now is the best time to be identifying and supporting talented teams with the vision and perseverance to experiment and build through the recession and emerge with new innovative games for all to enjoy (not just degen crypto bros), now that the space is a lot less hype-filled and noisy.
Needless to say, it will always be important to assess the gameplay, team, business model, competition and go-to-market strategy for any game, but one area I’ve been focusing on is assessing the web3 game economy and how sustainable it is. So I’d like to share a template for conducting due diligence on web3 game economies.
Here is a list of questions I’d ask when assessing a web3 game economy, which might also be applicable to Move to Earn and other X-to-Earn-style web3 economies where earning/reward mechanics are paired with broader utility beyond the financial (e.g. fun, entertainment, learning, etc.).
Token utility
What is the utility of various tokens in the game?
Earning mechanics/faucets
How do players earn in the game? What are the token faucets?
Do players earn by providing value to the game/community/spenders (e.g. making some meaningful economic contribution to the game, like creating/designing in-game assets that other players can buy and use) and through activities that involve actually playing the game rather than repetitive clicking? Or does the bulk of earnings come from just grinding? (Not a fun game.)
Is earning built into the game world/narrative? Are there in-game roles that earn while delivering value to the game/community?
How do players earn the best/most rewards? How long do players have to play before earning? (PvP, end-game content, challenges, leaderboards and other more competitive activities help to ensure that earning is tied more closely to long-term active play vs. grinding/DeFi loops.)
Are there limitations (frequency, energy, recharging, time-based, etc.) to earning activities (particularly for the most economically valuable activities) to avoid yield farming and inflation?
Do NFT assets generate cash flow for players? Is any revenue (e.g. marketplace transactions) being shared with NFT owners? How?
Spending/sinks
What do players spend tokens on? What are the main token sinks? And how is the game economy affected by them?
Are there enough sinks for players to spend tokens for fun/vanity/progression (not to increase earning potential)? Are there major sinks that don’t increase earnings and are players inclined to use them? (Token utility beyond financial, e.g. things that let players do/play/flex more - higher level gear, unlock features, additional dungeon runs, cosmetics) Or do all the sinks increase players’ earnings or earning efficiency (which leads to inflation of the reward token)?
Balance and incentives
Does the game have well-balanced faucets and sinks?
Does the game have sufficient levers to balance the economy and influence economic loops?
Is the earning incentive too strong?
Is the token/asset speculation (buy to flip) incentive too strong?
Is there a P2O (Play to Own) incentive (intrinsic/emotional value in owning/upgrading NFT assets representing ownership/participation and validated by market demand)?
Avoiding yield farming and DeFi loops
Are earning mechanics/activities/sinks (e.g. breeding) focused on increasing earning potential, i.e. yield farming? Are players expecting to earn passive yield from the token without playing (which leads to inflation)?
Does P2E (Play to Earn) make the game Pay to Win? Do players with the most capital have access to the most power in the game? (They can buy more resources, progress through the game economy loops more quickly, dominate the game economy and milk it for yield, which is bad for players with less capital or who are playing for fun. Check the breeding mechanics and purchasable item power and their impact on winning and yield farming.)
Or are players who put the most time and energy into the game rewarded with the most earning potential? (Players have to actually play - not grind - to earn and win.) Are there limits to increasing one’s earning potential by investing large amounts of capital? (Check for cooldowns to deploying capital, that the best gear/assets/ROI-increasing upgrades are soulbound or non-transferable so that the highest-earning potential and most competitive assets are only accessible to active players and can’t be bought by newcomers or yield farmers.)
How quickly and easily do players become ROI-positive and how easy is it for players to calculate earnings/game ROI, which will encourage yield farming? Are earnings unpredictable/irregular/high variance, which will encourage actual gameplay instead of pursuing DeFi loops, similar to loot boxes and Gacha mechanics in traditional F2P (Free to Play) games? (Players shouldn’t be treating a game as DeFi and just seeking ROI/yield.)
If the economy has a governance token, what is the governance token used for? Staking to earn more governance token? (Rewards DeFi loop instead of actual players, doesn’t improve/add value to the game, leads to inflation.) Staking to earn revenue share? (Avoid diverting earnings/rewards from actual players to yield farmers. Share game revenue from fees, ads, in-app purchases, etc. instead.) As a valuable finite resource for the most impactful upgrades to assets? (Allows assets to accrue value over time, gives players a reason to hold and use the token. i.e. lock up supply through sink/consumption.)
Accessibility and asset prices
What is the cost of entry? (Access should be free or cheap, up to the cost of a regular game ~$60.) Are entry NFT prices low enough to be accessible to masses of new players? Or are assets too high-value, which will attract more speculators than players and add more earning/asset appreciation/ponzinomic pressure to the economy?
Are NFT prices too high for players to break even within the lifetime of the game by generating cash flow? Or is the only way to break even by selling higher (resulting in ponzinomics and speculative bubbles)?
Player populations
Is the economy sustained only by new user growth (typical ponzinomics)?
Are there enough spenders in the game? Is there a balance between spenders (investing/putting value into the game) and earners (extracting value from the game)?
Is there a balance between P2E players earning from activities/roles, and P4F (Play for Fun) players paying for their goods/services?
How far can the balance be pushed towards P2E and how much consumption can the P4F population absorb?
Are there F2P onramps? Are there higher levels/higher stakes gameplay for more experienced/financially committed players? How do F2P players get converted to web3 elements?
Can the game evolve into a platform/ecosystem aggregating populations of players across different games/activities with value exchange sustained across different games/activities within the ecosystem?
Fun
Is the game fun? How well does the game appeal to players who want to play for fun? (Non-financial fun/utility beyond earning/token appreciation to retain players.) Does the community love playing the game?
Have the developers introduced earning elements before they’ve been fully baked/thought through and before a fun game has been built?
Is there a live ops strategy/plan for player retention?
If you’re interested in web3 games, I hope you find this useful, and please feel free to share your feedback so that we can all learn and improve this space together.
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Shannon - great article and how I wished you had written this back in Nov 2021, just before I plunked in money into SAND (to be fair, I did it as a learning project, and because my son wanted to try a Web3 game...) But like you correctly mentioned, it does take a market correction to provide the inertia for these companies / gamers / punters to be more...realistic.
Do you see any Web3 gaming companies that seem to be following a more true and principled blended-approach, that embodies that "gaming essence + XtoEarn + Web3" combination?
Look fwd to your future articles and musings!!