A data-driven overview of the crypto gaming landscape, growth metrics, prominent themes, and more.
Quick Take
The GameFi market experienced a tumultuous year along with the broader market as its market cap fell 79% YTD to $5.2 billion from $24.5 billion early this year.
In response to the drawdown of the GameFi market, several big guilds decided to shift their business model from scholarship providers to something more sustainable, forcing them to seek alternative sources of revenue.
The metaverse market had a strong first quarter of 2022, with NFT worlds gaining over 500% and Somnium Space gaining 34%. However, its YTD performance exhibited a dismal 90% decline.
State of Crypto Gaming in 2022
Crypto gaming, one of the most popular crypto sectors, did not fare as well in 2022 as it did in 2021. In 2022, crypto gaming-related tokens and NFTs experienced a sharp price decline of over 90%. Nonetheless, the Web3 gaming sector still experienced myriad developments – including the launch of ImmutableX as the global liquidity orderbook for gaming assets, Yuga labs' launch of its metaverse Otherdeeds, and games like Blankos Block Party and Grit making their first appearances on Epic Games' stores.
In 2017, CryptoKitties generated a lot of buzz by allowing players to buy and sell digital cats using blockchain technology. This was followed by the release of Axie Infinity in 2021, which created a new P2E trend in gaming. We predict that the next big thing in crypto gaming will be less about earning and more about revolutionizing the gaming experience. Although this is an obvious trend, it is still challenging because Web3 games are competing in a crowded market along with existing Web2 games (i.e., traditional video games).
The next gaming evolution that offers novel experiences is likely to be initiated by on-chain gaming. One of the expectations is that on-chain gaming will spawn a strong decentralized identity beyond the typical DeFi activities or asset holdings – for example, one's voting will be weighted according to one's performance within the game and may lead to token-less governance within the game.
Types of Crypto Games
Before diving into the crypto gaming market, it is important to distinguish between different definitions. The most common definition is "crypto gaming," referring to any game that utilizes blockchain technology in any way, with or without earning mechanisms (i.e., receiving tokenized in-game rewards upon playing). Additionally, the term "crypto gaming" is also used interchangeably with "GameFi," "blockchain-based games" and "Web3 games." There are currently two main types of crypto gaming:
Fully on-chain games
On-chain games are those whose game logic is stored on smart contracts, with every in-game action triggering a transaction and incurring gas fees. Consequently, the more active a game is, the more costly it is for the players. For instance, the increasing popularity of Crabada's idle game caused network congestion on Avalanche C-Chain. They migrated to their own network, Swimmer Network, to alleviate the scalability issue.
Thus, on-chain games are experimental, and many live on-chain games (e.g., DarkForest, Conquest, and Mithraeum) use Gnosis Chain as an alternative for cheaper transactions. Nevertheless, there has been a recent emergence of on-chain gaming built on StarkNet – an L2 that is expected to handle much more complex computation and have higher transaction throughput.
Off-chain games with on-chain real monetary trading
In contrast to on-chain games, 99% of the current blockchain-based game are hosted off-chain such as on trusted software programs like AWS, Unity, or Unreal Engine. These games mainly use blockchain technology to develop their own "real monetary trading" (RMT) venue, so that they can monitor its direct impact on their games.
RMT refers to in-game assets sold for real money. In Web2 games, RMTs are often done in a gray market (i.e., unofficial P2P trading marketplace between players) and are forbidden by most game developers as they disrupt an otherwise controlled game experience and economy.
With on-chain RMT, Web3 game developers can internalize the take rate of selling or minting their game assets. For instance, Axie Infinity charges 4.25% on its marketplace, whereas StepN and Illuvium charge 1% and 5%, respectively.
Similarly, on-chain RMT supports the development of NFT scholarships, which let guilds rent their game assets to other players in a trustless manner. On the flipside, emerging concerns might include smart contract risks, as shown by the $600 million hack of Axie Infinity's Ronin bridge.
Crypto games with on-chain RMT are often referred to as GameFi. GameFi refers to blockchain-based gaming that combines gaming elements with financial concepts. It offers digital asset ownership in addition to monetary incentives, thereby revolutionizing the relationship between players, game developers, and game publishers. From this point forward, Crypto games will be referred to as GameFi, as these games constitute the vast majority of crypto games in 2022.
