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Game On or Game Over? Crypto Economy’s Hope Of Web3 Gaming Declines Amid Increased Regulation

Blockchain technology, with its decentralized and secure nature, has emerged as a revolutionary force in various sectors, gaming being one of the most prominent. The Play-to-Earn (P2E) model, which leverages blockchain, has reshaped the gaming landscape, offering players not just entertainment but also financial incentives. However, as this technology intersects with gaming, it faces a critical juncture: increasing crypto regulations threatens to stifle web3 gaming’s potential, particularly as gaming stands as a beacon of hope in demonstrating blockchain’s practical applications.

The cryptocurrency industry has been grappling with its identity and utility in the modern economy. A key question facing this sector, including from regulatory bodies, is its practical application. Videogames have emerged as a potential arena where cryptocurrencies can play a significant role. However, this opportunity is currently being undermined by rampant speculation.

Blockchain Gaming’s Reality Check

In 2021, during the height of the crypto boom, a notable moment occurred when a founder of Axie Infinity addressed a gathering of blockchain gaming enthusiasts. Amidst the excitement, a question was raised about potential regulatory concerns in the Philippines, where the game was significantly impacting the labor market. Young people were reportedly leaving regular jobs for the digital world of Axie Infinity, breeding virtual creatures for profit. Dismissing these concerns, the Axie founder confidently stated that traditional governments, like Manila, would adapt to the emerging blockchain regimes.

Fast forward to the present, the perception of Axie Infinity has drastically shifted. Once a blockchain gaming beacon, it is now often criticized for its lackluster gameplay and exploitative nature. Traditional non-blockchain gaming franchises like Resident Evil and the Legend of Zelda continue to captivate gamers, unaffected by the rise of blockchain games.

This changing landscape is even reflected in the sentiments of crypto investors. At a recent venture capital dinner during the Mainnet conference, while the clichés about blockchain gaming’s potential persisted, a note of disappointment was evident. A respected investor, known for their contributions to the gaming sector, expressed disillusionment with their crypto investments. This sentiment aligns with a statement from a crypto executive at Brevan Howard, who suggested that blockchain games are not yet ready for mainstream adoption.

Despite these challenges, the future of crypto gaming still holds promise, particularly in its potential to innovate in areas like in-game currencies and the transfer of digital assets across different virtual environments. The investor at the dinner, despite their frustrations, remained optimistic about these possibilities.

The path forward for crypto gaming is not straightforward. To gain traction, blockchain gaming companies must earn the trust of traditional gamers, many of whom are skeptical about cryptocurrency. Additionally, they need to focus on developing games that genuinely engage players. Creating hit games is a time-intensive process, often spanning several years, but there are signs that some crypto firms are prepared to invest the necessary time and effort to create compelling games.

Realism is increasingly evident among crypto sector executives about the challenges they face. The once widespread belief that blockchain games could disrupt traditional government structures, such as in the Philippines, is now recognized as overly ambitious. The focus is shifting towards building games that not only incorporate blockchain technology but also offer genuine entertainment value to players.

FTX’s Collapse Changed The Game

The cryptocurrency market experienced its initial wave of regulatory scrutiny following the scandal involving Sam Bankman-Fried, who defrauded investors of billions of dollars. This incident highlighted the necessity for regulatory oversight, leading to increased concerns about the security of the technology. As a result, the gaming sector, which had been a prominent arena for demonstrating the applications and potential of blockchain, suffered a negative impact.

The ongoing legal issues surrounding Sam Bankman-Fried, founder of the now-defunct FTX exchange, underscore how cryptocurrency has deviated from its initial promise of being an alternative to traditional finance. Instead, it has become more of a speculative bet within its own sphere.

In response, many crypto developers are focusing on what Ethereum co-founder Gavin Wood calls Web3. This concept represents the third evolution of the internet, following static websites and social media. Unlike the current internet dominated by major tech companies, Web3 envisages a decentralized network of organizations connected through blockchain technology, cryptocurrencies, and non-fungible tokens (NFTs). This strategy is logical because merely facilitating digital payments is insufficient to justify cryptocurrencies, given that current banking transactions already serve this purpose. The crypto industry needs its own native, digital, and “real” economy where cryptocurrencies are both generated and spent within a self-contained ecosystem.

This envisioned economy would likely rely on stablecoins, which are linked to traditional currencies like the U.S. dollar, thus maintaining a connection to the conventional monetary system. Decentralized applications and smart contracts, which automatically execute agreements under specific conditions, could offer unique advantages in this ecosystem.

