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2022 Gaming Review
In 2022, the gaming industry brought in some of the most highly anticipated titles in recent memory including Call of Duty Modern Warfare 2, Elden Ring, and God of War Ragnarok. Call of Duty alone surpassed $1bn in sales within 10 days of release. Despite witnessing monster hit after monster hit in 2022, the global games market witnessed a YoY decline followed by unprecedented lockdown-driven growth. But that hasn’t deterred investors from cutting checks in promising game deals, especially in the blockchain gaming arena. Blockchain gaming has been all the rage and for good reason. The rising trend of blockchain gaming seeks to create a more equitable relationship between gamers and publishers by using decentralized technology to incentivize fairer revenue sharing and increased transparency, which has been lacking in traditional web2 gaming, thereby building a stronger and more trustworthy relationship between publishers and players. But before diving in deeper, let’s discuss what blockchain gaming even is, why there’s a strong community supporting it, and what is the current state of the video gaming industry in 2023.
Source: www.videogameschronicle.com
Defining a blockchain game is simple, it’s any game that implements the blockchain within the tech stack, whether through non-fungible tokens (NFTs) or fungible tokens. Adding NFTs or tokens to a game allows players to obtain a more significant stake within the game, have increased ownership over their in-game assets and progress, and give players the potential to earn money over time. NFTs can be traded and therefore create open economies within the game unless the NFTs have certain restrictions (e.g. soulbound NFTs).
While blockchain doesn’t necessarily make a game better or worse, the technology has amassed a loyal following and diverse digital communities that are eager to see the technology go mainstream in gaming.
Despite the emergence of blockchain games, we have yet to see a blockchain game success story that has reached virality like Call of Duty or Elden Ring. But why is this? In this report, we will illustrate the current state of blockchain gaming and dive into some exciting adoption metrics, VC funding metrics, go-to gaming blockchains, obstacles facing this industry, and our predictions. First, let’s look at performance.
Figure 1: Unique Active Gaming Wallets
Source: Footprint Analytics
From a unique active wallet perspective (“UAW”), the web3 gaming industry saw more than 1.3M wallets interact with blockchain-enabled games in January 2022. Today, that number is less than 500K. It’s important to note that not all users who play blockchain games actually need to interact with the blockchain, so it is likely that these numbers are understated. However, the number of players that do decide to engage in blockchain transactions in-game has significantly decreased. This YoY drawdown could be happening for a multitude of reasons, including the quality of games, or poor application of blockchain within games. Further, the blockchain industry has experienced a significant decrease from its all-time highs, with many gaming coins seeing a staggering 99% decline, making it challenging for players to earn profits in the current market conditions. Our belief is that as better games are released after multi-year development cycles producing fun game loops that offer replayability, we will see gaming UAW drastically increase, propelling the entire web3 ecosystem forward.
Figure 2: Gaming NFT / Blockchain Private Placements
Source: Drake Star - Global Gaming Report 2022
Although the gaming industry experienced a slight year-over-year decrease in revenue and a decline in UAWs in blockchain gaming, venture capital funding has remained strong. The blockchain gaming industry raised $4 billion in 2022, with half of the funds invested in early-stage companies. Further, there was a significant increase in the number of deals closed with 405 in 2022 compared to 151 in 2021, with a strong trend toward early-stage investment within the blockchain gaming sector. These numbers indicate a strong bullish signal among the investor community.
Figures 3 & 4: Gaming NFT / Blockchain Private Capital Investment by Stage
However, with such a large influx of venture capital funding in the web3 gaming space, it raises questions about which projects will be able to successfully execute on their roadmaps while attracting meaningful gaming audiences.
Moreover, looking at web3 games by blockchain supplied by Binance Research, BNB Chain is the most widely used blockchain for games, accounting for 37.7% of the market, while Ethereum follows closely with 30.2%. The choice of blockchain for games is driven by speed, reliability, and security, which are important factors in ensuring gameplay is uninterrupted and seamless for players. As developers prioritize the user experience, they must choose a blockchain that can support their needs and enhance their overall gaming experience. With the emergence of new blockchains specifically geared towards the gaming industry, such as Aptos and Sui within the Move ecosystem, it will be interesting to observe how their market share evolves in the coming years.