As of this writing, there are 1,873 Web3 games, a 34% increase from January 2022. 40% of these games exist on BNB Chain, 32% on Ethereum, and 16% on Polygon. Interestingly, the market share of BNB Chain and Polygon grew since January, while Ethereum's shrank. Note that games from game-specific chains are excluded due to a lack of time-series data.
Figure 264: Share of games by chains in 2022 Source: Footprint Analytics
If those games are included, the total number of Web3 games would be 2,089. The marginal differences mean that those game-specific chains (e.g., WAX, ImmutableX, Enjin, Gala Games, Catheon, and MarbleX) command less than 11% of the total market share.
Figure 265: Share of games by development status in 2022 Source: Playtoearn.net
Only 31% of all GameFi projects are now playable, while 64% are still under development. This is in line with the expectation of a long game development cycle of 3 to 5 years since most GameFi projects only received funding between 2021 and 2022. See the Digital Asset Investment section for more information on NFT/Gaming funding.
Figure 266: Share of games by devices in 2022 Source: Playtoearn.net
The bulk of GameFi projects (64%) choose web browsers to host their games, followed by Android (37%) and Windows (33%). Web browser as the preferred platform is likely because it is easier for players to connect their crypto wallets and self-custody their game assets while engaging with the game's RMT services (e.g., trading, minting, and staking).
Figure 267: Share of games by genre in 2022 Source: Playtoearn.net
In terms of game genres, many games are centered on player-versus-player (PvP), action, adventure, strategy, and RPGs, which correspond to the most populargenres on the Web2 market. Note the recent hype around Web3 games such as move-to-earn (e.g., StepN, Genopets, and Sweatcoin) and auto-battlers (e.g., Axie Infinity, Crabada, and Illuvium) are niche compared to other genres, accounting for fewer than 4% of all GameFi projects.
Figure 268: Top 50 market cap performance by crypto sector in 2022 Source: The Block Research, CoinGecko
GameFi Market Overview
The GameFi market experienced a tumultuous year along with the broader market as its market cap fell 79% YTD to $5.2 billion from $24.5 billion early this year. The decline is consistent with the broader cryptocurrency market, as the top 50 cryptocurrencies and DeFi have declined 65% and 79% YTD, respectively.
As of writing, the GameFi market accounts for 25% of DeFi or 0.8% of the total cryptocurrency market capitalization. It is 35 times smaller than the global gaming industry, estimated to be around $184 billion in 2022.
Figure 269: Top-50 tokens volume performance by category in 2022 Source: Playtoearn.net
Figure 269 illustrates the MoM volume growth of the three markets over time. The GameFi market saw decent volume growth in Q1 2022 before declining in the subsequent months. Note that all three markets increased in volume in November after months of sell-offs.
Figure 270: NFT sales by chain in 2022 Source: The Block Data Dashboard
Total NFT sales volume in November recorded this year's low at $390 million, a 93% drop from January's $5.4 billion. 79% of November's volume occurred on Ethereum, followed by Solana (13%) and ImmutableX (4%). Meanwhile, BNB Chain recorded only 0.7% despite having the highest number of games.
Token Sustainability
Even though the success of a GameFi project does not solely hinge on the short-term market performance of its game tokens, it affects its monetary-motivated players. Figure 271 compares the MoM price performance of five game-related sectors: (1) game index tokens, (2) selected popular games' governance tokens, (3) metaverse-related tokens, (4) move-to-earn governance tokens, and (5) gaming infrastructure tokens.
At first glance, Q1 2022 has a good performance prior to sell-offs from April onwards. Although almost every token saw a relief bounce in July, the price growth did not sustain and continued to slide. Overall, most tokens across subcategories saw a price drop between 80% and 99%, except for BinaryX, a free-to-play, web-based RPG game on BNB Chain, which saw its native token outperform the market by 120%.
Figure 271: MoM price performance by game-related token subcategory in 2022 Source: CoinGecko, The Block Research
Our initial research did not find any clear reason why BinaryX's token BNX outperformed other gaming tokens. With its static UI/UX, the game seems primitive and resembles an early 2000s web game. Simply put, the game offers an unremarkable gaming experience and has less than G,000 daily active users.
