Embracing the Grey Market - The Secret to Game Success.

Oasis is on a mission to democratise gaming and put power back in the hands of the player, to define their own way of playing.

Whatever floats your boat with gaming, whether for pure fun, or as a means of economic empowerment, there’s now something for you. A new wave of gaming has arrived that decentralizes value creation and opens up varied and innovative ways to play and even earn. With 72% of game companies saying they would consider blockchain elements in new games, this is happening.

But how did we go from playing Mario Karts, to discussing decentralized value creation and still be talking about gaming? Games by definition are supposed to be fun, are they not?

How did gaming become inter-twined with crypto and decentralized finance?

Evolution of Gaming - Convergence of work and fun

Let’s do a flying recap on how we got to where we are in 2022. This year alone, we have gone through the highs and lows of crypto and NFT bulls and bears, and have seen this new grassroots gaming movement reach millions of new players. In order to see how we got here, some additional context is needed.

Gaming to date has been a one-way flow of revenue from the players pocket back into the coffers of the game developer. In return, game developers give access to fun games, and more recently to status, power and economic earning capability in multiplayer games.

Games have evolved from:

  1. Single player experiences - It’s just you, the game + the cheetos
  2. Shared group experiences - It’s you + the game + (your buddies) - Together but alone
  3. Multi-player universes - A shared universe with many players interacting and flaming each other

Single player to Multiplayer to MMO

This has seen an evolution in the business model for game developers:

  1. Pay to play - Make the game, promote it and sell the box or download
  2. Subscribe to play - Monthly fee, often with additional micro-transactions
  3. Free to play - Free game, with in-game transactions and ads
  4. Play 2 earn - Earn cryptocurrencies, own NFTs
  5. Play AND earn - Play for fun (the many), play to earn (the few)

Image from Visual Capitalist - The Rise of Gaming Revenue Visualized

This idea of play AND earn as the current evolutionary stage sees the enablement of a variety of motivations to play. Economic players can remove value and empower more cash-rich but time-poor players. In a sense, it is the legitimization of the grey market of gaming.

The first rule of fight club is, don’t talk about gold farming

Something often missing in the economic overview of traditional gaming is the grey market of assets. It is not often talked about, though the scale is vast and certainly undervalued. Let’s dive down this side path for a moment.

The grey market of trading game assets, from account selling, gold farming, power levelling and code reselling has been universally condemned by game developers and often frowned upon by many gamers. To game developers, these third party service providers are the bottom-feeders of the industry, leaching on the legitimate games industry and scamming and spamming their player base. Players who want to sell their accounts are treasonous snakes and need to be banned. Buying gold is seen as the source of game economy inflation and buying accounts is seen as an unfair advantage.

Part of the reason for this condemnation is due to the illegal black economy of cracked games, stolen credit cards and illegal downloads. Because gamers want to access service outside of the walled garden of the developer, they have come into contact with these illegal activities. In some cases it is difficult to separate the legitimate from the illegal.

Don't do it

However, the grey market is a huge legitimate industry, employing millions of people, with 70% of farmers estimated to be in China. The demand for these services from players is huge. 30% of MMO players are estimated to have purchased gold. This is a multi-billion dollar industry.

Blizzard, NCSoft and other MMO powerhouses employ whole teams to systematically eradicate the gold farmers from their games. So, they have done it successfully right? Well, no. Demand for these services is incredibly high and it’s a lucrative business. Teams of thousands of farmers share multiple accounts to farm games and sell their earnings. In turn, the time hungry players with disposable income have an insatiable appetite for more gold and services. The status player who yearns for power and in-game achievement will spend beyond their means to get what they desire in-game.

In addition, the ‘real’ main reason why game developers detest gold farmers is because they see them as stealing the revenue which should rightfully go to them. Financially successful game developers are business people, driven by profit. The thinking goes that because they developed the game, sunk the investment to hire the devs, did all of the marketing and management of live services, all financial rewards should be coming back to them.

It's mine, all mine. Game developers have previously been reluctant to share revenues.

Part of the reason why mobile free-to-play gaming has grown so much is because developers can feel confident that they are capturing all revenues thorough the walled gardens of the app. stores.  Even while paying 30% to Apple, this is preferential. These are controlled economic environments where third party involvement is challenging. Whales in free-to-play mobile games are almost exclusively spending through the app. stores and therefore this spending is legitimized and promoted by the mobile game devs. This environment also allows them to tightly control and prevent any trading in-game, between players.

The alternative view is that the grey market enables players that would otherwise leave the game, to stick around, thereby uplifting player numbers and revenues across the board. Everyone wins when players get to fulfil their game ambitions and stay active, even when they don’t have the time to play as much as they would wish. The game ecosystem for the last 20 years has always involved other parties outside of developer and player. The rise of blockchain gaming rubberstamps this perspective.

Blockchain Gaming: Welcome to the New Frontier

This whole previous preamble was essentially to lay out three concepts:

  1. Creating games is an industry like any other, and game developers want to secure as much revenue as possible.
  2. If money can be made from a game, other people will be there to service this need or exploit the game mechanics to make money. Either as a grey market or (more recently) legitimized through decentralization.
  3. Some players are more cash-rich than time-rich or they value in-game advancement highly and are willing to pay in order to shortcut time required in-game to advance or obtain assets. Time and money are interchangeable assets in gaming.

The time-poor gamer - Has cash and will spend.

Where do blockchain games come into the picture?