The lack of mainstream adoption for web3 games has been attributed, in part, to the quality of these games. The development and refinement of games, depending on genre and type, is time-consuming and can take years. As shown in the chart, only 30% of blockchain games are live, while the remaining 70% are in various stages of development, alpha or beta testing, or have been canceled. While it may appear that only a small portion of blockchain games are live, it is important to note that many of the next-generation, highly anticipated games are still in the development phase. The current crop of blockchain games can be considered the first generation, serving as a test bed for blockchain implementation and simplifying gameplay loops.
The current state of the blockchain gaming industry has not seen the level of mainstream adoption that many have hoped for, despite a growing community of enthusiasts and a significant amount of venture capital investment. This raises questions regarding the obstacles impeding the growth and widespread acceptance of blockchain gaming. This section will examine the current challenges facing the industry and discuss why its growth has been less than satisfactory.
CHALLENGE #1: DEVELOPERS INCORRECTLY UTILIZED BLOCKCHAIN TECHNOLOGY WITHIN GAMES.
The first generation of blockchain games focused heavily on NFTs and tokens. In many cases, these game-related assets were made available before the development of any substantial games, and attracted retail investment largely driven by speculation and expectations of future game development. Unfortunately, many of these games have yet to be released or may never be released, resulting in financial losses for retail investors. During this period, the primary revenue model for blockchain games was based on NFT sales, however, it has become clear that this is not a sustainable, long-term approach. It is crucial for the success of blockchain games that players are drawn to the gameplay experience first, rather than being primarily motivated by the web3 functionality or the prospect of game asset appreciation—the technology should support the game, not the other way around.
CHALLENGE #2: GAMES ATTRACTED MONEY-FIRST AUDIENCES.
During the bull market, the popularity of games with NFTs and tokens increased, as users were able to earn money through playing games. With a significant increase in demand from retail investors, token prices rapidly increased. However, the utility of these NFTs and tokens within the gaming ecosystem was limited, which resulted in the majority of assets being held only for the purpose of strictly accessing the game. As the market shifted towards a bear market, token prices plummeted, leading to the unsustainability of the "play to earn" model and causing a significant reduction in primary income for many players.
CHALLENGE #3: BLOCKCHAIN'S BENEFITS IN GAMES AND ITS UTILIZATION ARE NOT WELL-UNDERSTOOD BY DEVELOPERS.
Challenges in understanding the potential benefits of blockchain technology in gaming remain a hindrance to the growth of the industry. During the gaming and crypto bull market, developers were attracted to web3 due to the availability of funding and the integration of blockchain through token offerings and NFTs. While NFTs were intended to offer utility for players within the game, their open economy nature resulted in a pay-to-win dynamic that was different from the original intent. Currently, developers are moving towards more advanced blockchain integrations that aim to establish sustainable economies, value accrual, and asset ownership.
CHALLENGE #4: INITIAL BLOCKCHAIN GAMES LACK ENTERTAINMENT VALUE AND QUALITY COMPARED TO CONVENTIONAL GAMES.
The quality of blockchain-enabled games does not yet match that of traditional games, which is understandable considering that the earliest of these games have only been in development for a few years. It is anticipated that the developers of these games will continue to refine their products, taking into account feedback from players, to eventually launch games that offer enjoyable gameplay with replayability and watchability, and where the blockchain elements serve as a secondary feature rather than the primary focus. The aim is to create a better user experience and foster the growth of new models within the web3 gaming industry.
PREDICTION #1: MOBILE WILL BE THE PRIMARY PLATFORM THAT FACILITATES WEB3 GAMING ADOPTION.
