This analysis is written by Javier Barnes. This is not financial advice, and the opinions are strictly his own.

The current massive deceleration of the Web3 space is a good moment to re-evaluate and re-think the fundamentals of Web3 gaming.

Although many whitepapers mentioned sustainability, the previous gold rush meant that for most players and crypto investors, it was just another promise to fuel the hype. The goal for all parties involved was still to achieve a massive return on investment, often relegating the delivery of the actual game that served players to a secondary objective.

Ultimately, this was not a system where customers/investors prioritized a realistic answer on how to keep these games running in the long and even mid-term. Something that recent events have revealed it’s still an unresolved topic.

In my humble opinion, there are two main challenges to the sustainability of Web3 games:

Challenge #1:
Most L1 cryptocurrencies, particularly the ones that contain the big whales, are not stable.

So if their value fluctuates, they can bring down the entire system built on top of them.

For example, pretty much all Web3 games are in the red these days for reasons that are outside their control: Because the market is red, players don’t trade. And newcomers don’t join.In the short term, this is bad news that will put in jeopardy the plans of many companies, particularly those that were self-funded or will require another funding round soon.

But thinking long term, it also highlights that even if you do all the game economic homework, and you craft the in-game economy so that it doesn’t break by itself, sustainability still remains a problem due to the underlying ecosystem.

In other words, if players mostly care about the value of their in-game assets: How can you avoid that they abandon the game en masse when there is a wave of panic across the entire Web3 ecosystem? How can you keep player interest high when the asset value, which depends on the L1 cryptocurrency value, drops?

There are other L1 chains better optimized for games. Ones that offer more player-friendly features such as lower gas fees and faster verifications, and ultimately more stable in terms of value. But almost none of the big web3 games are on them. While these chains are a bit more disconnected from the ups and downs of the financial market, choosing them is not obvious. The reason is that the high-value whales and the bulk of the Web3 players are not in those chains. Crypto whales remain on the big “non-gaming” chains partly because most of them generated their wealth on them, and moving their value to new chains involves going through tricky bridge systems.

And without whales, web3 games have few chances of reaching escape velocity in terms of volume and growth, which can foster a larger wave of players.

Challenge #2:
Most Web3 players choose their games based on their expected value growth.

And as long as that remains, the games that will stand out are those that sacrifice sustainability for growth.

I believe that several of the economic flaws that harmed sustainability (among them: PvE focus, inflationary economy, and high and market-driven entry price…) were the very thing fostering the growth of the Web3 games that stood out.

These “problems” triggered and accelerated speculation, ultimately providing a higher, yet unsustainable, return of investment to players. Removing them would mean dismantling the Ponzi spiral that attracted players to join, without the game being able to provide any other premise for them to stay.

Such was the case of Axie Infinity, once the main flagship of Web3 games. Developers went from collecting +$8M per day in fees to barely $10k, and a drop in active accounts from a peak of 1 million to ~50k. The reason? A change in their economy that aimed to make the game more sustainable in the long run popped the speculation bubble. That triggered a massive player (and value) exodus and froze the activity of those players that still remain.

This is not to say that Axie can’t make some sort of comeback in the future (after all there is a significant amount of value still locked inside).

But in order to become sustainable, at the very minimum the game needs to move away from its previous model, replacing the premise of “passively grind real money” for a new setup more based on betting and high-stakes competition fueled through deeper upgrades and collection systems.

How can the next wave of Web3 games become sustainable?

Some may defend that the model can be fixed primarily through reform of the game economy design and management. 

For example by adding systems that would increase the time between the player's cashing-in value, and the moment where she will want to cash out, so players can’t abandon ship even when the value drops. As well as by adding deflationary mechanics (sinks) that would limit the potential speculation.

In my humble opinion, all these solutions are useful patches but do not tackle the core issue. They are based on the perception that the problem to fix is the specific issues that caused the game value bubble to pop, instead of the fact that the model requires a growing bubble to attract and retain its customers to start with.

It is my belief that if the main reason for players to be in the game it’s based entirely on the speculative value of its assets, then it ultimately doesn’t matter how well crafted the in-game economy or blockchain is: The bubble will continue to grow more fragile until something different pops it, just later in time.

The core of the problem with Web3 games sustainability is that it is not possible to fulfill the player expectation that these are positive-sum games. It is not possible to have a game where most players earn money by playing. That money has to come from somewhere. From an economic perspective, and taking into consideration the system as a whole, ultimately every videogame is negative-sum.

It can only be positive-sum for very specific players under very specific conditions. For example, many mention things like EVE Online's “black market” or World of Warcraft gold retailers as predecessors of play-to-earn. But in reality, those practices were minor (and sometimes parasitic) elements of the bulk of the game economy and player population. The vast majority of players in any of these games spent more than they earned and expected it to be like that because they were purchasing a service (spend money to buy fun). This is not the expectation of most players in Web3 games.

To become sustainable, the premise of Web3 games for most players has to do a 180º flip: It has to go from “this is a game where you come to make money”, to “this is a game where you come to spend (lose) money, to have fun”. That way, players won’t sell and abandon the game even if the asset value drops because they won’t care about the value.

A proposition that - in my opinion - removes a lot of the attraction power of the Web3 concept, may possibly mean targeting a different audience than they do right now. And ultimately, perhaps also demands a serious reevaluation of the market size expectations of this emerging space.

In my opinion, I think there are some directions where the model could evolve to achieve this premise switch, but they all have their challenges.

Early Investors and Late Spenders.

The idea here is that early players are not actual players. They are actually investors that crowdfund the development team so they can create a game that is intended for an audience of pure spenders that will come in the future, providing profits to the investor.

The way I see it, this is already the model that most games in the space are following, even if they don’t explicitly it. This is why most games are filled with products and practices that attempt to sell securities with some utility elements to avoid regulations: Lands that will grant passive fees to the holders based on the activity performed on them by players; as well as Initial Coin Offerings and NFT presales where buyers' expectation is to later sell those assets to others.

In my opinion, this model presents obvious problems:

1. The biggest issue is that - contrary to actually investing in a company - this provides zero incentive or obligation for the teams to actually deliver or manage with common sense. Quite on the contrary, it promotes bad actors and bad behaviors (building false hype, rugpulls, soft-rugpulls…), particularly due to the absence of regulation.

2. Investors are not necessarily interested in the actual profitability or success of the company, but only in the price evolution of the game assets (tokens, NFTs…). This means that most of them may dump when their false securities rise in price, potentially crashing the value.

3. In order to avoid regulations around securities, the security-like assets need to be primarily framed around utility. This forces these games to target the Web3 space primarily, which is a business risk factor (small space, unproven premise that the players are there just because the investors are…). It also means that the assets need to be designed in a way that they maintain their value, which makes it more challenging to introduce new content which is a requirement for long-term sustainability.

That said, I think the model could theoretically be sustainable… But IMO it has very limited chances to do so without strong regulations that force those false security assets to have similar protections as actual securities, have a valuation method more closely linked to the actual performance of the company, and have systems in place to avoid tourists.

Gambling 

Poker, Slots, and other casino-like games already have the premise of earning money, although it is known that only a small percentage of players actually win. For most, it’s all about having a fun and exciting experience until you lose all the money.Through blockchain, these games could more easily integrate complex RPG/upgrade/trading systems that could make them more interesting than classic gambling games for a gamer profile. Such is the approach of a few games that emulate horse racing or car racing betting.

The issue with this is that the gambling space is relatively niche and whale-oriented, as well as more controversial and government regulated than any other branch of gaming.

Out of all the models, provided that the Web3 space moves away from the unsustainable promise of money for everyone and the greater fool theory system explained above, it is the one that I believe is the most likely to become the standard.

UGC (Content Creators and Spenders).

This would be the Web3 translation of the model used by Roblox or Tik-Tok: Here the idea is that there’s a separation between content creators (earners) and content consumers (spenders), and blockchain acts as a method to manage the transactions between both groups.

An important distinction to make here is that this model would be based on content creators that actually create reasons to spend on the game (Roblox developer, Tik-Tok content creator), as opposed to content providers that act as middlemen between consumers and the product (Axie’s play-to-earners, WoW gold farmers, metaverse landlords…).

For example, a Roblox developer generates games that players want to play and spends money on adding a lot of value to Roblox. Same as a Tik-Toker that creates videos that make users want to stay in the app for a longer time and generate ad revenue. So a person that invents a bot that automatically creates engaging Tik-Tok videos or great Roblox games would be a fantastic asset for the app.

On the contrary, a person grinding in Axie to sell it to others is not providing any value, since it’s not increasing the reasons for players to spend. The reasons are provided by the game developers, and the grinder is just extracting it. Therefore, bots are a menace.

In my opinion, this model could be sustainable, provided that the distinction is maintained. 

Unfortunately, I’m doubtful about this model becoming really a thing. The reason is that creating such a platform it’s much more complex than creating just a product: The main problem is not the tech, it’s getting the users in.

SN-like platforms only work when they have a critical mass of users willing to consume the content, providing enough incentive for content creators to start appearing organically.

That means that this is a winner-takes-it-all system that won’t allow many relevant competitors, making it a risky investment proposition. It also means massive marketing investment to reach that critical mass, and the limited size and entry barriers of the current Web3 spaces make it even more difficult.

Ultimately, it also raises the question of why would you want to build that platform over the blockchain to start with, instead of a more centralized system that allows much easier management and return of investment like Roblox, Tik-Tok, or Twitch.

Play and Own (Play for fun but you own the game assets)

For those that are not familiar with this concept, Mitch Zamara (Million on Mars) did a fantastic video explaining it, as well as explaining the issues with other models. 

In summary, the concept is to move away from the expectation of profit (by removing entry price speculation, avoiding a value bubble, and getting rid of the inflationary economy) but maintain resource trading as a core activity in the game to generate engagement.

The idea is that the strong focus on trading and ownership would incentivize users to team up and establish complex economic and social structures, and ultimately greatly foster engagement similar to what games like EVE Online do.

Alternative setups following the same idea could be what ImmutableX is aiming for in games like Gods Unchained: A CCG game where blockchain aims to empower collection value and card trading. This is similar to the existing mechanics in physical support games like Magic: The Gathering or Warhammer, where players mostly care about the game, but also often trade their assets (like when I sold my old and boring Space Wolves army to get a kickass Carcharodons squad).

I find this concept the most interesting from a gamer's perspective. But also still very challenging since these assets are closely linked to real value means it requires very close monitoring, making them much harder to manage than in regular games.

Having a game that has the same economic complexity as EVE Online sounds great, but there’s a reason why despite EVE’s success, there has been a limited success at replicating its model, and instead, most MMOs have simpler in-game economics. It’s very hard to manage.

For example, in Warhammer or Magic: The Gathering, a collapse in the secondary market wouldn’t affect the core game too much. But on a play-and-own game, a collapse in the secondary market might mean a lot of game resources flowing at a cheap price, potentially removing the requirement of players to put effort into in-game activities to obtain them.

As a consequence, it seems like a much more complex system under the premise that ownership would make the game more fun, which - even if true - might be easier to manage and scale without any blockchain at all.

Finally, I can anticipate other problems, like how players in these games would be reluctant to the addition of new content that would evaluate their inventories, which limits the capacity of the developer to tweak things to keep the system working and engaging.

That last problem isn’t a big deal in Warhammer or MTG, since the devs get profits exclusively from the primary market. In fact, this is one of the reasons why the digital version of Magic is moving from the previous MTGO which allowed peer-to-peer trading to the more recent MTGA, which doesn’t.

What is next for the Web3 gaming space?

Perhaps the most significant handicap on all of these possibilities is that at the moment blockchain games can only target the current audience that populates the blockchain space. 

And those players are interested primarily in achieving great returns and becoming early investors because blockchains are first and foremost fast-paced finance speculation tools. And therefore, the current audience will likely prioritize short-term success over better fundamentals that greatly limit growth -- a paradigm actually reinforced by the volatility of the space: “Blockchain games tend to explode, so try to hit the jackpot and move to the next one!”.

That makes me quite pessimistic about the immediate future. In my opinion, the most likely possibility is that when the blockchain environment accelerates again, the new Web3 games that take the spotlight share the same flaws that most that preceded them had.And those that somehow solve the challenges will remain undetected.

Regarding the far future, I think this is still very much an open question. It's possible that eventually, the accumulation of negative experiences by players and investors will force these games to evolve towards approaches that foster sustainability at the cost of growth. Even if it takes a lot of tears first.

This process could also accelerate if these games are able to become attractive to other audiences (that disregard asset value), which are not present nor interested in the blockchain sphere at the moment, especially given the current volatility of the space.