In 2018 Vietnamese developers Sky Mavis first released Axie Infinity. The game exploded, reaching a peak audience of 2.7m daily active users (DAU) in November of 2021. It heralded the new age of blockchain games, centred around play-to-earn. Sky Mavis was valued at $3 billion, with $152 million funding round led by Andreesson Horowitz.

The growth of the game was almost entirely due to economic players, playing the game to make money. The main growth came from players in The Philippines (40.5%) and Venezuela (6.3%), with the U.S. at (5.7%).

Much of what has been learned about game development, pushing the boundaries of 3d graphics, complex advancement paths and sophisticated core loops, has been put aside in this first wave of blockchain games. Axie Infinity, when launched was at best, an average creature battler game. The game mechanics and depth of strategy were not unique. However, it offered the opportunity to make money while playing.

In Axie Infinity, players use their Axie creatures to battle, and earn in-game currency called Smooth Love Potions (SLPs), which can be used to breed further Axies, or can be cashed out ultimately into fiat currencies. To a certain degree, Sky Mavis accepted an inflationary economy, creating some limited sinks, but it still requires constant growth of the player base in order to return value to existing players.

From a macro-economic perspective, the game has an in-built inflationary loop. Players used their Axies (which are NFTs) to battle and earn SLPs. The SLPs can be sold or used to create more Axies, which in turn produce more SLPs. In order to maintain value, an inflow of new players is needed to create the demand-side of this economic equation. An economic system where a constant influx of new participants is required to return revenue to the early participants, will eventually run out of gas.

As new players into Axie Infinity started falling the value of the SLPs fell from a high of 39 cents each to less than 1 cent. This in turn meant that the game was no longer a viable economic machine for many players, many of whom left. Sky Mavis took action by removing much of the earning of SLPs by playing. This meant more time needed to earn SLPs, and less incentive for those playing to earn.

Price of SLP on CoinMarketCap

The economic inflation was amplified by the development of player guilds. These groups of players shared their resources, lending out Axies, in order to further the economic advancement of the group, and bring in more players. This has only accelerated the economic downfall of the game. Though the Axie economy was not badly balanced, there was enough imbalance to throw the entire system into collapse.

The key factor in this equation is the predominance of economic players, far outnumbering the players who are there for fun, game advancement and the development of power and status within the game. These are the players willing to invest into the game. When an economic system is sanctioned by the game developers and enabled by the incorporation of tradable NFT asset tech and a game currency that can legitimately be converted to fiat currency, this needs to be balanced. Economic players need to be offset by those playing for fun, power and status. Sky Mavis have seen this and made significant changes to their game, utilizing their significant revenues to attempt a rebalance.

Embracing the grey market

Blockchain gaming is at a nascent stage, evolving on an almost daily basis. The growth of NFT lending to other players arrived as an unexpected side industry. It has quickly become apparent that the potential size of this industry is enormous.

Many games currently under development or in early stages of development are still touting their games as play-to-earn and selling the opportunities to make money. This is similar to the NFT market, which rose on the hype of making 100x on secondary markets by flipping NFT pictures without having any other real utility.

NFT first sold for $2.9 million then later only achieved a resell bid of $280

The blockchain game developers who are putting development and game design before marketing and play-to-earn shilling, have been quietly growing. They see the potential of blockchain games as a way to give players ownership over assets, develop the utility of those assets, incorporate fun core loops and build a player base of gamers and not just economic players. These games have incorporated the grey market of gaming, the secondary markets and asset sales, by allowing other members into the ecosystem who are able to benefit. No longer is the flow of revenue a one-directional system back to the game company. It becomes a complex web of players, asset traders, guilds, NFT marketplaces, advertisers and developers.

By focusing on gameplay and making great games, the game developer creates an ecosystem which has a diversity of players including cash-rich/time-poor, esports/competitive, economic players, more traditional gamer types such as socializers and explorers. This diversity is needed if the game is to create a virtuous economic system that does not suffer from runaway inflation. It also needs the checks and balances required to keep the economy stable, often requiring regular adjustment from a game economist.

In order for great blockchain games to be developed, it must be economically lucrative for game companies and their investors. Much of this revenue will come from in-game asset sales. In order for balance to exist in utilization and production of in-game assets, there needs to be a balance of economic and traditional players. This is the ultimate legitimization of the full game ecosystem, including the grey markets. The immutability and trustless nature of blockchain allows for the elimination of bad actors and to achieve the objective of a complex and robust economy involving a vast number of members, all with different objectives.

In conclusion

The development of a vibrant ecosystem with a large number of players makes it attractive for advertisers wanting to spend money to reach these players. This in turn creates the in-flow of capital required to balance the drains, and generate revenues for the game company, needed in order to keep investing in the game, marketing to new players and onboarding the 'new majority' of players who have never encountered blockchain gaming.

This gamified introduction to blockchain and crypto will, for many, be seamless and probably slightly surprising. Before too long, players will be fluently using their wallet, trading between in-game tokens, engaging in governance tokens and feeling like they influence the direction of the game. These are powerful tools that add additional bonds to the game, building relationships and player lifetime value.

When the game works for all participants, regardless of their motivation, it has long-term viability. When the varied participants fulfil differing roles of supply and demand, the economy can remain balanced and avoid rapid inflation and subsequent decline that is so very often the curse of multiplayer games. This is the utopia of gaming.

If game companies fail to embrace these other members of the economy, they risk losing players, both economic and traditional. Player will migrate to the games where they can reach their objectives as a gamer, whatever they might be.