Web3 Gaming Monetization: Primer
Introduction
The following series, “Web3 Gaming Monetization” will cover the basic monetization strategies employed and employable by web3 gaming companies. This series will focus mostly on the overall strategy of these methods as opposed to optimization. I do, however, plan on going into the data of web3 monetization: how to get it, how to analyze it, and how to use it to improve your business. But for now, given how little content there is on the subject, I will only discuss the broad strokes of web3 economy monetization. Below is a brief article outlining the topic and also this (currently) 3 part series.
How does monetization in web3 compare to that in traditional games?
Web3 games are so-called because they utilize blockchain technology for one or more parts of their game development. At a minimum, this means that the game utilizes assets called non-fungible tokens (NFTs) as its virtual items or game data. At a maximum, this means that all of the game’s logic and code is written as a smart contract on the blockchain so it can be decentralized and immutable. That said, most games in web3 are not fully on-chain. Building a program on chain is extremely challenging and requires years of transition for decentralization to occur. Once a game has become decentralized, only a majority vote can change the code that was originally written.
In traditional gaming, items are stored in a centralized server and not owned by the players. For example, a player owns her Runescape inventory insofar as she maintains her Jagex account and stays logged in. If she ever churns away from Runescape, she will “lose” her items. This concept is typically referred to as the “Walled Garden”. In web3 games, there is no walled garden. NFTs allow virtual assets to be traded between accounts within and outside of a video game environment. The NFT’s ownership is tracked by a blockchain, a decentralized ledger. Furthermore, developers will typically allow players to buy and sell these NFTs from one another using a web3 marketplace like Magic Eden or Opensea. Signing a transaction on a blockchain charges the signer a nominal fee. This fee varies greatly by chain: Solana charges 0.000006 SOL (0.00015 USD as of 7.24.2023) and Polygon charges about 0.055 USD.¹
While there is nothing stopping a web3 game from using traditional monetization strategies like microtransactions, premium purchases, and subscriptions, blockchain technology provides additional monetization strategies to the game developer. For example, with the assets being connected to the real world economy through some centralized exchange, there is an opportunity to extract revenue on every single marketplace transaction as well as game event.
Traditional games can monetize in the same way as web3 studios without blockchain technology. In fact, the technique I discuss in this article is not exclusive to web3, it is only made easier and more natural with web3. In further articles, I will discuss additional techniques that are also implementable in web2 games. For example, a small scale tournament is made very easy in web3 through the ability to pay out players directly into their accounts. Call of Duty and League of Legends are just as capable of pulling such a feat off, though it would likely require a bit more coordination with bank accounts and customer information.
Risks for web3 game economics and monetization
There are many risks associated with operating a web3 marketplace, I outline 4 of the biggest ones:
Player Tracking — Tracking players is difficult in web3 because players can seamlessly transfer assets from one wallet to another, making it difficult to profile players. For example, suppose a player breaks some rule in the game or runs a scam in the marketplace. Ideally, you would ban this player for malfeasance by restricting their wallet address from interacting with your game’s blockchain programs. Unfortunately, once they have laundered their assets through multiple wallets outside of your ecosystem, it is very computationally expensive to track down that player. From those transactions, it’s impossible to tell whether the asset transfers were legitimate (to an innocent player), or washed.
Market Mis-Incentives — TXN fees and other costs associated with web3 gaming incentivize players to go somewhere else without fees. Suppose a competing marketplace decides to offer trades at a fee equal to your fee minus delta. The unfortunate equilibrium is the fees drop to near zero. One way to mitigate this threat is by introducing benefits for using your marketplace. For example, ease of use is a huge boon to most players (i.e., keeping everything in the same ecosystem). Additionally, UI/UX improvements can greatly increase a player’s likelihood of sticking around. One final consideration for creating a sticky marketplace is through security. By creating an attractive marketplace with many benefits, firms can essentially dress the fee up as a “service charge” as opposed to a “greedy money grab”.