Tokens that saw their value drop over 90% are unlikely to witness their previous-high valuations again. One of the reasons is the inherent economic flaw of tokenized assets that can be explained via the Mundel-Fleming trilemma. According to the trilemma, an open market can only control two of the three aspects of free capital flow, fixed exchange rate, and sovereign monetary policy.
Figure 272: Impossible Trinity for gaming economy Source: The Block Research
Side A: There are currently no Web3 games on this side because having a fixed exchange rate requires the in-game currency to be pegged to a certain external value, such as stablecoins. The problem is that the game developer will lose control of the game's monetary policy (i.e., the token supply) and will no longer be able to mint tokens at will, resulting in a budget constraint in development funds to bootstrap the initial growth.
Side B: All crypto games with tokenized assets are on this side because they can have both free capital flow (e.g., NFT sales and staking) and autonomous monetary policy (e.g., minting of in-game rewards). However, they will be required to forgo fixed exchange rates of in-game currencies, which are the bane of token economic sustainability.
In 2022, the value of tokens in numerous P2E games released in 2021 fell by more than 90%, indicating their demise. Most of them were designed to have a net inflationary effect on their in-game rewards to attract initial players. For instance, players are guaranteed to receive $200 in-game rewards if they purchase a $100 NFT game asset, resulting in a $100 profit. The situation worsens when the net $100 reward is cashed out instead of being retained within the game's ecosystem, causing economic leakage. This occurred in each and many P2E games, such as Axie Infinity and StepN.
Some may argue that economic leakage occurs when a game is not "fun" to play, though we contest that "fun" is difficult to quantify and measured. Even if a game is rated as the most enjoyable by a large number of players, a mental shift is inevitable among those who believe they can earn "money" by participating in an open-economy game. Therefore, regardless of "fun," a game with a poor economic design will suffer in the long run.
Side C: This aspect is inapplicable to Web3 games because the introduction of tokenized assets automatically subjects a Web3 game to the dynamics of the open market. Thus, Side C is the pinnacle of Web2 game monetary governance, as seen with Roblox sets a price for their ROBUX in US dollars.
Other Web3 Gaming Trends in 2022
Pivot of GameFi Guilds
Numerous gaming guilds were formed in response to the Axie Infinity craze that defined 2021, and many received significant funding from big investors. Some of these guilds released their native tokens that can be traded as part of their equities, or as a means of obtaining access to their revenue stream, or used within the guild ecosystem.
The prices of guild tokens dropped significantly in 2022, dropping up to 98% YTD. In most cases, a guild's business is to earn higher revenue from in-game rewards than its expenses. Hence, when the in-game rewards they earned dropped in price throughout 2022, guilds experienced high operating expenses and inventory losses.
Figure 273: Price performance of guild tokens in 2022 Source: CoinGecko, The Block Research
Figure 274: Quarterly YGG's number of scholars Source: YGG Q3 2022 community update
The situation for the guilds deteriorated further as some scholars may no longer find the in-game rewards appealing enough to continue putting hours into Web3 games. Yield Guild Games (YGG) saw a 32% drop in its number of scholars from 29,548 in Q1 2022 to 20,213 in Q3 2022.
Thus, it became clear that guilds that hinge on in-game rewards as their business model will not survive in the long run and thus forcing them to seek alternative sources of revenue. To that end, several big guilds pivoted to a different business model, mostly focusing on investing. More specifically, GuildFi and YGG begun investing in other gaming projects and infrastructures. Meanwhile, Merit Circle ceased its scholarship services and transitioned into becoming a venture capital fund, game publisher, and incubator. These changes will allow guilds to help their scholars while also improving the game environment for all players.
Figure 275: Treasury breakdown of GuildFi and Merit Circle Source: GuildFi mid-year report 2022, Merit Circle treasury dashboard
Both GuildFi and Merit Circle have a treasury of over $100 million, but GuildFi has a more prudent allocation to stablecoins (64%) than Merit Circle. Meanwhile, Merit Circle allocated a large portion of its treasury to volatile tokens (57%), such as BTC, ETH, and game-related tokens.
Despite never updating its financial statement since December 2021, YGG claimed in its Q3 2022 community update that it had a two-year runway. Its public wallets showed a total asset worth less than $25 million, including its NFT holdings, much lower than what it reported back in December 2021 of over $845 million.
