If Pokemon was built on Blockchain: a dive into web 3 game economies
Gotta catch em all
If Pokemon had been built as a blockchain game, it would be very sad: You could never catch em all.
Early players would hold all the Charmander’s, Bulbasaur’s and Squirtle's. Not to mention Pikachu. Pikachu would be the equivalent of MtG’s black lotus, or these days — crypto punks: trading at a floor price of $4,000,000 (at least).
It would have launched, early players would have cleaned up gen 1 Pokemon. They would have hyped up $POKE, the Pokemon game token, and used it to purchase leaf stones and thunder stones and to create gen 1 Charizard’s who would be the most powerful Charizard’s out there.
And they’d have a great time — all 10,000 players who were lucky enough to participate in that first drop.
The problem begins when someone who’s heard good things about the game wants to join and play. They soon find out that they have to pay $500 just to get a Rattata, a Pidgey or worse, a Magikarp.
And they’d leave. Because why pay $500 for a Magikarp when you can buy the Nintendo version for $12 or any game for $50 and have fun?
The game design web 3 trap
Once enough players come into the game, only to ditch after seeing too high of an entry price to have fun, the game designers/game DAO will have two options: Screw the new players or screw the old players.
Screwing the new players is easy. Don’t create more new Pokemon, keep the original batch, and hope that by keeping them rare and highly sought after, the price stays inflated, which will keep the current players happy. Maybe that works in propping up the game economy, but new players don’t join, so it’s only a 10,000 person game economy of people playing and trading with themselves. After a while, this just becomes circular and the game dies.
This leads to the second option. Screw the old players, otherwise known as inflation. Game designers need to start creating new Pokemon so that new players can actually play and have fun. They can do that by flooding the market with more supply (mint new Charmander’s and Bulbasaur's). Or by giving every new player a ‘starter set’, for example a less rare Pokemon that could get them started. Say a Pidgey — that way they can actually have fun before deciding to commit $500 to a game.
Inflation degrades the value of the currency — in this case the value of Pokemon. We’ve actually seen this play out before in other in game economies, like Magic The Gathering. Starter sets are given out to let players onboard, which causes a dichotomy of prices. A Black Lotus is worth tens of thousands of dollars¹ but a Raging Goblin is worth 2 cents. Most of the game experience becomes affordable (otherwise it’s not fun) and the speculation bubble pops, leaving only the most desirable and useful cards worth something.
While Play to Earn (P2E) has been the rage recently³, much about it isn’t sustainable⁵. It’s alluring to think that web2.0 games 100% take rate will be their opportunity², but it’s more complicated than that.
Current P2E models are built on high enough asset values (of Pokemon’s, Axie’s or whatever) to create real life earning powers. Unfortunately, games have a natural cycle. People don’t play them forever, so you need a constant influx of new players, but for new players to join, you need a good onboarding experience, which leads to lower prices to play, which necessitates inflation of core assets = lower prices = less GMV and less earning power.
But web3 brings in two new aspects that can change this cycle, and completely change the equilibrium of in game economies — for the better. Part 2 of this series will be about that.
For game designers this will mean that they’ll need to increase their take rates, because as P2E word of mouth decreases, marketing spend will need to increase. When you look at a ‘web 2.0’ gaming company like Take Two Interactive, the company behind NBA® 2K21, GTA, Civilization and many more titles, you’ll very quickly see that these business don’t have that much room for error. There’s a reason they take 100% take rates. In 2020, Take Two Interactive reported a gross margin of 13.8% for the year.
That means that there isn’t that much room for failure. Games are a hits driven business that need to cover a lot of expenses: R&D, marketing & distribution, customer acquisition & retention.
As the cycle described above plays our for web3.0 games, all of these costs will rise, which will lead to an increased need for higher take rates.
We’re seeing this cycle play out in real time across many web3 games, most of them will pop and crash, Axie Infinity, the high flier of web 3 games is going through this cycle as we speak⁴. Their in game token $SLP is inflating, decreasing the value of P2E and angering their community.
But web3 brings in two new aspects that can change this cycle, and completely change the equilibrium of in game economies — for the better. Part 2 of this series will be about that.
Footnotes & Sources:
- https://www.mtggoldfish.com/price/Unlimited+Edition/Black+Lotus.
- This great thread by Chris Dixon got me thinking about this topic: https://twitter.com/cdixon/status/1425645842552086532?s=20. This great thread by Squish Chaos inspired me to write this post.
- https://www.youtube.com/watch?v=Yo-BrASMHU4
- Valuing DAOs: What is Axie Infinity really worth?, By Nakul Gupta. Axie Infinity Part 1: Economics &Axie Infinity Part 2: Sustainability By Defi Vader
- More articles on P2E:
- Best breakdown of Axie economy and the value of SLP: The hidden danger to the Axie economy that nobody is talking about, by Bill Gains.
- What P2E is and what it isn’t, by Amy Wu: https://twitter.com/amytongwu/status/1429325719545384964?s=21
- Great thread on problems in Axie Infinity: https://twitter.com/akramsrazor/status/1418702043968155654?s=20
- Game economies & P2E aren’t new: Runescape faced a similar problem two decades ago: Runescape documentary https://youtu.be/7RNK0YBdwko?t=2751 or NPR episode: https://www.npr.org/transcripts/1018915121)
- The Razor’s edge newsletter
- Utility NFT super flywheels: Axie Infinity, Sorare and Zen Run, By Justin Seeley
