Hello. My name is Derek and I’ve bred 30,000 digital cats. On the blockchain.
I have been playing CryptoKitties for over a year. For the uninitiated, this is a game where you own and breed cats on the blockchain. There are 4 trillion possible cats you can breed, based on the genetic make-up of each parent.
You can’t do anything with the cats. It’s just for fun. Yet over US$15m (81,600 ETH) of CryptoKitties have been sold. And over 1.7 million cats have been bred.
I ‘played’ the game with the goal to make money. And I did. I arbitraged the marketplace, calculated breeding probabilities, made back alley deals and have single-handedly crashed the market.
I won’t get into the details of how it works and what I did. That’s a LONG article saved for another day (post).
However, what I will share, is eight interesting things I’ve learned about crypto-economics, incentives and marketplaces.
- People with Crypto will buy anything (including useless things)
Most people in crypto are risk-taking investors. Otherwise why would you own it? Naturally these investors want to deploy their money, but there just aren’t many good opportunities right now. This means that low quality games, which otherwise wouldn’t make any money, become interesting places for investors looking to make some money quick.
This will change. It’s a matter of time. But given the novelty of blockchain games and the opportunity to make money, any NFT instantly becomes an interesting speculative asset.
One recent example is ChainFaces. Someone bought this tokenised image (which is purely on the blockchain) for US$1679 (10 ETH). ChainFaces doesn’t even have a website.
- Crypto investors will spend money on anything and love speculation
- An actual fun game which properly uses the blockchain will blow away all other competition
2. Mainstream press means you can expect a spike in demand and prices
This might seem straight forward. Of course, getting PR on your game will help with new players. What might not be obvious though is that without mainstream press, the only players are the game are those in the Crypto space.
To really drive up demand, blockchain games need to reach a mainstream audience. This has typically been done through smart press.
- Cryptokitties had some big sales early on and the concept of people buying and selling digital cats for $100,000+ received a lot of mainstream press
- GodsUnchained did some clever marketing and jumped onto the Blizzard Blitzchung scandal. A viral tweet attracted a lot of attention from thousands of Hearthstone players.
Hype for mainstream exposure will also drive speculative demand. If players think a mainstream audience is incoming, then they will spend more.
An example of this is the infamous ‘China launch’ by the CryptoKitties team, which drove a lot of spending but ended up backfiring as legal issues prevented them from actually launching in China.
- Mainstream press can be a great leading indicator for short-term popularity (and therefore profits) in a crypto game
- The secret for a game developer will be to sustainably grow interest by the mainstream market
3. Whales cause a ripple effect and are the #1 predictor of marketplace volume
When a ‘whale’ enters a blockchain game, they usually allocate huge volumes of funds by buying assets. Sometimes as an investment, sometimes to support the game, sometimes for prestige and glory.
All of a sudden, players who have sold their assets to a ‘whale’ will have a flood of cryptocurrency that they can choose to either re-invest or to cash-out. The tendency is for people to re-invest, as more often than not they think they can ‘do it again’.
These players will choose to re-invest by buying assets from other players, who in turn re-invest in other players, etc. This cycle will continue for a short period (in my experience 2–3 weeks) before all value has been extracted, due to people cashing out and not re-investing.
I would compare this system to trickle down economics.
However, there is one critical point which severely diminishes this from happening — when the game developer is the one selling assets directly to the ‘whale’ or to the re-investors. This is important because it means money is being extracted from the spend cycle, and often the game developers will not put it back in.
- You can identify short-term marketplace trends by looking at what the big whales are doing and how much is player sold vs company sold
- Gaming companies should identify how to maximise the re-investment ratio (Amount re-invested vs Sales made due to Whale) if they want to stimulate market activity
4. Games where people only ‘play to earn’ will be dangerously reliant on new players to sustain the economy
Many people play crypto games to make money. Even if they don’t want to make a lot, they also don’t want to lose.
If this assumption is true, then once someone successfully makes a profit, they will withdraw it from the ecosystem. The logic is that even if there is still more profit to be made, investors will want to ‘bank’ their profits.
A crypto game which only relies on play-to-earn is therefore not sustainable. Players will join with the intention of making money. Those who do will take it out, those who don’t will stop playing. The implication is that the only way for players to keep making money is if new players join the game.