X- to-earn
As Web3 gaming evolved from Axie Infinity's P2E game, developers began to create novel gameplay mechanics to attract diverse audiences. For instance, StepN, Sweatcoin, and Genopets introduced the gamification of exercises, known as move-to-earn, with a bigger target audience than just gamers. Since then, numerous Web3 developers created various variants of "X-to-earn" projects, including learn-to-earn projects such as Hooked and Rabbithole and sleep-to-earn projects such as Pacer.
StepN's success hinges on the gamification of its fitness app and the incorporation of in-game rewards via the move-to-earn mechanism. As the market leader in move-to-earn, it attracted more than 3 million monthly active users at its peak in April, resulting in a high trading volume of its Sneaker NFTs, which generated $149.3 million of revenue in H1 2022. Despite the impressive revenue, StepN's tokenomics has proven unsustainable as their token supply has continued to become net inflationary in the absence of sufficient user demand.
Free-to-play Web3 Games
Following the failure of Axie Infinity's SLP token model in 2021 and spur of purchasing NFTs first before one could play a Web3 game, "P2E" gained a negative public perception and induced poor brand imagery among players.
As a result, many games pivot towards the free-to-play model to lower the high entry barrier of the current iteration of GameFi. Free-to-play examples include Axie Infinity with its Axie Origin, Thetan Arena, Illuvium: Zero, Skyweaver, and EV.io. Though it remains to be seen whether this shift would solve the economic woe of Web3 games.
Thetan Arena, a free-to-play multiplayer online battle arena on the BNB chain, boasts over 25 million active users. Yet, only 134,358 holders of its in-game NFTs, Thetan Heroes. In other words, fewer than 0.5% percent of its gamers contributed to Thetan Arena's in-game economy.
On-chain Games
The current wave of Web3 games appears to be stifled, with the vast majority offering the same gameplay as Web2 games, albeit with on-chain RMT. Consequently, we anticipate that the gaming experience will remain unchanged even with tokenized assets.
The Block Research believes that games that may create a novel and unique experience are on-chain games because they are built on top of new technology and infrastructures, such as zk-SNARKs, a form of zero-knowledge proof that can prove the correctness of complex transactions cheaply.
Figure 276: List of known on-chain games in 2022 Source: The Block Research
That said, such technology and infrastructure are still in their early stages, and thus there are only a few on-chain games. Figure 276 showcases 40 existing on-chain games.
While it remains to be seen, developments and activities on on-chain gaming can spill over innovations, such as tokenless governance, more transparent and unique gaming metric, a more immersive gaming identity, and a strong presence of a decentralized metaverse that is never seen in Web2 gaming.
Metaverse
The term "metaverse" became one of the most overused words in 2022 due to its wide variety of interpretations. The Block Research defines "metaverse" as a unified experience between digital and physical realities. Numerous Web3 developers are currently utilizing blockchain technology and digital assets to create a more immersive and meaningful metaverse, ushering in the next generation of the digital economy. Nonetheless, we may be a generation too early for blockchain-powered technology, as the demand for such an experience stems only from a small user base.
In reality, the Web3 metaverse industry lacks matured infrastructure, compelling content, and user-friendly applications. All of these increase friction in accessing the metaverses, making it less appealing even for those early adopters, further preventing widespread adoption of these virtual worlds.
We identified two types of Web3 metaverse:
Social metaverse is a virtual world that simulates the real world and is primarily used for social interaction. Social metaverses mainly provide landowners and visitors with soft benefits, instead of hard benefits.
Soft benefits are based on improvements in aesthetics and status that have little to no impact on player experience. For example, a landowner can decorate their lands with castles and pets to create a virtual space where friends, co-workers, and other communities socialize. In contrast, hard benefits grant players rewards with in-metaverse utilities. For example, a player can purchase stables to store their in-game horses.
Therefore, visitor retention in social metaverses is highly dependent on landowner-created content. Some metaverse, like Decentraland and Voxels, may suffer when their holders become land squatters instead of producing meaningful content. To avoid this, The Sandbox is curating its content experience by partnering with large brands with strategic land locations (e.g., Binance, Snoop Dogg, Gucci, and Adidas), encouraging future visitors to explore and participate in its virtual world.
