This week, Take Two Interactive announced that they were acquiring Zynga. All analyst focus is now on how accretive this acquisition can potentially be given the eye watering premium Take Two paid, and the stock took a massive beating on the announcement. On a somewhat interesting note, Zynga also seems to be trying to embrace Web3 with NFT mobile games (I have no idea how this is going to actually work).

So that is what’s happening in the real gaming market, but meanwhile in the crypto market there seems to be a huge craze taking over which is the advent of blockchain gaming. “Metaverse” games are raising VC funds at ridiculous valuations as people across the board are betting that this is the future of gaming. I’m going to explain why this is not the case. Game economies are something which I’ve spent a lot of time with, I used to do game design stuff on Roblox, so seeing all this hype pop up really made me want to figure out what was going on here.

To really get into this, we need to look at a few things:

  1. What Is Crypto Gaming?
  2. What Drives P2E Games Currently?
  3. The Fatal Economic Flaw Inherent To Crypto Gaming
  4. Lessons From Roblox

What Is Crypto Gaming?

Crypto gaming is a relatively new invention in the crypto (web3.0 if you like the marketing rebrand) space. Supporters call it the next iteration of crypto adoption, where they expand the long-held notion in crypto of “self sovereignty” into the realm of gaming too, where all their accumulated in-game currencies and special items (represented as NFTs) sit in their crypto wallets, free for them to monetise at any point by selling them on the open market. The phenomenon of being able to earn in-game currency (similiar to how you can earn small amount of in-game currency in games like Fortnite) but with the ability to sell it for real fiat currency has earned the genre the “Play to Earn” (or P2E) label.

What Drives P2E Games Currently?

Well, first, why do people play games? Because they enjoy it, or if we’re talking in economic terms, they gain utility from it. Kids play Roblox because they want to have fun playing with their customised avatars in user-generated games. Teenagers play Call of Duty Warzone because it’s an inherently fun game. The games I’ve just mentioned are free to play, but other very popular games like Grand Theft Auto V, Fifa 21 etc etc do cost money.

But P2E turns this idea on its head completely. Crypto gamers aren’t playing these games because they’re fun. In fact, all these games are very underdeveloped and frankly very boring. The reason why players play P2E games is in the damn name: to earn

It’s not play to have fun like games have been for eternity, it’s play to make money. I’m guessing you’re raising your eyebrows right now.

How it works is pretty simple, and I’ll walk you through the very simplified user flow of the most hyped up and popular blockchain game, Axie Infinity (basically dollar store Pokemon), to explain this.

Here’s a diagram which shows an overview of the Axie economy:

(Credit to AxiePulse)

So to breed Axies, one needs to buy SLP + AXS (the governance token for Axie). Therefore, the demand for SLP (what keeps the price propped up) is a function of breeding activity. But that’s not all, there’s also pure speculative demand. The supply mainly comes from the game throwing coins at players, but it also comes from players who are selling their SLPs on the open market. Note that currently the quantity of token inflation far exceeds the amount of SLP being destroyed through the breeding process.

The speculative market for SLP, although beneficial in the initial stages to help increase the SLP price, will also accelerate the further downfall of SLP when the market starts to see more players trying to exit to realise their “earnings” and less players willing to enter the game. Reflexivity is a real thing, and it’s going to particularly sting the crypto gaming market for sure.

This tweet from Zhu Su is true, GameFi (another name for crypto gaming) is where participants are punting purely for degen entertainment purposes: