Recessions, Future Proofing Games and Psychology
An article on social interactions between users
Recessions have penetrated the major economies within GameFi that hold play-to-earn models (P2E).
As the forefather of Economics, Adam Smith argues supply and demand aspects are important in all model designs as it is the “invisible hand that naturally guides the economy”.
The design of a game and its actors influence such variables. To enable this close to perfection has become the increased focus in recent times, particularly within the gaming community.
To understand the potential for Web3 gaming, I would like to zoom out from play-to-earn concepts and analyse what is currently driving the most revenue and user adoption. With this in mind, we can apply the more intuitive concepts from Web-2 into blockchain games and explain where the greatest barriers lie.
To truly initiate a thesis on Web3 and the current sustainability of designed models it will require us to break down why as a species, this evolution to on-chain gaming is yet another bump in the road that we will inevitably cross.
A cost-benefit analysis would suffice, yet the world on-chain is so unexplored that time may be the only tenet to unravel the intricacies ahead.
Firstly, I will address the mind of a gamer and explain the behavioural economics that corporations seek to profit from. We will then shift in to ascertain how such psychological exploitation occurs.
Towards the end, I’ll detail how Web3 gaming does not detract from the gaming industry but rather provides inclusions that are yet to be profited from.
The Gamer Mind
To start with let us reflect upon of one of the prized concepts of Daniel Kahneman - an esteemed psychologist. The idea of systems within our mind operating as a basis to form our decisions.
System One: Is fast and often reflexive. The defining characteristics is that it is unconscious, automatic and effortless. There is no self-awareness nor control and this accounts for 98% of our thinking.
Example: When you’re driving or walking to a friend’s house, you’re on auto-pilot. This is not an operation that demands strategic thinking; traveling this route is a previously learned behavior. Your System 1 thinking, which includes deeply embedded memories, is doing all the work.
System Two: Is slow. The defining characteristics include deliberate, conscious, effortful thoughts that have controlled mental processes and include rational thinking and judgement. We retain self-awareness and seek total control. This accounts for 2% of our thinking.
Example: System 2 thinking is used when looking for a friend in a crowd, parking your vehicle in a tight space, or determining the quality-to-value ratio of your take-out lunch. These are all controlled slow mental processes that come from our conscious.
Note: Understanding gaming may now require you to use System Two to process.
To understand how revenue has been driven in the past, we must conceptualize the inner systems of a gamer and the corresponding mental framework. It is nonetheless difficult to “place a label” on all gamers as such. As shown below, gamers range across all ages and both genders. So, it follows that it is purely my introspection as an ’03 born and an avid fan of video games will drive my thoughts and thesis.
When individuals download a game, this is a conscious thought that was mentally processed and accordingly the decision they took falls under System 2. There are often tutorials which need to be completed to gain an understanding of how the game works — this is also System 2.
If we take the example of Supercells Clash Royale. When onboarding into the game there is a tutorial that must be completed. In it, gamers learn the basic mechanics and how to effectively battle and “win”. We focus large amounts attention to these processes until they are engrained within our system.
Based off the user experience so far, there is little left to do with System 2. Once the cognitive structure for battle has been developed, there is greater reliance on System 1. Of course, this is not discounting for new strategies, game modes or formats of battle that the player can undertake throughout their time on the game.
Profit
The target aim of a gaming firm is to maximize profits. To do so they need to “convince” the gamer to exchange their money in return for a more “valuable time”. In the history of games, we have maximized social value as a primary objective. The ability to be better than the next person, often a friend is an example of our innate competitive nature that has been engrained within our human nature since the great gladiator battles of Rome.
To increase social value becomes the main objective. This can translate into making the game “fun” to play amongst friends, or perhaps have lower gradual skill barriers to game entry.
As perhaps many of you reading this are crypto natives, you are familiar with the popularized play-to-earn models that have been found.
Pay-to-win was a predecessor that has become almost extinct. Pay-to-win meant that firms were charging people in a way to exploit their addictive tendencies to advance in the game. The mere existence of a pay-to-win mechanic changes the nature of the game.
Understanding the psychology of gamers is crucial here. Most gamers play game for fun with some form of interaction engagement— they do not want to win a game outright, as that defeats the objective of them playing in the first place. It is the hours spent grinding often late at night that creates addiction spirals that gamers thrive off of.
In that same sense, it is best to classify the well-designed user experience games as exploitative and grindy. This is where the most micro-transactions can occur. The barriers to payment are lowered often the more hours an individual spends on a game.
Nevertheless, if we truly value our time like we claim to - then for gamers who have got into addictive loops and are stuck in that “spiral of grinding” it is less likely they would be averse to spending $4.99 on a custom exclusive that provides additional marginal utility.
To understand how this works, we need to examine the “greats” of the gaming industry. A giant driver of revenues is Fortnite. At its’ peak in 2018 it generated $5.4 Billion in revenue. Yet with the exceptions of select packs- almost anyone could purchase the same items playing for free that most people ended up paying for.
In fact, I had a friend that unlocked everything for free and spent most of his days grinding Battle Royale lobbies to earn those extra V-Bucks. There clearly was a massive social incentive that was unlocked through hype and marketing.
The reason people ended up spending their hard-earned dollars was because they understood this. As soon as they comprehended the fact that they could achieve anything, almost for free (not including hours spent)- they lowered their mental barriers.
They realized that due to the wide user adoption, there was a great social value in unlocking the items fast. Yet for most individuals they didn’t have the time nor incentive to grind through lobbies. The opportunity cost was much smaller to simply purchase a V-Bucks deal, which was often further incentivised by greater unlocks.