Constantly finding new players is tricky. And if the profit opportunity decreases, then all your core players who play ‘to earn’ will also leave.
- Games purely focused around play-to-earn (playing for money) will fail
- New money enters a game while old money leaves
5. Market deflation will happen without a strong supply sink
The current trend is for crypto games to launch with a pre-sale, where they sell items to fund development of the game. They will typically sell a lot of tokens. Why not? The more the better.
However, when the game launches they won’t have too many players. Thus when players are able to use and trade items, the marketplace will become flooded. Supply will be greater than demand, and them market will deflate.
This happened in Cryptokitties. A ‘Gen 0’ cat cost 0.5–1.0 ETH after the pre-sale ended, but this has deflated down to around 0.15 ETH today.
Unfortunately most crypto games don’t know how to manage this.
On the flip side, when a game introduces a supply sink for items, you will see the price increase. In this way, it’s possible for a game to artificially increase prices, through demand incentives such as promotions, raffles, new releases, etc.
- Most crypto game prices will deflate because supply will exceed demand
- Lack of supply sinks can cripple a game economy, as demonstrated in the case of CryptoKitties
6. You can’t sell at the floor price (Hint: The floor price isn’t the floor price)
This is linked to the above. In a game where supply > demand, you can never sell at the floor price.
Because players don’t have to buy in a deflating market.
If someone sees the cheapest price as 0.100, why would they purchase when they could wait 2 weeks and buy it for 0.050? Or wait 4 weeks and buy for even less?
Therefore, players who want to actually liquidate their assets need to sell substantially below the floor price. You want to sell at a discount (in my experience at least 25%), to make it look like a great deal. Before people find out it isn’t.
If other players end up flipping it for a profit — no problem. You will end up overall better this way. Trust me, I’ve sold ~22,000 digital cats.
7. There will be bots. There will be bot wars.
In any marketplace there are arbitrage opportunities. This is also true for blockchain games.
The only difference is that in a blockchain game, all the data is available on the blockchain. This means that smart people can build bots that take advantage of these arbitrage opportunities.
As an example, there are many bots used in CryptoKitties.
- Some are used to breed or sell cats, making the player’s life much easier
- Others are used to profit —for example to buy mispriced items which have been listed for an extremely low price
- Funnily there are also people on the ‘good’ side, such as Alley Cat’s ‘Botty lost and found’ service, which uses a bot to buy mispriced cats and offers to return it to the owner
Bots will cause grief. Bots will cause tension. Bots are here to stay.
My view is that the best game developers will build economic incentives to counter harmful bot activity, instead of trying to eliminate them all together through ‘traditional’ means.
- For the technically gifted, creating bots to arbitrage crypto games is a great way to make profit
- Developers must understand the implications of bots and create measures to prevent abusive gameplay disruption
8. 3rd party developers really help boost the core game ecosystem
One of the best thing Cryptokitties did was launch their ‘KittyVerse’. This was effectively a small fund that encouraged 3rd party developers to build other use-cases for Cryptokitties.
The inventiveness and effort of 3rd party applications were huge, and is probably one of the reasons Cryptokitties still exists today. For example there are 3rd party services to:
- Breed cats
- See their hidden genes
- Battle cats
- Trade ‘wrapped’ cats (an asset-based basket of cats that can be traded on a liquid market)
The reason 3rd party developers are particularly attracted to blockchain games is due to the trustless and transparent nature of blockchain. The original developer can’t really do anything to interfere with 3rd parties, unlike in traditional gaming models. This creates a safe space for building sustainable businesses.
- Game developers should nurture and encourage 3rd party developers to build on their platform
- However, they can’t do everything, so don’t rely on them too much (like Cryptokitties did)
Well done. You’ve made it to the end. Or if you haven’t, here is a quick recap of the 8 things I’ve learned from breeding 30,000 digital cats on the blockchain:
- People with Crypto will buy anything (including useless things)
- Mainstream press means you can expect a spike in demand and prices
- Whales cause a ripple effect and are the #1 predictor of marketplace volume
- Games where people only ‘play to earn’ will be dangerously reliant on new players to sustain the economy
- Market deflation will happen without a strong supply sink
- You can’t sell at the floor price (Hint: The floor price isn’t the floor price)
- There will be bots. There will be bot wars
- 3rd party developers really help boost the core game ecosystem
Hope this has been insightful.