It’s Game On for Web3: How Gaming Will Onboard a Billion People

In April 2023, a digital item with distinct, rare traits was sold to a gamer for $400,000 reportedly paid for in cryptocurrency. Digital assets similar to this one have garnered $100 million in overall sales the same month. But the $400K sale wasn’t for a non-fungible token (NFT) – it was a skin in Counter-Strike:Global Offensive, more commonly shortened to just “CS:GO”.

When I start conversations about Web3 with gamers, I often hear the same objections: that NFTs are “useless” “scammy” or “expensive;” that this is just another way for gaming studios to extract value from players; that gaming doesn’t need blockchain; and that crypto is “too difficult” to deal with. Many also argue that current Web3 games just aren’t that fun.

But the appetite for in-game items on secondary marketplaces is booming, indicating that gamers understand the value of in-game items, though they often deal with a considerable amount of friction to buy and sell these items. And digital currency is very much part of Web2 games like Fortnite and Roblox that scores of users pour millions of dollars into every year. Roblox has over 66 million daily active users (DAUs) as of May 2023 and made $7 million a day in 2022, much of it in the game’s native currency Robux, which can only be used within the Roblox ecosystem and has zero value outside of it.

While other industries like entertainment and loyalty programs have the potential to onboard millions of new users into Web3, gaming provides fertile ground for the seeds of mass adoption. Gamers are already familiar with virtual currency and understand how to buy and earn in-game assets. And while there are nearly 8 billion people in the world, over 3 billion of us play video games pointing to a considerable amount of the population primed for a gamified digital future.

This particular combination of opportunities was noted by Alex Connolly, co-founder and CTO at Immutable. “Gaming is the perfect candidate for spurring Web3 mass adoption simply because there are so many gamers in the world who are already used to trading digital items and buying digital things,” he said.

Yat Siu, co-founder and CEO of Web3 giant Animoca Labs, agrees that the gaming industry offers a robust framework for transitioning users from Web2 into Web3. “Gaming is basically a cultural and entertainment phenomenon that is bigger than movies and music. And gamers and people who play games already have a relationship with virtual assets and items.”

This piece is one of three in a series about the path to Web3 mass adoption. Read the case for entertainment here and membership, loyalty and ticketing here.

Healthy supply and demand

In order to create a winning economic formula, there needs to be both consumer demand as well as an opportunity for profit for the people feeding the supply.

“Gaming is the biggest industry when it comes to entertainment,” said Urvit Goel, vice president and head of global business development at Polygon Labs. “It's bigger than music and movies combined. And there is a very clear use case here. No one's spending as much on digital assets in any other industry than gaming.”

But according to experts, what's lacking in the gaming industry today is the ability for gamers to truly own their in-game items and profit alongside developers and studios.

“We already have a huge community – billions of people who spend hundreds of billions of dollars every year on buying items that they don't truly own,” Connolly explained.

Siu also noted that unlike other industries like music that have moved from the physical to digital realms through streaming, gaming is a “digital-first culture” that has had an impact on the physical world.

“Why do we have curved screens?” Siu provided an example of a gaming need that impacted real-world design. “It's because people wanted to experience their games in a curved environment. And so the virtual purpose drove physical needs, which is different from any other industries.”

“It’s one of the main arguments why we think gaming is just so powerful and so influential and has driven so much innovation,” he added. “It would seem logical to us that it would do the same for the metaverse and digital ownership.”

The offer of true ownership

Web3 gaming presents a unique opportunity for gamers to truly own their in-game assets, thanks to blockchain technology, which allows in-game items like “skins” (also known as “cosmetic” items that change the look of a character but offer no advantage in the actual game) to exist as non-fungible tokens (NFTs).

Currently, when players want to buy items like skins from huge Web2 games like CS:GO, Rust, League of Legends, Valorant or Fortnite, they can buy them directly from the game or via marketplaces like Steam.

But selling these items or even just giving them away is a bit trickier. One person I spoke with spoke about how he had created a dummy Fortnite account for his child before they turned 13 (the actual age you are allowed to play most games), but then when his child actually turned 13 and wanted his own account, there was no way to transfer any of the skins or V-Bucks (Fortnite’s digital currency) to his child’s new account. At that point, most of the items were not available to purchase or earn anymore, as they are tied to Fortnite’s ever-evolving seasons and ever-changing item shop.

There are some marketplaces on services such as Steam for players to buy and sell items from certain games, but there are price limits on Steam so no item can be listed for more than $1,800. The $400,000 CS:GO skin sale mentioned earlier wasn’t done in-game and the transaction wasn’t made directly between the two parties, but rather it relied on a third-party broker to set up the auction, take payments and transfer the assets.

Spencer Tucker, chief gaming officer at Yuga Labs, the parent company of the Bored Ape Yacht Club and Otherside Metaverse, told CoinDesk that gamers don’t “really yet understand what Web3 or blockchain technology really offers the players.”

But to him, the use case is clear. “It's about just getting something back for what you put into it, in terms of possessing some sort of interoperable utility.”

He gives an example of someone who bought a character in-game for $500. “You can't trade that character. You can't give that character to somebody else. You can't do anything with it. And so your $500 is effectively going to nothing.”

Instead of these in-game assets being trapped and losing all value, putting these assets on-chain as NFTs allows direct peer-to-peer transfers, and eliminates the need to trust third parties with your assets, money or access to your accounts. A user can gift their Fortnite skins and V-Bucks to a new account. A pricey CS:GO skin can be transferred directly from the owner to the buyer without the friction, cost and risk of using a third party.

Web3 allows individuals to decide whether to “trade it to somebody for something else, sell it or sit on it to see if it grows in value” – all options previously unavailable to them.