Significance Of Gaming For Blockchain Adoption

Once recognized as a disruptive technology beyond its initial cryptocurrency applications, blockchain’s transformative potential now appears more theoretical than actual, leading to accusations of it being overhyped. However, the gaming industry stands as a notable exception. Industry experts are predicting a significant transformation in gaming, propelled by blockchain technology. They believe that gaming will be the first sector to fully harness the power of blockchain, potentially revolutionizing the industry. This could upend the existing console market monopoly, pave the way for an interconnected multiverse, and create gaming experiences that are more immersive and boundary-defying than ever before. The way gaming overcomes its current challenges with blockchain integration could serve as an instructive blueprint for other sectors considering its widespread adoption.

  • Demonstrating Practical Use Cases: Gaming serves as a powerful demonstration of blockchain’s practical applications. Unlike other sectors where blockchain’s benefits might seem abstract or speculative, in gaming, these advantages are tangible and directly experienced by users. For instance, blockchain enables true digital ownership, provable rarity of in-game assets, and secure, transparent transactions, enhancing the gaming experience in a way that players can readily appreciate.
  • Engaging a Tech-Savvy Audience: The gaming community is typically more technologically literate and open to innovation than the general public. This makes gamers more receptive to new technologies like blockchain. By integrating blockchain into gaming platforms, developers can introduce these concepts to an audience that is not only sizable but also more likely to embrace and understand the technology.
  • Encouraging Decentralization and Empowerment: Blockchain technology promotes decentralization, shifting power away from centralized authorities and into the hands of individual users. In gaming, this could mean more control over in-game assets, fairer systems for rewards, and even player participation in game governance. This empowerment is a significant draw for gamers who are increasingly seeking more autonomy and input in their gaming experiences.
  • Facilitating New Economic Models: Blockchain enables new economic models in gaming, such as Play-to-Earn (P2E), where players can earn real-world value for in-game activities. This not only adds an additional layer of incentive to play but also demonstrates a novel way of blending entertainment with economic opportunity, showcasing the broader potential of blockchain for creating new economic systems.
  • Pioneering Cross-Game Interactions: Blockchain allows for the possibility of cross-game interactions through interoperable assets. Gamers can potentially use items or currencies across different games, creating a more integrated and expansive gaming universe. This feature can illustrate the power of blockchain in creating interconnected systems, a concept that can extend beyond gaming.
  • Providing a Testbed for Scaling and Improvements: The gaming industry can serve as an experimental ground for blockchain technology. The challenges faced in integrating blockchain into games, such as scalability and user interface, provide valuable lessons for improving and scaling the technology in other applications.
  •  Building Trust in Blockchain: As gamers become accustomed to blockchain in a familiar setting, it builds overall trust and understanding of the technology. Positive experiences in gaming can translate to a greater openness to blockchain in other areas of life, gradually increasing public acceptance and adoption.

Web3 Gaming: Market Data

A significant area where crypto has found application is in Web3 games like Axie Infinity, which base their appeal on the ability to earn money through speculation on digital tokens. However, the use of cryptocurrencies for practical services like web hosting and private networks remains minimal. A 2021 survey by the British tax authority revealed that only 4% of cryptocurrency holders received coins as payment for goods or services.

For major crypto firms like Coinbase, which are facing regulatory challenges in the U.S., advocating for a non-financial Web3 economy has become a crucial part of their strategy to engage with policymakers. According to Tom Duff Gordon, Coinbase’s VP of International Policy, showcasing humanitarian use cases and developments in gaming could facilitate discussions with regulators.

The gaming industry, worth $200 billion globally, is an attractive sector for crypto integration. It offers functionalities like earning and transferring non-fungible digital items, potentially even outside the gaming context. Major gaming studios such as Ubisoft and Take-Two Interactive have already invested in Web3.

However, the challenge lies in the focus of many Web3 games, such as Axie Infinity and The Sandbox, on their GameFi models, where gameplay is secondary to earning digital assets. This approach has led to a speculative mindset, mirroring the broader crypto market. For instance, Axie’s AXS token lost over 90% of its value since its peak in 2021 and hasn’t recovered since.

The drop in venture capital investment in Web3 and gaming startups in 2023 reflects this crisis. Even companies like Mythical Games, which secured significant funding last year, have had to announce layoffs. Yet, new ventures continue to emerge, some fully built on blockchain technology like Primodium. These games face technical challenges due to the limitations of blockchain networks, resulting in rudimentary gameplay.

Hurdles Of Web3 Economy

The broader Web3 economy faces similar hurdles. Services like social networks and email, built on blockchain, offer privacy and decentralization but are inferior to existing products. This has limited their appeal to a niche audience of crypto enthusiasts.

To address these challenges, some, like Alex Alamri of Web3 indie-game studio Hundreds & Thousands, advocate for integrating crypto assets subtly into enjoyable games. This approach, mirroring the success of microtransactions in mainstream titles like Fortnite, could gradually introduce Web3 elements into popular gaming without immediately invoking the speculative aspects of cryptocurrency.