The Sandbox, Decentraland, Voxel, and Somnium Space are well-known social metaverses, also called the Big4.
Gaming metaverse is a virtual world where players are given a map and a set of objectives to achieve. The experiences in gaming metaverses center around the lands and surrounding resources. For example, it is more strategic to purchase lands near resource areas such as water and gold mines so that players can loot the items. These instances are hard benefits as they change the players' experience.
If successful, the virtual economy on gaming metaverses is anticipated to be more robust than social metaverses as it has clearer functionality, objectives, and relationship with all players. Social metaverses are much less sticky than gaming metaverses and more prone toward land speculators. For example, many of Decentraland's lands were left unbuilt for 4 years.
Market Overview
In 2021 and early 2022, many social and gaming-oriented metaverse platforms emerged. On a fully diluted basis, the top three metaverses (i.e., Otherdeeds, The Sandbox, and Axie Infinity) are valued at roughly between $230 million and $340 million. However, these valuations appear to be on a speculation basis as these three metaverses are still in the development phase, with The Sandbox and Axie Infinity being in development since 2019.
Figure 277: Valuation of 7 popular metaverses by market cap and fully diluted valuation as of end November, 2022 Source: The Block Data Dashboard, The Block Research, OpenSea, CoinGecko
The metaverse market had a strong first quarter of 2022, with NFT worlds gaining over 500% and Somnium Space gaining 34% in land price. However, its YTD performance exhibited a 90% decline.
Figure 278: Land price performance across popular metaverse in 2022 Source: The Block Data Dashboard
Although all metaverse platforms experienced land devaluation, NFT Worlds suffered the most as it lost 98% from its ATH. This was due to Mojang's new policy banning NFT usage within Minecraft, the game platform NFT Worlds used to build its metaverse. NFT Worlds has since shifted its focus towards developing its own engine, MetaFab.
Figure 279: Monthly trading volume on popular metaverses in 2022 Source: Dune Analytics (@metaland)
The decline in the hype surrounding metaverses is reflected in the monthly volume traded on these popular metaverse platforms, which decreased by 96% from its ATH of $49.2 million in January to this year's low of $2.0 million in November.
Figure 280: Volume dominance of popular metaverses in 2022 Source: Dune Analytics (@metaland)
At the start of 2022, The Sandbox enjoyed a high market dominance at 65% as it conducted aggressive land sales and auctions towards the end of 2021. Of its 21 land sales in 2021, 60% were done in Q3 and Q4 2021. In contrast, there had only been 5 land sales in 2022, leading to low trading volume. The Sandbox's market share shrunk from 65% to 54% YTD.
Meanwhile, NFT Worlds’ market share fell sharply to less than 10% following the Mojang bans on Minecraft. The only metaverse project which grew its volume dominance this year is Decentraland, which more than doubled its share from 12% in January to 33% in November.
Are We Too Early?
The primary distinction between the physical and the virtual worlds is that lands in the former are naturally scarce. Meanwhile, the latter is by arbitrary rules set by the metaverse developers. Users will have to trust the developers' claims that the land supply is fixed or follows a known inflation schedule.
The land supply in the metaverse has been widely discussed by developers and users, but the question remains: is fixing land supply the right thing to do? If it is fixed, then how do users ensure that the project developer will not release new collections of lands that devalue existing ones? At the same time, if it is not fixed, then this raises the question of how a developer can implement a plan that does not lead to the excessive dilution of existing landowners' holdings.
For example, Yuga Labs recently released Otherdeeds, a metaverse airdropped to its BAYC and MAYC holders with a fixed supply of 200,000 lands. However, it does not mean it will not release another series of metaverse for its other NFT collections like CryptoPunks and Meebits.
Figure 281: Total land supply across popular metaverses Source: Etherscan, Nansen, public documentations
The overall number of unique landowners in the metaverse increased marginally throughout the year, except The Sandbox and NFT Worlds, both of which saw a reduction by 4%. Meanwhile, Decentraland and Voxels experienced an increase in unique holders by 34% and 26%, respectively. Although The Sandbox has the highest number of holders, one must also consider the supply size of each platform. A metaverse with a large land supply will naturally have more holders.