Polygon’s Goel echoed this issue with the current Web2 model, explaining that in-game items effectively go to waste once a player grows tired of a game. “There are games that I'm done playing and it's like, 'well, I spent my time, money and energy on this and there are other folks that actually might find value in these items and I can't give it to them, I can't sell it to them, I can't trade it.'”

Empowering creators and community

Another aspect that has allowed non-blockchain games like Minecraft, Roblox and Fortnite to grow in popularity and retain its users is that each game allows players to also be creators and contributors.

Siu explained that Minecraft’s passionate community has created a network effect that has led to its long-term success.

“People buy Minecraft today, not because they want to play just Minecraft. It's because they want to access the ecosystem of Minecraft, like the forges and all these external sorts of environments.” Siu said. “Microsoft continues to sell Minecraft copies of licenses because of the ecosystem that has emerged outside."

“User-generated content (UGC) is the future of gaming, as far as I'm concerned,” Tucker said, tying the idea to Roblox’s breakthrough success.

“Imagine that UGC happening in your own ecosystem, and the opportunity for somebody who creates there can have financial upside,” Tucker said. “[In Web3], they can sell that experience or generate eyeballs or monetize it however they decide to do so. It engages the community, and now they have skin in the game, which reinforces that ownership and interoperability component and all these things operate together to create a durable experience.”

Easing development and onboarding

While user-generated content is a great way to decentralize the content mill and expand a user base, creating the right tools is essential for great games to build upon.

Although a lot of the focus is on the end user, both Connolly and Goel stressed the importance of investing in the development behind the scenes as well.

When asked what it would take to get a billion players to Web3 gaming, Connolly started by identifying “two massive challenges,” in the space right now. “The first one is the infrastructure that exists today to support Web3 games isn't mature enough. It doesn't smooth over enough of the user experience issues, it doesn't deal with scale well and it has problems with security.”

Immutable recently launched the Immutable Passport to “support the next generation of Web3 games by solving their user experience, onboarding, transaction and purchase, and game development challenges,” Connolly said. “This is how you get a high-quality game to the market as quickly as possible.”

Goel said that Polygon’s focus has been on supporting developers in building excellent consumer experiences.

“The promise around digital ownership is something that people want," Goel said. “They just don't care how we get there. And NFTs are a way to get there, but the masses don't want to hear about the technology, they just want the thing to run.”

“The biggest barrier of entry isn't cost,” Tucker added, “it's actually the friction around the technology, like wallet creation.”

Tucker believes that technology gradually moves mass adoption and noted how fast smartphones became ubiquitous. Similar to smartphones, he said, Web3 will also hit that inflection point where its use cases become more widespread.

“It kind of happens when something really breaks through and then it’s just good,” Tucker said.

The importance of the fun factor

While “fun” wasn’t universally agreed upon as the most important factor for mass adoption by the experts we talked to, the majority of leaders in the space come back to the point that games are supposed to be fun. According to a 2022 report on U.S. gamers, most people play video games because it brings joy (93%), provides mental stimulation (91%) and allows players to relieve stress (89%).

“A lot of the games we will actually see in the market are not very fun,” Connolly said, noting it as the second massive challenge in the space. “We think that all it will take to reverse this perception is a high-quality game that people simply want to play and that just happens to support Web3 asset ownership.”

Tucker agreed that fun was important, but added that a breakthrough hit would also need to give “players an experience that they don't ever want to remove themselves from because it's just so much better than what they had before.” Yuga seemed to have cracked some of the code for its Dookey Dash game, which while not the most graphically impressive or complex game, was fun enough to entice players to spend an average of 28 hours in the games’ sewer to top the leaderboard and win a one-of-a-kind, highly valuable NFT reward.

This layer of value is one of the things that Siu thinks makes Web3 gaming such an attractive proposition. While games obviously have to be enjoyable, Siu stressed that a player’s time should be given actual value.

“Your relationship to the game changes if you know that your time in the game is worth thousands of dollars to the game,” Siu said. “If you’re a guild leader in a game, it's probably worth much more than sort of a casual player, and that should be somehow enumerated.”

Siu also noted that esports, a $1.4 billion industry that draws in millions of viewers at live events and through streaming platforms could benefit enormously from the verification that on-chain gaming provides.

“One of the challenges with esports right now is that it relies on video screens for verification of events in the competition,” Siu said. “But if everything is on-chain, you have a way of verifying everything.” He noted that this would not only benefit the tournament but also the lucrative sports betting industry, which could leverage blockchain to authenticate results.

Experts said that the next big Web3 game could be a AAA game or could be a mobile game that offers a more accessible user experience.

“I'm not sold that it's going to be a high-end PC game or a high-end graphics game that's going to be dragged to mainstream adoption,” Goel said. “There are more mobile devices in people's hands than PCs and there are more people that have played Candy Crush than say, Madden from EA.”

Not far off

While experts have brought forward ideas for the future of blockchain gaming and its potential to bring in the next million users to Web3, it’s unclear when that watershed moment will arrive, though they agree it is not far off.

With heavy investment in the space over the past 18 months, Connolly predicts that innovative products will make waves within the next 12 to 18 months “simply because that's how long it takes to build a really great game.”

“There's some really awesome stuff coming,” he said.

Goel predicts that some of the “most advanced games” are currently in the final stages of development and are slated to release in the near future. “We think that by the end of this year, there should be a handful of really fun, directionally triple-A games.”

Siu noted that Animoca Brands has invested in “over 140 games” so far, many of which are set to come out by early next year. “It takes a few years to make a good game. So that means that the true effects of the mass onboarding I think will happen in the next 12 to 18 months.”

In the end, it’s not a question of if, but when Web3 games will enter space in a way that drives mass adoption.

“It's just a matter of time,” concluded Tucker.