Bankless 85 - The Crypto Gaming Revolution | Arianna Simpson
Primer: In this episode of Bankless podcast, David Hoffman and Ryan Sean Adams invited Arianna Simpson, the general partner from a16z, to talk about the crypto gaming space in general. She shared her thoughts on the play-to-earn phenomenon, the total addressable market in the space and also what Yield Guild Games is all about. Learn more about crypto gaming from her vast experience in this field by reading the summary.
Arianna Simpson
Introduction
General partner from a16z Andreessen Horowitz
Before joining a16z, she founded Autonomous Partners, an investment fund that focuses on cryptocurrencies and digital assets
Recently named in Fortune's 40 under 40
Her speciality is in crypto gaming
Why is Arianna excited about gaming and why now?
In the last few years, the whole crypto space was about building the core infrastructure that was necessary before consumer-facing and application layer experiences, including games, can come in to build on top of that
While the building of infrastructure can never be finished, it had reached a level of functionality to allow the building of other things
Crypto has a high barrier to entry and it can be fairly technical but gaming is a lot more approachable and is a fun way to introduce people to crypto
Allows more mainstream people to join in and experience all the positive things about the crypto space, and perhaps they will percolate out into other parts of the crypto ecosystem
Infrastructure
Is there other infrastructure that allows the crypto gaming sector to bloom?
A massive part of the infrastructure issues is still about scalability
The problem is tackled on both layer 1 and layer 2
"When I minted my YGG badge, I think I ended up paying nearly $100 [in gas]. That's kind of outrageous. And, you know, I would certainly not be willing to spend that much as a transaction costs for most things. But, you're like, oh, it's for the development of the ecosystem and so you just kind of go along with it."
- Arianna Simpson
E.g. Flow blockchain from Dapper Labs is designed and optimised around gaming and entertainment use cases
E.g. Polygon has taken off and allows a number of games to run on it
Other considerations might include speed and low cost
To make crypto gaming mainstream, the cost will have to come down
Total addressable market (TAM)
What is the TAM of crypto gaming?
TAM is all the people on the planet
Sounds crazy but is realistic considering more people are online
There is a huge demand for throughput on blockchains and it is rising very fast
E.g. The high demand for Ethereum leading to high gas prices
Hard to forecast demand until the barrier to entry are reduced
E.g. Axie growth shot up exponentially after they switched to their own Ronin side chain with zero transaction costs
As the barriers to entry continue to fall, there will be more people having more experiences with crypto
Lowering barriers to entry include scalability solutions (e.g. L2) and lowering transaction costs
Ryan shared an analogy with cell phone adoption in the past
In the 1980s where cell phones are like bricks, nobody thought that everyone is going to have a phone
But as the phones get more compact and the costs goes down, it went mainstream and now everyone has it
The exponential growth of Axie caught the team by surprise too - a 10-year overnight success
The team worked for years to build their vision when it was not popular
Did it without any external validation or short term benefits for a very long time
Crypto Gaming
A short history of gaming
Started off with a CD where you had to pay an upfront cost to buy the game and then you play it
Evolved into a freemium model where the game was free but you had to buy items or skins. Players do not really own these assets
Currently, the cost of joining a game goes negative because the game is paying you to play and you are earning real crypto assets that are yours
"In the early days you'd have a programme that was written in the back of a magazine, and you would literally have to type in the entire thing to download something or you eventually could get a CD mailed to you. It was kind of the honour system where you would either mail cash or a cheque and then you would get a game in the mail. And I was just like, oh my god, people used to be so good. I still believe they're good."
- Arianna Simpson
How important is it for gamers to own their assets in the game?
