A Conversation: What’s Next in Web3 Games?

The following transcript is from a conversation on the topic of NFTs in gaming, featuring Aleksander Larsen, Cofounder and COO, Sky Mavis/Axie Infinity; Gabby Dizon, Cofounder and CEO, Yield Guild Games; and Jonathan Lai, General Partner, a16z. This conversation took place during GDC 2022 at an a16z-hosted event.

Jon: Thank you, everyone, for joining us. I’m Jon. I’m a general partner at a16z. Today we are talking about topics that I know are near and dear, and on everyone’s minds here at GDC, which are NFTs, Web3, and the impact in games. So, I’m honored to be joined by two luminaries in the Web3 games industry. Aleks Larsen, the cofounder and COO of Sky Mavis, which is behind Axie Infinity, and Gabby Dizon, the cofounder of Yield Guild Games.

Let’s jump into it. Aleks and Gabby, we’ve heard a lot this past year about how NFTs and Web3 games are totally going to change the way people game, and the way the industry evolves. Let’s break it down into specifics. First, from a player perspective, what are some of the things that we can do today with NFTs or other Web3 primitives that were not possible before?

Gabby: Speaking as a player from a developing country, the Philippines has always been one of the soft launch countries for games because there’s a lot of people who like to play who are very active on the social side. But people weren’t always able to receive real-world rewards for the time and skill they spent in-game. Now with NFTs in games, people can own their assets, and then participate in the game economy. So, that’s been huge for people from my country and other developing markets that have been able to participate in game economies, such as in Axie Infinity. It has allowed them to own digital assets that have their own value in the form of NFTs, like Axies or tokens. It’s just really changed the way people look at games. I think almost 2% of Filipinos play Axie Infinity, so it’s been a huge game-changer for the entire population.

Aleks: I think one of the things we see in Axie is higher engagement, retention, and that people actually care more about these assets more than they did in the past when they were leased by the game studios. When we’re looking at what an NFT actually is, it’s a part of your digital identity. So, I truly believe that part of why we made Axie and Sky Mavis is that we want people to own their own data. And when you’re starting your journey online, especially younger people, a lot of that is in games. Whenever you play a game, I firmly believe that you should have something that belongs to you. And this is represented by an NFT.

That has meaning for many people. And it’s not actually only about the monetary value. It’s about the emotional connection that people have to these game assets. That in the past, you used to just disappear if the games shut down. Now, at least you have some tangible proof that, “Hey, I actually did this in that game.” That has meaning. So, to me, that’s really important. And I think that was never really possible before, at least in the same way that we see now. So while the money is what draws people in, I believe that they will stay for everything else that’s surrounding these, and making them unique.

Jon: It’s very interesting that one of the first things that you mentioned was ownership. The concept that these are digital assets that no one can take away from you. If the game shuts down, if Axie Infinity closes tomorrow, your Axies would still be in your wallet. You can trade them and they have some intrinsic value. A common pushback that we get from Web2 developers, of which there are many in the audience today, is that digital ownership might just be a policy change that Web2 game developers could make for an existing game. For example, in World of Warcraft, they could just allow people to trade accounts with gold. In Diablo, there was a real money auction house for a time period, where people could buy and sell weapons and armors that they found in game. If you could take it one level deeper, what is it beyond just the ability to own and trade your digital items that is special about Web3 and NFTs?

Aleks: It actually ties to what I said in terms of identity. Players are spending years grinding for game assets in games like World of Warcraft. The items they acquire have value to them, because of the time it took to get them, rather than y for the sales value. If they then quit the game but want to come back later to prove to someone that they did all these cool things it’s not certain they are there. The game developer could easily have deleted those game assets.

Gabby: Yeah. NFTs are digital property. It’s the digital analogue of owning a Magic card, or owning a baseball. You can play by different kinds of rules, or flavors of magic with Magic cards. You can also completely make up your own game around those assets. And the same thing goes with baseball. You can play it in a structured way with your friends, or you can play it in your backyard. Having NFTs transfers that concept of having digital ownership to the digital world.

Jon: And from a developer’s perspective, if you are building games today, how should they be thinking about NFTs and exploring Web3? We’re seeing a massive flight of game developers moving from the Web2 world into Web3. What is it that’s motivating them? What’s exciting?