Overall, while cryptocurrency has found a potential purpose in the gaming industry, its success is hampered by speculative behaviors and technical limitations. A shift towards integrating crypto elements into enjoyable and functional gaming experiences could pave the way for a more sustainable and practical application of cryptocurrencies in the digital economy.

More Chains Mean More Competition

2023 marks a significant year in the realm of blockchain gaming, showcasing notable trends in development, funding, and technological transitions. This year has seen a sharp increase in blockchain networks focusing on gaming, leading to a competitive environment for attracting game developers and notable shifts in the underlying blockchain technologies used by these games.

Most blockchain games that ceased development or support in 2023 were from smaller studios. In contrast, larger “AA” and “AAA” studios, defined by Game7 as having funding of $10-25 million and over $25 million respectively, experienced fewer shutdowns. Despite this, indie games still dominate the Web3 gaming landscape, with 42% being developed by individuals or small teams without significant financial backing.

The funding landscape reveals that a majority of Web3 games are categorized as “indie” or “midsize,” the latter securing up to $10 million in funding. In contrast, AA and AAA games represent a smaller fraction of the blockchain gaming ecosystem, accounting for only 5% and 1% respectively.

The number of gaming-focused blockchain networks surged from 37 in 2022 to 53 in 2023. This increase has intensified competition among blockchains to attract game developers. While Ethereum’s mainnet remains popular, many games are now opting for Ethereum-compatible sidechains or scaling networks. The Ethereum Virtual Machine (EVM) is the predominant choice for blockchain games, followed by Solana’s virtual machine.

2023 is witnessing a significant trend in game migrations, with 65 blockchain games switching networks, compared to 48 in the entire year of 2022. The majority of these migrations are toward networks like Polygon, Immutable, and Arbitrum, with 60% of games moving from a layer-1 to a layer-2 network.

Switching blockchains is a significant move for any game developer. Indie developer Reinhardt Weyers, creator of “Untitled Platformer,” moved his game from BNB Chain to a gasless chain, SKALE, this year. This shift resulted in increased player engagement and longer play times. Similarly, games like “Mighty Action Heroes” and “Pirate Nation” migrated from Polygon to Arbitrum, citing scaling issues as a key factor.

Conclusion

As the landscape of blockchain technology and its integration into gaming evolves, the sector finds itself at a critical crossroads. The Play-to-Earn model, fueled by blockchain, has revolutionized gaming by intertwining entertainment with financial incentives. Yet, this promising merger is now facing significant headwinds due to increased crypto regulation, which casts a shadow over the potential of blockchain in gaming.

While the gaming industry offers a robust platform for showcasing the practical applications of blockchain, the rising regulatory scrutiny, exemplified by the fallout from the FTX scandal, has instilled uncertainty and skepticism. Despite these challenges, the industry’s commitment to innovation and adaptation suggests that blockchain gaming, though currently in a state of flux, holds the potential for significant growth and evolution. The future of Web3 gaming hinges on striking a delicate balance between regulatory compliance and the nurturing of technological innovation, a balance that will determine whether the sector can fulfill its promise or succumb to the growing pressures of the regulatory environment.

FAQs

What is the Play-to-Earn (P2E) model in gaming?

The P2E model in gaming is a blockchain-based approach where players can earn real-world financial rewards through in-game activities. This model has transformed the traditional gaming experience by integrating financial incentives with entertainment.

How are increasing crypto regulations affecting blockchain gaming?

Increasing crypto regulations are posing challenges to the growth and potential of blockchain in gaming. These regulations could stifle innovation and limit the integration of blockchain technology in gaming platforms, affecting the Play-to-Earn model.

Why is the gaming industry significant for blockchain adoption?

The gaming industry is pivotal for blockchain adoption because it offers practical applications of blockchain technology. Unlike other sectors, the benefits in gaming, like true digital ownership and secure transactions, are tangible and directly impact the user experience, potentially revolutionizing the gaming landscape.

What challenges do blockchain games face in gaining mainstream popularity?

Blockchain games face challenges such as skepticism from traditional gamers, the need for more engaging and high-quality gameplay, and overcoming the perception of being overly speculative or financially driven. To gain traction, they need to focus on creating games that are enjoyable and immersive, beyond just the blockchain aspect.

How has the collapse of FTX influenced the crypto gaming sector?

The collapse of FTX, a major crypto exchange, highlighted the need for regulatory oversight in the crypto sector. This event raised concerns about the security and stability of blockchain technology, casting doubt on its applications in gaming and leading to increased regulatory scrutiny in the sector.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

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