Blockchain gaming is on the verge of a mobile revolution, as Solana takes on mobile endeavors and game studios centered around mobile devices are emerging. Mobile devices have a wider reach and accessibility, making it easier for a larger audience to participate in games that utilize blockchain. Given that mobile devices have become an integral part of everyday life, users are able to conveniently access and play games on the go. Moreover, advancements in mobile technology, including improved processing power and storage capabilities, have enabled the seamless running of blockchain games on mobile devices. As such, the combination of reach, convenience, and technical feasibility offered by mobile devices makes it an ideal platform to spur the widespread adoption of blockchain gaming.
PREDICTION #2: MANY EXISTING BLOCKCHAIN GAMING PROJECTS WILL CEASE TO EXIST.
The web3 gaming sector has experienced a significant influx of venture capital investment in recent years, however, not all of these projects have been successful in securing subsequent funding rounds. This is partially due to the fact that many of these projects raised capital based on little to no development progress, and often at significantly inflated valuations that were not supported by revenue. As a result, many of these companies are now struggling and seeking to raise capital at much lower valuations, indicating a challenging market environment. In light of this, it is likely that some projects will face closure or acquisition, particularly if market conditions persist.
PREDICTION #3: NFTs WILL REIGN SUPREME AS THE PRIMARY DEFINITION OF A “BLOCKCHAIN GAME” VERSUS TOKENS.
It is our belief that, in the majority of cases, the integration of NFTs in web3 games is a more logical solution compared to token integration. The two-token model, which involves a utility token within the game and a separate governance token for investors, is no longer an effective strategy. This is because tokens within the game are not always necessary and a more effective and sustainable alternative is to integrate NFTs that offer provenance and rich on-chain history, ultimately adding value to the players.
PREDICTION #4: IT WILL TAKE LONGER THAN WE EXPECT FOR A NEW WAVE OF HIGH-QUALITY BLOCKCHAIN GAMES.
Game development is a complex, capital-intensive, and time-intensive process. Despite repeated claims that a particular year will be the "year of gaming," the industry continues to experience a slow and steady progression. Currently, there are a number of games under development that have been in the works for over a year or two. It is anticipated that these games will not only be released but will undergo further optimizations through various updates and patches in the coming years. By comparison, it is likely that mobile gaming will see quicker adoption due to typically shorter development cycles for mobile games.
PREDICTION #5: BLOCKCHAIN GAMES WILL NEED TO WORK EVEN HARDER TO ATTRACT TOP INDUSTRY TALENT.
The attraction and retention of top talent from traditional gaming publishers and developers to web3 gaming remains a critical factor for the growth and success of the industry. To effectively transition from web2 to web3, web3 gaming studios need to mitigate potential risks and uncertainties associated with the new technology. This, in turn, will encourage experienced game developers to take on the challenge of developing games for this emerging platform. Given the time and effort required to create high-quality games, it may take some time for the top tier of gaming talent to fully enter the web3 space and make a significant impact.
In conclusion, the gaming industry at large had a successful year in 2022 with some of the biggest titles generating massive sales. Despite a YoY decline, investors remain optimistic and have invested billions of dollars in blockchain games. However, the current state of blockchain gaming has not seen the level of mainstream adoption that was expected. The decrease in unique active gaming wallets and the low percentage of live blockchain games highlight the challenges the industry is facing—good games take time, and good games coupled with new technology take even more time. Developers must focus on creating experiences that gamers truly want to play and use blockchain as an alternative technology to better the overall end-user experience. That being said, we are seeing many promising games in development, both in open development and in stealth. These games are directed by the best gaming experts from prominent publishers and well-established game studios. As the technology continues to evolve, including the development of new game-focused blockchains (such as Aptos and Sui), we expect these factors to converge and create a more vibrant gaming category with new, global player bases.
Disclaimer
This report is for informational purposes only and the reader should not construe any information or other material as legal, tax, investment, financial, or other advice. The reader acknowledges that Everyrealm has not given any investment advice, credit information or rendered any opinion as to whether any purchase or investment is prudent. To the extent any of the information contained in this report may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. All information contained in this report is believed to be correct and unbiased and Everyrealm does not accept responsibility for any loss arising from decisions made upon this information.