Figure 282: Number of unique holders for each popular metaverse in 2022 Source: Dune Analytics (@metaland)
To better understand the ownership concentration in each metaverse, we examine their Gini coefficient, which ranges from 0 (perfectly distributed) to 1 (high ownership concentration). Additionally, lands in each metaverse are stratified according to supply and estimated market capitalization based on floor price.
Figure 283: Gini coefficient of popular metaverses relative to its current supply and market cap
Source: The Block Research
The Gini coefficient shows that most popular metaverses are skewed toward high ownership concentration. Otherdeeds has the lowest at 0.58, while The Sandbox has the highest at 0.96. This makes Otherdeeds has the most distributed and Somnium Space comes second at a score of 0.61.
Figure 284: Ownership concentration across popular metaverses Source: Dune Analytics (@metaland), Nansen, Etherscan, The Block Research
Figure 284 tabulates the ownership concentration in different metaverses. In most cases, 30% of landholders of each metaverse control 90% of the total land supply. Meanwhile, 40% of Otherdeeds holders control 80% of the land supply.
Outlook on Gaming & Metaverse in 2023
Web3 Gaming SuperApp for Mass Adoption
The adoption of blockchain technology in the gaming industry is hampered by a lack of strong infrastructures, which prevents developers from innovating and scaling their games. The major problem for developers working with blockchain technology is not so much about developing games themselves but integrating blockchain infrastructure into their games.
A gaming project that wishes to leverage Web3 infrastructure often needs to build a browser-based game. Web browsers are not designed for high-quality games, which can limit the gaming content and thereby create inferior player experiences. Even if the game has its own desktop client, on-chain activities will still need to be conducted through web browsers. Otherwise, the game will need to allocate more resources to build its own blockchain infrastructures such as in-game wallets and marketplace. Thus, various Web3 infrastructure projects are developing an all-in-one platform to solve the issue.
1. HyperPlay is a game launcher that aims to solve interoperability issues between gamers and developers. Developers can focus on building their games without having to build the infrastructure needed to support them. Meanwhile, players are able to install and connect their wallets to the same platform, keeping track of all their assets and tokens in one place. For example, players can exchange items between games, which might be useful for someone who wants to swap their sword for a shield in a different game.
2. Sequence is a smart contract-based wallet that can be used with dapps and games. It allows multiple private keys to control the wallet rather than just one private key as most Ethereum wallets do. The multiple keys add extra security because more than one of these keys would need to be compromised for the wallet to be compromised. Additionally, one can modify the wallet's smart contract logic to meet their needs and thus have multiple accounts under one wallet.
Smart-contract wallets are proposed solutions to the problems of Ethereum wallets, which are externally-owned accounts (EOAs). An EOA is an address on the blockchain controlled by a private key and derives a public blockchain address from it. The issue with EOAs is that they cannot be programmed to execute custom logic. Additionally, you cannot prevent your fund from being drained if your private key is compromised. Thus, many blockchain developers – including Vitalik Buterin – proposed switching Ethereum wallets to smart contract-based. Account abstraction is the process by which EOAs are replaced by smart contracts.
3. Cartridge is a gaming console that enables users to interact with and sign various on-chain StarkNet games. It also functions as a session key, allowing users to pre-approve a set of rules during gameplay. The pre-approvals transactions are an issue that is most prevalent in on-chain games, where players are bombarded with transaction approvals for every in-game action.
Metaverse Development Remains Slow
Recent interest in VR and metaverse surged as Facebook rebranded itself as Meta in late 2021. Hopes were high that VR would provide a more immersive avenue for digital economies and be powered by tokenized assets, including NFTs and cryptocurrencies.
Web3 metaverses have yet to prove themselves having superior experiences than their Web2 counterparts (e.g., Roblox and Minecraft). It is clear that land scarcity caused irreparable damage, now some of these Web3 lands being gatekept by land squatters, thereby creating pockets of empty land. This is evident upon logging into Decentraland, Somnium Space, or Voxels.
On the other hand, The Sandbox tried to mitigate the "ghost town" effect by partnering with various Web2 and Web3 brands, although it has yet to fully launch its virtual world to the public. If The Sandbox proves to offer a more enjoyable experience than Roblox or Minecraft, Web3 Metaverse may experience widespread adoption.
Appendix: Timeline Event Related to Gaming & Metaverse in 2022