Regulation — Regulatory issues in all of web3 are prominent. Minting a coin for your marketplace can be risky as the general populous is unsure what they are buying and what tax implications there are. There isn’t much to say on this topic right now as the landscape is still being formed in the US. The only advice would be to potentially set up operations in a crypto friendly country outside of the US or stick with USDC and free NFTs. Recent news on XPS has given us some clarity on free digital assets —tldr; they’re ok.²
Large Fixed Costs — All of the primary monetization strategies outlined below rely heavily on large player numbers. Most of them piggy back off of the microtransactions model. The fees add up at scale but likely don’t provide a large payoff for smaller player counts. This is because all web3 games currently face large fixed costs of production — even larger than web2 games. As new platforms for developing web3 games enter the market, this upfront cost is likely to decrease over time.
Limited Scale — Issues associated with high fixed costs are exacerbated when you consider that the universe of web3 gamers is actually quite small, ranging from an estimated 100K for a single game (Axie: Infinity) to 2 million for a single gaming ecosystem (Solana). This is the scale problem currently facing web3 game devs but it will necessarily become smaller over time as the universe of players increases in size.
Types of Monetization in Web3
While web3 has access to most of, if not all, the monetization techniques in web2, it also has a few other tricks under its belt. There are 3 very interesting techniques I will cover in my articles before moving on to more straightforward ones:
Secondary Market Transaction Fees
Primary sales into a secondary market
Bolstered chain signing fees
Briefly, (1) above is the first topic I will tackle. It involves charging a fixed rate fee to the seller of an N/SFT on a secondary marketplace. The critical questions a firm must ask in order to employ this technique are: (a) Do we have a vibrant and highly active marketplace? and (b) Is average volume times the fee equal to a typical ARPU?
(2) This is a fascinating technique currently being employed by Limit Break’s Digidaigaku and theoretically explored in Castronova’s and my article “Economics of Digital Media Firms: Models and Perspectives”.[3] In this model, firms give assets away for free in the market and then sell those assets at a later time into the market at secondary prices. This technique works when strong prices are prevalent in the market.
(3) Perhaps entirely unique to web3 is the ability to charge bolstered signing fees on blockchains like Solana. In this model, the firm increases the signing fee by some factor which they take as revenue. In doing so, they charge an additional fee for services rendered and to make money.
Other topics in this series
Some other techniques I may or may not get around to talking about are: Premium N/SFT sales, microtransactions, and lending/financial protocols. Many might be offended that I have categorized all of lending/financial protocols in web3 as a single article topic, but this is web3 Gaming so I’m less concerned with financial instruments and more concerned with selling good content.
I will also likely dive into how to deal with data in web3 gaming as well as building and designing with blockchain in mind. Depending on the degree of “on-chain-ness”, data collection and ingestion could vary wildly from studio to studio. In addition, designing systems that will ultimately be hosted on blockchains can be challenging for a number of reasons — decimal points and
About Me
My name is Chris K-S. I write about web2 and web3 virtual economies and analysis. I got my PhD in Economics from Purdue University where I studied labor economics and, eventually, virtual economies under Edward Castronova. I’m the Head of Game Economics at Star Atlas. I’m also a co-chair for the IDGA Game Economics SIG as well as the co-host of the Game Economist Cast with Phillip Black and Eric Guan. Please visit my website or reach out to me on LinkedIn, Twitter, or my personal email if you want to connect.
Notes
[1] One irony about transaction fees is that fees increase with the value of the token. That is, wildly successful blockchains in the future will see greater and greater signing fees, decreasing the utilization rate of that chain.
[2] Wagner, Casey and Katherine Ross. “Judge Rules in SEC case vs Ripple”. July 13, 2023. Blockworks. https://blockworks.co/news/judge-rules-ripple-xrp-not-security
[3] Castronova, Edward and Christopher Kaczmarczyk-Smith. 2023 “Economics of Digital Media Firms: Models and Perspectives”. Working Paper SSRN