Aleks: We speak to a lot of game developers and they’re curious. “How did this innovation happen? What is the 2-token model? What is SLP?” Truth be told, a lot of it is just about experimentation, and trying to figure out what this new technology enables. For game developers coming into the space, they have to view tokens really, really carefully. And I emphasize to many entrepreneurs, especially those who are trying to raise money by selling tokens, just how important these tokens are. Because the liquidity that players immediately have, or investors immediately have, is something that you as a game studio or developer will have to defend over time.
Rather than selling NFTs, just as a light cash grab, it’s much better to actually reward early community members, and tie them into your community by giving them NFTs. And I think that actually flips the script. Because the moment that you’re selling something to a player, they feel like you owe them something. But the moment that you give something to a player, they feel like they almost owe you something in return. And that feeling of gratitude is insanely strong. And that’s how you can actually start building some very core communities.

Gabby: My take on the difference between Web2 to Web3 is that you really start with the assets as the base layer—the NFT is your base layer for IP, for intellectual property. Instead of thinking of the game, and then thinking of what assets you can put there, you actually think of what is the base asset itself? Let’s take Yuga Labs, for example. You have the Bored Ape, and then from there, you get airdropped Serum. And then you can create a second NFT, which is the Mutant. So, you’re actually creating your world one-by-one from those assets. And when you have that base asset, you can think, what does it mean to create a three-month game experience for my community, or a six-month game experience, or a two-year game experience? Maybe an MMO that takes five years to build. All using that same base layer of assets to reward your community, not only with different experiences, but also different assets that they can get from holding your base asset.

Jon: I find Yuga Labs and what they’re doing with ApeCoin to be really fascinating, because I think it’s a great example of bottom-up game building. They’ve basically given the community a set of primitives, the NFTs themselves, and told them, “Hey, we want to build a universe around this.” And then they’ve given commercial rights, in many cases, to the NFT holders. How do you reconcile that with the traditional model of game development? When you have a centralized game studio, an organization like Sky Mavis, which maintains a creative vision that’s balanced in the game, to make sure that things are fun to play, there are no cheaters, and so on, do you feel like these approaches are at odds? How do they reconcile?

Aleks: The Sky Mavis approach is actually hybrid in a sense. When I’m looking at Yuga Labs, what are they doing? They’re giving away the commercial rights to use Apes in various things. Which is great–you can unlock creativity. As a game developer from the start, we are trying to progressively decentralize. At Axie, users can earn significant monetary value, but if they want to participate deeper in the ecosystem, they will need an agreement with us. We’re trying to make it so that the incentives are aligned with those who hold the underlying token, like the AXS, in our case. And the revenue that is generated, that either goes back to the players, or it gets put into our treasury, which then benefits the token holders.
Now, for ApeCoin, I have stronger opinions about that because I’m not bullish on currency tokens. I believe that tokens need to have a clear way for people to collect some kind of value, whether that be money streams or to govern the platform. Just using them for trade or bartering is not really something that I believe will make the price go up, which is what a lot of this is actually about. I would rather focus on, especially if you’re issuing a token, why do people want to hold this? Make it so that people want to hold your asset for a long period of time, rather than just having it as a currency.

Gabby: It’s really difficult to build a game. But there’s a lot of things that NFTs and Web3 communities empower. One of my favorite examples is RTFKT and CloneX, which just started as a bunch of NFTs. But then they dropped another NFT, Space Pods, which is like a physical 3D space that people can decorate. A lot of people have actually entered as creators, and are decorating their own pods, and even learning Blender to do so. So, having your community feel like, “I am a real owner of this economy, and I can co-create with the developers.” And of course, you can set some boundaries there. There’s a core game experience that only the developer can create.

Aleks: The structure.

Gabby: …. But if you can create a sandbox for the community to be really playful, and to have ownership, you’ll really see long-term loyalty that you won’t be able to see in any other kind of game.

Jon: One of the challenges that we have today in Web3 is that there just aren’t that many players. To use a personal example, two nights ago I beat Elden Ring, which is a best-selling premium console game. They recently announced that 12 million people played Elden Ring last month. To the best of my knowledge though, there isn’t yet a blockchain game with 12 million players cumulative, let alone on a monthly active basis. What do you think needs to happen in order to have an Elden Ring level of success in blockchain gaming?

