What investors need to know about Blockchain Gaming

Summary: The promise of blockchain games is that players can benefit from the same technology that powers cryptocurrencies, which means real ownership, transparency, limitless transactions, and the ability to win items that can grow in value. The overlap with the Metaverse and Web3 technologies makes blockchain games even more exciting for investors.

Blockchain games are in a league of their own, for two main reasons:

• They involve a lot of decentralization.
• Players can earn while playing.

Traditional games are centralized. All elements of the game, the game story and the code come from a single company (for example, Electronic Arts or Blizzard).

Blockchain-based games, although still developed and published by a central company, give players more control over their in-game items, which can be traded on secondary markets. There are even promises of item transfer between games.

Blockchain games introduce new economic and revenue-generating models that are not available with traditional games. These involve a combination of non-fungible tokens (NFTs) that represent in-game items and other assets, as well as proprietary cryptocurrencies that fuel the in-game economy.

The play-to-earn (P2E) model is very popular across blockchain games, Web3 and Metaverse applications. It enables players to generate income by actively playing and participating in various tournaments and other events.

While players can theoretically make a lot of money playing traditional games (DOTA 2’s prize pool for the International Championship was $40 million in 2021, and FIFA 22 players can earn tens of thousands), blockchain games involve more democratic reward systems, benefiting a wider spectrum of casual players.

More importantly, in blockchain games, the value and potential rewards are directly tied to the items in the game, be it lands, characters, weapons, etc.

Advantages of Blockchain Gaming

Games based on blockchain technology have increased in popularity due to several major advantages:

• Own – Players can own in-game assets in the form of NFTs, which cannot be counterfeited. They can monetize their assets, such as land, virtual spaces, weapons, avatars, etc., by selling the NFTs on secondary markets or renting them in the game world.
• Improved security – Blockchain games leverage decentralized public networks that have no single points of failure, making player interactions more secure. Thanks to blockchain, sensitive data, including player ID, game data and user transactions, is stored securely.
• Transparency – all transactions on public blockchains can be freely monitored by anyone, making blockchain games transparent. Once a transaction is completed, it cannot be reversed or tampered with and is viewable by anyone online.
• Potential to make money – in addition to selling or renting NFTs on secondary markets, blockchain players can earn money from their efforts, as many games integrate the P2E model, which motivates players to actively participate in various tournaments, complete quests and missions, as well as others activities.

In 2021, the Blockchain Game Association (BGA) surveyed over 200 players worldwide and found that the majority of them (85%) considered asset ownership to be the most important benefit of blockchain games, as the decentralized ledger technology enables users to have real ownership of their in-game assets through NFTs.

Other benefits mentioned were new revenue models, transparency and decentralized project ownership.

Early investment is huge

Blockchain gaming is still a new and unexplored market, which comes with risks and challenges. However, that hasn’t stopped venture capital firms and other institutional investors from gaining exposure to this new sector by pouring in hundreds of millions of dollars.

Blockchain research firm Delphi Digital found that institutional investors’ interest in blockchain games remained high in the second quarter of 2022, despite token values ​​falling significantly during the crypto winter.

Earlier this year, DeFi-oriented venture capital firm Framework Ventures raised around $400 million for its third fund, FVIII, half of which was dedicated to blockchain games. Co-founders Michael Anderson (ex-Snapchat) and Vance Spencer (ex-Netflix) are betting big on crypto games:

“I think the next phase of the blockchain industry will be all about onboarding new users, and we think gaming is by far the biggest opportunity for the top of the funnel. As the economics of gaming to earn models converge with triple-A gaming that are actually fun to play, we expect an explosion of growth for this sector.” -Michael Anderson, Framework Ventures

In mid-October, Framework led a funding round to help Stardust, which offers developer tools for creating blockchain games, raise $30 million.

Elsewhere, Horizon Blockchain Games, the developer of blockchain game Skyweaver, has raised a $40 million Series A led by Brevan Howard Digital and Morgan Creek Digital.

All in all, early investments in blockchain games remain at a high level, despite the tough conditions in the crypto market.

Popular blockchain games

Blockchain gaming is increasing rapidly, with many new games competing to attract players and investors. However, some complain that the “fun factor” is still missing, as blockchain games have not evolved to the level of traditional AAA games.

Nevertheless, there are well-established games that still have the potential to grow. Some examples are the Metaverse games Sandbox (with its token SAND), and Decentralized country (MANA).

Some other gaming symbols on the rise are STEPN, the original symbol of a Web3 lifestyle app, and MAGIC, the symbol of the first profile picture (PFP) MMORPG called Legions of Crypto.

Legions of Crypto (click to view)

There are several newcomers who can grow quickly. For example, Calvary may be the best new crypto game that utilizes high-bandwidth networks. The public sale of the RIA token started in November 2022.

Fight against Infinity, a fantasy sports gaming platform that hosts P2E games integrated with a Metaverse world, is another candidate with great potential. The original IBAT token was launched in September 2022.

Address ongoing challenges

Blockchain gaming is promising, but there are several challenges that could hinder its expansion and competitiveness with AAA gaming.

The first is security. In the first half of 2022, Axie Infinity, one of the most popular blockchain games, suffered a massive hack that caused total losses of over $600 million. The US government found that the attack was organized by a North Korean-backed entity known as Lazarus.

For this reason, developers should consider building on well-established blockchains – such as Ethereum – which can reduce the possibility of large-scale hacking attacks. And investors would also be wise to look for games that are hosted on developed and secure blockchains.

Other challenges that need to be addressed are limited awareness of NFT and blockchain technologies across the wider gaming community, accessibility barriers, price volatility and complexity.

Price volatility is double-edged, as it can increase the value of rewards thanks to token price appreciation, but there is a risk of losing money as well. For example, the price of AXS, the original token of Axie Infinity, has dropped dramatically after the hack. The token collapsed from $70 in March 2022 to just $10 by November 2022.

However, these are challenges experienced by any emerging sector, and most players agree that blockchain gaming is here to stay.

“Over the next few years, we predict that blockchain gaming will become one of the largest forms of work in the world, with billions of people attracted by the lure and access to better financial opportunities found in brand new digital universes.” -Michael Anderson, Framework Ventures

Investor Takeaway

Blockchain games come with many opportunities for investors. There are three main ways to gain exposure to crypto games:

1) Invest in the project itself by participating in seed funding rounds. This approach is suitable for institutional or accredited investors.

2) Buy the symbols that fuel the game, for example AXS for Axie Infinity, SAND for The Sandbox, MANA for Decentraland or GODS for Gods Unchained. If you analyze the fundamentals of a game and like it, you can benefit by buying (or earning) the original token, and sell when the game attracts more users and the price goes up.

3) Play P2E games and get rewarded for participating in tournaments and events. You can also collect NFTs that represent in-game items and eventually sell them on secondary markets.

Due diligence is mandatory before earning or investing, given that blockchain gaming is still a nascent sector. You might not get rich playing these games, but it’s a way to have fun while learning about them.

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