Critically important for games, as well as the whole of crypto in general
In the crypto space, power & wealth are reclaimed from platforms that have historically been extractive. These are then distributed back to the community that are actually participating in the ecosystem
This is the first time we have found a way to make the economics of this work by incentivizing people
Here we have a new system where we can spend time and effort to have fun and also participate in the upside of the community
Playing games doesn't just become fun, it also becomes work because it can earn an income
A new generation of games
In the past, players are not allowed to cash out and are held captive, because the thinking is that they will leave the game and value will leak out
In reality, some value does leave but by letting players be willing participants and not captively held, they will be more loyal and the total value of the ecosystem will still be higher
The new generation of games are not coming from a place of fear
More and more game studios are having crypto as a significant part of their strategy - from 0 a year ago to almost all currently
The transition of traditional game studios
The bigger triple-A studios are moving slowly but they cannot ignore crypto as part of their strategy anymore
For bigger organizations, it is very hard to reconfigure and transition the whole business model
Politically challenging to propose or orchestrate because it is hard to kill the golden goose that had been responsible for the success of the firm for so long and change to a brand new strategy
The transition involves either building up themselves, partnering with someone else or buying others
Most of the strategies are focused on partnering and buying but have not seen much happenings yet
Players will eventually demand these traditional games to move towards player-owned assets to have a stake in the games. If not, they will leave
Eventually, gaming studios will have to cave in or risk losing their player base
The imperative to act might come only when there is a real existential threat, but might be too late by then
Already seeing the beginning of the transition period and it is happening right now
Crypto is fast becoming a way of enabling and powering certain things
Eventually, crypto won't have its own category as more and more things are reconfigured to include it
Similar to how there is no such thing as an Internet fund now, unlike during the dot com era because Internet is just everywhere
Player acquisition in play-to-earn games
Arianna highly recommended reading Masters of Doom by David Kushner, which talks about the history of games
Until very recently, the majority of games are dependent on getting people to read your ads and download the game
If you can't do that in a cost-effective way e.g. Facebook changed their ad rules, then it will create problems for continued user growth
For play-to-earn games, more than 90% of the players are referred by other players in the game, so there is organic growth
Due to these games improving the players' life, they want to talk about it and share with others too - it becomes a positive force and that is what drives organic growth
"You want to tell people about it because it's improving your life in a meaningful way. And so you want your friends and your neighbours to also be able to do the same. I think that really turn things around. Games are no longer like something that you try to get your kid to stop doing. But it's actually, you know, a really positive force."
- Arianna Simpson
The scholarship guilds for Axie Infinity is one such force that is providing a valuable service for the game economies
Game Economy vs Real Economy
Different types of participants perform different roles in the economy and are willing to contribute different things
If you have more time than money, then you might be willing to spend your time playing a game to earn tokens to sell to others in the marketplace
If you have more money than time, then you might want to buy from others to save yourself some time or engage someone to do the work for you
Seldom do people think of the game economy as being parallel to the real-world economy
Game economies have different growth rates and the economy expands and contracts at different times, just like real-world economies
There is a real risk that when new elements are added to the game, they might end up causing unanticipated and adverse economic effects
As such, many of the game studios actually hire real economists to help them navigate some of the complexities found in the game economies
Is play-to-earn a Ponzi scheme?
No, it is not
The key part of the equation for the game to succeed is that it must remain fun to play because it depends on the willingness of the players to put money in to buy new things
This is similar to many other games out there
If for some reason, players stop wanting to buy new things, the world economy will collapse, so we just have to make sure that there is enough desire for players to continue investing in the game for fun
In the digital metaverse, there are so many things you can do to enrich the game playing experience so that people can continue to play
Esports with a financial layer added
There are some happenings between the intersection of crypto and esports but not as big as other areas in the space
Keeping an eye on it but feels that it had not reached its potential yet
Crypto Gaming As A Form Of Work
About Yield Guild Games (YGG)
YGG was started by Gabby Dizon, Beryl Li and the pseudonymous Owl of Moistness
Mentioned that the picture taken of the trio is the best ever
Had a fun time trying to explain to the compliance team and to their investors
But this is the essence of the crypto space
During the pandemic, Gabby saw that a lot of people losing their jobs
Realized that he could loan out his axies from the Axie Infinity game to other people so that they can earn SLP tokens that can be converted to fiat currency
The starting upfront cost to front a team of 3 axies can be too high for most people - above $1000 USD
"Oh, yeah. Oh, yeah. It's funny. You just kind of have to roll with the punches in crypto. I love it. I mean, I think this kind of stuff to me is just like the essence of the space and why I say that I'll never be able to do anything else in my life. Because what am I gonna do? Like, sell bonds after this? Come on now."