Aleks: Right now in Axie, we have about 1.6 million daily active players. And that is without having the game on any app stores. You can’t download the game on iOS. The only way to get it on Android is to have the APK downloaded directly. Having said that, what happens when we can reduce the barriers of entry even more? And it’s not about earning a whole lot of money as a developer, it’s about giving something back because forever gamers have been taken for granted, and actually exploited. They’re being squeezed to the max, especially by mobile game studios.

Gabby: I’m a mobile game developer, by the way.

Aleks: Speaking as a mobile game developer right now, we went down that path and figured out that it’s actually not the game developers who are the worst. It’s the middlemen. It’s the way that you have to spend money on ads. Now, what’s possible with blockchain games is that you can go to market directly to the consumer by dropping tokens, which is why Axie Infinity has been able to get so many users in such a short period of time. We went from 36,000 to now 2.5 million by the end of last year. By reducing the barriers even more, people are able to play for free but still experience the magic that’s surrounding Axie. That’s what it’ll take to get to those numbers.

Gabby: I represent how players are now engaging with gaming guilds, so I’ll talk about that. We started YGG on top of the Axie community. The community figured out that you could actually lend NFTs to other people without giving wallet access away, basically, by this kind of two-login system. If I gave you access to a username and password, without giving you access to my blockchain wallet, you could play the game, experience the game, and earn value without having to trust the person with your assets. So, we did that starting 2020 and now this has really blown up with Axie Infinity in the Philippines and other parts of the world. We are kind of set up as a player community, or run as a DAO (decentralized autonomous organization) that is now purchasing assets of different kinds of games. We’ve bought assets in over 40 games now. Whether it’s a card game, or strategy, or RPG, we now have the assets for players to come in and enjoy these games, and earn it without having to buy an NFT to start. Of course, if they like it a lot, then they might buy something afterwards.
We’re seeing now that YGG has grown tremendously, a lot of it in developing areas such as Southeast Asia, India, Latin America, where people are playing these games and earning supplemental income. But I think we’re going to see an evolution similar to a World of Warcraft guild with a bank account. The guild itself may buy a castle or a kingdom, and it will produce buildings. And people will come in and harvest resources. The competitive people will be fighters that will be doing PvP against other people. So, having that kind of guild layer on top of digital assets gives you new gameplay primitives to play with that you’ve never seen before.

Jon: Gabby, on the topic of DAOs, maybe just one contentious question… have DAOs today basically become web3 game publishers? If you’re working on a new Web3 game, you want YGG to take a look at the token design, to go through the game design docs and sign off on it. And that way, your community, your scholars and scholarship managers, will all know that this is a legitimate project and they should put their time and money behind it. Do you think there is a world where DAOs actually become too powerful in that perspective? Because they’ve actually become gatekeepers to future Web3 games and dApps in general, even outside of games. How do you think about that as you’re structuring your company and growing?

Gabby: That’s a really good question. I think the way to win and create value in Web3 is very different from how it was before. Before, if you had something proprietary, you wanted to gate it and charge for it, which is why Facebook and Google grew really big on top of their algorithms. In Web3, the way you grow is by compounding network effects, which means that if YGG comes in and helps a game launch, helps with a token design, and buys assets, we’re not going to gatekeep and not let other guilds in. We’re actually setting the design so that hundreds of other guilds can come in, enjoy the game, and have a thriving economy. We actually reduce the network effect, and therefore the value of what we’re doing, by gatekeeping. This is really the core difference in creating value between Web2 to Web3.

Jon: One final question for each of you, which is that there are a lot of Web2 developers in the audience who are crypto-curious, and want to learn more about Web3. What general advice would you have for them? How should they get started?

Aleks: I would make sure that fundamentally the game that you’re designing is fun. That it can benefit from having an open or player-owned economy. And that the IP that you’re trying to create has the potential to grow outside of just being that one thing. So, truth be told, NFTs are primitives that can be used as building blocks.t. The experiences are unlimited, if you do it right. But you need to start somewhere, so I would say start from the fundamentals and go from there. Don’t get dragged into all of the hype around raising rounds before you’re ready.

Gabby: Understanding the difference of the value of community in Web2 to Web3 is just so crucial to creating your game. Community has always been valuable in games, right? But in Web3, they can actually make or break your game. So, join a DAO, join the community, join a guild, and vote on some proposals. Or experience the game from the perspective of a DAO, which really gives you an idea of how powerful the network effects are of having digital assets that are owned by your player community.

Jon: Thank you, everyone, for joining us.

 

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