Capsule Corp. Labs
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Capsule Corp. Labs

The Problem With The P2E Model

With gamers touting earnings of over $2,000 a month, it’s become a no brainer as to why these new blockchain-based games are taking off. Many users are quitting their side gigs and day jobs to make a steady stream of income from doing what they enjoy. Their newfound money has mostly been achieved through earning in-game assets that they sell on other markets for a profit. The rise of this novel business model has been deemed the Play-to-Earn (P2E) industry. In order to see where the P2E market is headed (and what problems may arise), it is important to first observe where it came from.

Quick History — The Changing Video Game Market

In 2020 the video game industry was valued at nearly $200 billion. By 2024, it is expected to grow to $300 billion (See the breakdown below). Much of this growth is attributed to the changing economic model of the industry. Before, the flow of capital was fairly simple and linear — money would flow from the pockets of users to the hands of the gaming developers and publishers. The growth of Web 3.0, however, has made things quite interesting. For the uninitiated, Web 3.0 is the next evolution of the world wide web, where there will be a more equal power balance between internet companies and its users. In terms of the gaming industry, this means that users can create their own peer-to-peer (P2P) markets outside the control of big, centralized corporations. Usually, a user’s assets within a game are subject to the whims of the game developer. With the advantage of blockchain technology though, money can flow dynamically from P2P, creating a multitude of markets. Now, all digital assets from a game can truly belong to the user.

We saw the beginnings of this take place with the CryptoKitty sensation of 2017–2019. Users were able to purchase digital cats as NFTs, breed them in the game, and then sell them off somewhere else. The decentralized nature of the blockchain meant there was no need for a full team of personnel to take care of the transactions. This is one of the biggest reasons why this model didn’t exist before, because the idea of an in-game asset didn’t seem valuable. Now, a new asset class can rely on the blockchain’s automatic ledger to act as an informal banking system between participants in the system. The barrier to entry into the gaming space became even easier since then — and the success of games like Axie Infinity and Gods Unchained is a testament to this.

It’s no wonder why the video game industry will be worth what it is by 2024 ($300B). Someone can now take whatever earnings they make within a game and keep it as an investment or trade it for fiat on a separate market (Think OpenSea, Rarible, or even Coinbase’s new social NFT marketplace).

Transitioning to the Metaverse and P2E

The next evolution of the video game industry is happening now with the metaverse. The combination of virtual reality (VR), accelerated reality (AR), online gaming, and NFTs is contributing to a brand new world where a thriving economy exists. In addition to the previously mentioned 2024 video game market forecast, it’s expected that the total metaverse market will reach a whopping $800 billion (See below). Yes, that does include the video game industry as part of the prediction. Now throw in the NFT economy as part of this growing industry and it makes this figure look even smaller. Current research is underway to see what the projected figure of the resale market could look like for those NFTs.

The figures continue to get mind-boggling when you factor in the play-to-earn (P2E) aspect of gaming today. On Axie infinity for example, players buy Pokemon-like animals called Axies (which are NFTs) to train them in battle. The main goal, however, is to accrue an in-game token called Smooth Love Potion (SLP) from winning battles and completing tasks. With this token, players can breed their Axies, giving them potential even more SLPs. The SLP is actually a cryptocurrency that can be bought and sold for fiat, along with the Axie creatures themselves since they are NFTs. The intrinsic values of the coin and NFT depend on the demand the users place on the items themselves and the general popularity of the game. All in all, it has generated a gigantic investment opportunity for onlookers who are simply out to make money. This causes a few problems.

The Problem With P2E

One of the first things that happens when you make a game winnable with money, is it becomes a zero-sum game for those with the most capital. Let’s say Player A has the option to start at Level 0, but Player B has the option to start at Level 10 with an upfront cost. Naturally, Player B will edge out Player A to win the game by a landslide. This model weeds out all the players that would otherwise play the way the game was originally designed. Instead of a P2E economy being created, it is now a pay-to-play game. Additionally, since the game’s path to victory is too easy, it lowers the demand of the coin and NFT itself.

This was seen previously in 2011 with Diablo, a famous game by Blizzard where users earned loot and weapons by creating a dungeon in order to get to the next level. A shabby resale economy of these weapons began to develop where sellers earned up to $10,000 for their loot. All was good and well, but Blizzard noticed a huge drop-off of players after obtaining the loot because winning the game became too easy. They had to change the design of the game to keep it interesting for players to keep playing.

Possible Solutions

The key for modern P2E games is to design the positive feedback loop in the game to keep flowing. This way, demand for the coins doesn’t depreciate when players inevitably buy in to start their games. Games that are actually enjoyable and don’t have an easy path to victory are ideal for this newfound economy. While the other pay-to-play problem seems to be harder to solve, the P2E gaming model is still here to stay. In fact, the founder of Reddit, Alexis Ohanian, forecasted earlier this year that 90% of video game players will only play games if they are P2E. This says a lot about where the video game industry in general is headed in the next decade.

Stay tuned for our next series where I will dive into the future of the Play-to-Earn game sector.

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