Full On-chain Games When?
Recently, I interviewed for a gaming investing role. During the interview process, I had extended conversations about my thoughts and hesitance on the concept of fully on-chain games taking over in the near future. Don’t get me wrong, web3 brings numerous innovations into the gaming ecosystem. Features like true ownership of in-game assets, decentralized governance through DAOs, and the ability to play-to-earn introduce potential solutions to problems that games have suffered from for years, namely ecosystem locking purchases and player-influenced game balancing. However, despite these advantages, I believe mass adoption of fully on-chain games is still quite a bit away.
Mass Adoption
First, let's discuss mass adoption. Axie Infinity peaked with a DAU (daily active users) of over 2.7 million in November 2021, dropping to under 1 million in mid-2023, and is currently hovering around the 20,000 mark. According to DappRadar, 2023 ended with the top 20 web3 games averaging 685,000 daily active users. In comparison, Steam regularly sees over 25 million concurrent users online in 2024, with just CS2 averaging around 1 million players daily. The relatively lower adoption rates of web3 games can be attributed to two factors: overall higher barriers of entry, and lack of mobile penetration.
Friction for the Common Gamer
Due to current Gamefi’s preference for DEXs, users looking to play need an understanding of basic crypto concepts, such as setting up a wallet and managing private keys. In addition, most current web3 games require some purchase of their token to begin gameplay, resulting in navigating exchanges and dealing with transaction fees. This heightened logistical process and capital investment make web3 games significantly more complex than simply downloading a traditional game and playing, turning away non-crypto native gamers.
The World’s Shift to Mobile
Within the past decade, mobile gaming has taken over the gaming industry. Over 72% of Roblox’s users access the platform via mobile. In terms of revenue share, mobile devices account for almost half of all gaming revenue, at over $90 billion. In comparison, console games had a 29% revenue share, and PC games had a 21% share. However, the decentralized nature of Gamefi naturally contradicts with mobile, which heavily relies on centralized app stores like Google Play and Apple App Store for distribution. The closest bandaid solution we currently have is Telegram’s bot-powered gaming platform, which supports lightweight HTML5 games that load on demand and can be played within chats (it’s basically your modern-day Facebook 8ball). But until Apple or Google start lifting their restrictions and stop taking cuts from their digital store sales, which is highly unlikely given Apple’s precedent case with Epic, it will be difficult to see true adoption of web3 games on mobile.
Full On-Chain Challenges
Fully on-chain games also face significant issues with scaling under the current infrastructure. Even with advancements in side chains, layer 1 EVMs, and layer 2 solutions, hosting game state on-chain is still significantly more expensive than web2 server solutions. Storing 1kb of data on Ethereum can cost several dollars alone, with likely risks to fluctuate up depending on network congestion, contrasting with mere cents with traditional web2 servers. Currently, most large-scale on-chain games like Axie Infinity and Decentraland utilize a hybrid approach, hosting ownership assets through the form of NFTs on-chain while keeping game state off-chain. Dark Forest serves as an example of a web3 game attempting the full innovative on-chain approach, and faces high operational costs and performance limitations as a result. The developers have openly noted that using zk-SNARKs and ensuring on-chain processing of all game interactions is unideal in terms of cost-efficiency and speed. Ethereum's transaction throughput, handling only about 15-30 transactions per second (TPS), further limits Dark Forest's real-time responsiveness. Nonetheless, the developers choose to stick with the full on-chain approach to ensure transparency of their cryptographic fog of war. Projects like Dark Forest showcase potential but also highlight the inefficiencies present with the current infrastructure. Maybe further scaling attempts with layer 3s such as Degen Chain and multi-threaded layer 1s such as Sui may help begin balancing these numbers, but before that happens, I reckon it hard that more web3 games will attempt the full on-chain approach aside from novelty purposes.
Web3 Games Investing
As a part of the interview, we also discussed web3 gaming from an investor’s perspective. Let’s compare some fundamental metrics between web2 and web3 games.
In terms of revenue, Axie Infinity generated $1.3 billion at its peak in 2021, while Fortnite earned %5.1 billion. When examining RPU, the difference becomes more pronouced. Axie Infinity generated $5.13 per user, while Fortnite consistently achieves an average $14.57 per user. Objectively speaking, I believe crypto has fundamentally altered standards for VC funds, setting unprecedented records in terms of valuations and exit cycles. Typical exit time for a traditional investment lies somewhere between 5-10 years, while crypto projects can see exits within 1-3 years. This is because ICOs allow for significantly earlier participation from consumer investors compared to the traditional IPO process, with considerably less regulatory scrutiny as well. As someone whose track record falls almost exclusively in enterprise SaaS, the metrics to validating crypto projects were very foreign to me. A friend who invests heavily in the space ran a regression model and found that there is a higher correlation between valuations and Twitter followers than valuations and revenue (0.5 and 0.1 respectively). Hilarious. Crypto is an industry that trades off of volume, similar to consumer with traffic, but more extreme, and contradicts greatly to enterprise SaaS, where ARR is usually the king metric. Due to these characteristics, the feasibility and execution success of the web3 game is almost decoupled from ROI. The investing philosophy falls into “good projects can make money, but bad projects with good marketing can also make money.” This also inherently encourages founders to build around narrative over PMF, which may be unideal, but the truth is, VC is an industry where demand influences supply.
Conclusion
All in all, web3 games already bring incredible innovations to the gaming ecosystem. Even though the current landscape still struggles with high entry barriers, low mobile penetration, and fundamental scaling issues, solutions are already in the works. Telegram’s bot games and numerous scaling solutions provide steps in the right direction. If anything, it shows initiative in solving the problem. I still believe the future of gaming is decentralized; there just needs to be a balance struck in the utilization of blockchain in games between novelty purposes and a genuine increase in utility.