- Arianna Simpson
YGG will take a cut from the earnings of these players, called scholars, while a big bulk of it will be retained by the scholars
The model was so successful that some of these scholars ending up giving scholarships to other people because they were able to buy their own axies
YGG helped many people get through the pandemic and some of them earned even more than before
Crypto gaming is a stepping stone for many people to have access to financial services that they might otherwise not have access to
Bot farming in the game economy
Definitely at the top of the mind for game builders but the problem is not insurmountable
Part of this can be solved by technology and by adding enough complexity to separate those who are solid participants in the community and those that are just extractive
The other part is that there will be other games with models that are similar but allows the problematic areas to be solved
This means that players can leave to play other games if nothing is done by the developers to address the community's concerns
The developers will be very willing to make sure things are kept to a state where everyone is benefiting
Innovation & Creativity
Crypto tends not to take itself so seriously, which allows for innovation and creativity that would be difficult in other spaces where people are more concerned about being wrong
Everything is open and composable without a centralised gatekeeper also means that you can start building stuff without needing access or permissions
Hence it is very fast and iterative - a positive driver for the speed of innovation in the space
Loot
The first experiment of its kind where the important role of the community is taken to its logical extension
Loot is just providing a literal list of things and giving people free license to go build experiences around it
The community is no longer just passive participants because they have to do everything
Impressive to see how creative the community is and how willing they are to pick up the mantle
DAOs & Crypto Gaming
DAOs are organisational units that generally have a financial component e.g. LLC
The community organises around a shared objective
Have shared control over assets e.g. ETH, in-game assets, NFTs
Makes sense to have a DAO's structure in gaming communities because the cost of in-game items might have risen a lot
E.g. pool together with other people to buy a Mystic axie in Axie Infinity
DAOs are not a category, it is just a tool and structure to allow you to do something
Most of the organizations in crypto will eventually be like DAOs
DAO is sort of a crypto native LLC structure
E.g. YGG is a DAO of DAOs - complicated even for Arianna who spends her time studying these
China's ban on video games
💡 China barred online games for anyone under the age of 18. They are only allowed to play between 8 pm to 9 pm on Fridays, Saturdays, Sundays and statutory holidays.
Will the ban affect the learning of super important components of the future economy?
Many successful people said that games helped them to learn about strategy and how to collaborate to achieve a given objective given a set of constraints
Definitely an important tool for development
The rule is difficult to enforce, so will have to wait and see how it goes
"When I was a kid, I played a lot of video games. My mom didn't like it so much. You know, if I was grounded, I get grounded from video games. David was sharing a story with me before this podcast, that his mom used to hide the power cord from you, right?"
- Ryan Sean Adams
With play-to-earn games, parents might see games differently because they can be a viable source of income
Flips the idea that games are a waste of time, even though they are really not
There are tangible benefits in learning and developing through playing games
Metaverse
How is crypto gaming linked to the metaverse?
Metaverse is a virtual world and crypto games are virtual worlds
With games, people can hop into specific worlds that cater to their personal preference
Can't go to different countries because of border control but people can go to different open digital worlds
What is the next frontier for gaming?
Metaverse building will be the next frontier
The development of virtual worlds where one can do different things will be something to look at
The richer these virtual worlds, the more people will be willing to spend more time on them and find more ways to interact with it
ETH as an asset
She is very pro-Bitcoin
There is a logic that Bitcoin has a fixed supply but Ethereum does not, hence the former will go up in price but the latter will be worthless
This logic is proven to be wrong currently
The value of a blockchain also depends on the richness of developers and projects built on it
ETH is money already
You can use it to buy all kinds of things and interact with different protocols in a given ecosystem
ETH will be a critical currency, though not the only one
If ETH becomes the critical currency of the metaverse, it will be a very very big market
Trading card
We did a trading card for Arianna Simpson. We knew she’s a bookmark, so depicted her as Belle from Beauty & the Beast.
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