Token Pricing
One of the greater shifts towards Web3 and Crypto has been the greater necessity for tokens. Whilst this has been questioned by many, I wrote here on why tokens are needed and some of the benefits that it can generate for a protocol.
The narrative shift that we will experience in to on-chain gaming with the usages of NFT’s will require tokens. Or a form of decentralized governance.
Perhaps in the not too distant future, we may not require tokens and can rely more on concepts built off the shoulders of DAOs. My dislike for tokens to be used within gaming arises from the correlation between the gaming and crypto markets.
For games launching — user adoption is essential. With the case of Axie Infinity early adopters were incentivised through high levels of token issuance or early tournaments with monetary incentives, such as cash prizes.
The flywheel effects that tokens can create can ultimately drive down user adoption and disincentivize users:
A rise in price of the tokens is unlikely to generate gamer adoption. Gamers will not onboard due to speculative prices and the fear of “buying in too high”. As outlined earlier the focus for them is upon social value. Higher prices of tokens where governance is required via staking tokens will increase the barriers to entry for individuals.
Low prices can also lead to downward spirals. If prices are crashing, it induces doubt about the sustainability of the game — especially if the economic incentives begin to be questioned. Additionally, in “bear” months, a wider sell off within the market can cause irrational fear and can lead to a negative spiral of downward pressure in prices for the in-game tokens.
A proposal I have for this is to reduce the amount of circulating supply available on the markets.
Amongst the remainder of the supply:
The team should have a dynamic supply schedule that is back-vested in order to reduce heavy selling pressure in one go.
Supply should be unlockable during the game, e.g. tokens won via battles or quests.
70% of the supply should be available to the public. Mechanisms to prevent earlier individuals from gaining too much supply should be in place — through the form of monetary incentives, for instance.
Forming Moats
“You can fire your arrows from the Tower of Babel, but you can never strike the moat”. — Adapted from Apocalypse
Every game designer should constantly evaluate whether their moats are intact and secure. In a world where everything is viewable on-chain. Creating moats around your products will separate and allow you to outcompete any forks.
Perhaps you may be more familiar with the term network effects.
Whilst there are endless complexities to forming a network effect, some of the ones we will explore are:
Streaming as a form of efficient marketing
Upgrades to incentivise game time
We address these concepts in the wider context of blockchain gaming.
Streaming
The total combined market cap of streaming platforms was USD 50.11 billion in 2020. The most popular games being streamed at the time of writing include: Fortnite, Apex Legends and Valorant.
How different are streamers to your average gamer?
Similar to your “retail” gamers they play the game because they enjoy it, and they also can attract an audience by playing a fun game at its early stage.
Financial value they can receive is often in the form of donations or being paid commissions via their audience subscribing to the platform they operate on. Twitch is an example of such a model.
Key to note, is that they don’t derive any value from the game themselves. Often skill-based players are rewarded in tournaments which are externally sponsored.
But what about all the in-game achievements and non-tangible assets they have accumulated?
Would large streamers not have the ability to sell their weapons (if they could) for a higher price, and thus have incentivize to do so?
Secondary Markets
This brings us smoothly to the concept of secondary markets.
A secondary market is a market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.
It has not been fully explored as a concept and it is one that we will dive in to in another article. Yet it is something which unlocks great potential for the industry. Secondary markets on-chain which is trustless by nature has the potential to shape a whole subset of industries.
But as I mentioned earlier, this is a topic for another day…
Upgrades
In the context of Fortnite or Roblox, constant upgrades and implementation of new gaming modes such as the much loved “Creative” were deployed.
New guns/skins and many upgrades were considered to keep this Battle Royale trend enjoyable. Epic Games understood that to entertain users for the longer haul, they needed to diversify across a set of game modes.
Roblox implemented the same concepts yet took this one step further. Children effectively created games for other children, all whilst enjoying the whole process and being rewarded financially. Whereas game creators on Fortnite were paid by kind donations from players, Roblox actually issued payments to kids for creating games!
Roblox pays creators and developers over 28 cents per dollar spent. A fully decentralized p2e model would remove the entity (Roblox) and this would lead to a higher transmission of value — and thus a higher pay per dollar.
We are seeing these concepts being applied and taken further in GameFi. There is and should be an incentive within a decentralized game to drive user adoption and treasury fees. The community therefore want to “mod” the game, similar to Roblox and improve features to make it more enticing for others. This generates demand for the token and ultimately drives up price. These concepts are yet another unlock of industry to be explored.
Finally, it is important to consider in a world where models are being drawn in varying levels of complexity that these games operate a smooth user interface and have an enjoyable user experience. The game may have had a complex revenue model, but to the consumer the front-end was simple and the focus remained on aspects of the game — rather than economic incentives.
True decentralization is where the entity steps away and users can create value for other users.
I believe that a form of decentralized governance will be required to manage expectations and in-game mechanics. Initially the entity will be required as we’ve seen with Axie Infinity. Eventually the design of a game should be self-fulfilling with incentives being enough for continued improvements — in whatever form that may take.
— — — — — — — — — — — — — — — — — — — — — — — — — — — — — — —
Wow, that was a long article! This will be the first in a series of articles, breaking down the GameFi industry and exploring improvements.
This has become the core focus of my research and I aim to dive down all the rabbit-holes.
Articles down the road may potentially include:
Bridging DeFi and GameFi and whether we should
Token design — a case study of major games
How do secondary markets function optimally with NFTs
Will guilds have a sustained use case with industry maturity
Please feel free to reply directly to this e-mail/article with your thoughts.
Every question gets us thinking more: That’s how we can improve GameFi!
If you liked this, please share it, or feel free to repost on social media!
Thank you for reading!