“Are We Human or Are We Dancer”
The authors or their affiliates have ownership or other economic interests or intend to have interests in ETH, SOL, BTC, YGG, Sec3, BlockVision and may have ownership or other economic interests or intend to have interests in other organizations and/or crypto assets discussed as well as other crypto assets not referenced.
It was a tough week for gaming that made me think of this line from the Killers’ “Human”. Bugs were everywhere and big titles struggled to deal with the infestation. The AI revolution faced a major pushback on a number of fronts. Esports received several new blows.
The World Wide Web celebrated its 30th birthday, but it was the web3 ecosystem that provided the much needed silver lining with a couple of research papers and mounting expectations for Sui after its mainnet launch. Let’s dive in!
This Was Not a Feature
The number of high profile titles dealing with painful technical difficulties is concerning. Last week I wrote about the troubles of Star Wars Jedi: Survivor, and it looks like EA delivered a helpful patch. However, users started reporting that their DLC content has disappeared.
Call of Duty Season 3‘s launch also didn’t go smoothly, and gamers are still waiting for a fix for a pesky bug. It was also discovered that a single line of code caused the recent issues for Apex Legends. Redfall had to deal with its own technical difficulties, although the title appears to be an all around miss, which is something a single patch isn’t likely to fix.
The technical missteps are something web3 teams should be carefully watching. Traditional gaming studios have the luxury of operating in completely closed and controlled ecosystems. Web3 takes that away. Not only does an open economy amplify missteps, it also increases the attack surface for malicious actors, as bugs can have direct or indirect implications for the game’s economy.
The DeFi sector went through a lot of pain with hacks and algorithmic attacks before it started seriously valuing auditing, technical due diligence and active monitoring and prevention techniques. Gaming teams utilizing web3 should learn from that.
One of our portfolio teams, Sec3, has been working on a suite of offerings for the gamings sector in an effort to try to make the metaverse a safer environment. Others are also contributing, but the space as a whole needs to take the issue seriously.
Esports Can’t Seem to Catch a Break
Some time ago I wrote about Riot Games trying to use the Virtual Pass to address esports teams’ monetization problems. Now. Activision is expressing doubt about its Overwatch and CoD leagues’ ability to survive. Teams have long struggled with the economics of esports, but the publishers have certainly not made it any easier.
The EA’s alleged refusal to do a 50/50 revenue share split on skins sales just adds fuel to the fire.
These circumstances present an amazing opportunity for the web3 space. The traditional esports model is broken, and the publishers, who own everything, don’t feel incentivized to address the problems. In web3, studios are (hopefully) acutely aware of the fact that they need gamer attention.
As such, they are much more open to coordinate with teams because they want the audiences that come with the competitions. Furthermore, the decentralized nature and ownership ethos of web3 transfers power to gamers with studios functioning more as service providers to the game worlds as opposed to its overlords.
At Sanctor Capital we have always argued for the concept of gaming worlds where gamers have citizens rights. Now, we are starting to hear this take form in DAOs. For instance, Paladins DAO has introduced the concept of citizens esports. When there are polished titles utilizing web3, the esports space could really take off.
The Case for On-chain Worlds
Staying on the topic of gamer owned worlds, in a recent article, 1k(x) detailed their thesis on the future of Autonomous Worlds. The paper narrates through a number benefits for having games run fully on-chain, including stronger gamer alignment and incentives for mods and ugc, as well as the development for new dynamics and applications.
The piece is certainly thought provoking, but could benefit from some contextualization. For now, it is still difficult to identify game mechanics that could be considered endemic to blockchain technology. Furthermore, implementing a fully on-chain game requires a high number of painful trade-offs that would not be tolerable in many instances.
As such, at Sanctor Capital, we tend to consider the applications of the wider spectrum of web3 technology as opposed to just blockchains. Gaming worlds need to be distributed and owned and controlled by gamers, but that does not mean that everything needs to be stored and computed on-chain.
This is where distributed storage and computation protocols come into play. There is a lot more infrastructure that needs to be decentralized and imbued with proper incentive mechanics, but we believe that is the way to give gamers citizen rights in high fidelity worlds.
Nevertheless, the concept of Autonomous Worlds is incredibly powerful, especially at a time when publishers are flexing their power in rather egregious ways. The practices around IP usage, esports leagues, asset monetization are already super restrictive to say the least.
Now, Blizzard has come out with a Program Member Agreement for its EU Community Discord Program. Among other curious asks, it stipulates that those who sign are not allowed to say anything “negative” about the company.
The situation reminded me of a scene from LOTR, when Gandalf tells Saruman: “There is only one Lord of the Ring, only one who can bend it to his will. And he does not share power.”
The Creators Are Becoming Afraid of Their Creation
The past few weeks AI has been taking the world by storm, but now there is growing concern and increased push back, especially in the gaming space. Geoffrey Hinton has left Google where he worked on AI and has publicly voiced his concerns about where the technology is headed.
While he sees danger in people’s ability to control and/or prevent misuse of increasingly more powerful AI, others are infuriated by how it is being used to replace creatives in the gaming space.
Prime Matter tried using Midjourney to create an image of an evil AI antagonist for its game System Shock, but the gamer community was not amused. What may have started as a creative take on the game’s narrative came off as the studio trying to devalue artists’ work.
The timing was unfortunate, as David Gaider recently spoke out about the lack of respect for writers in the gaming space.
AI offers a great deal of cost and time savings to gaming studios, but they must be careful with its uses. Analysts often speak about the importance of immersiveness for the gaming experience, and a great part (if not the majority) of that falls on the shoulders of artists and writers.
Many of them toil in semi-anonymity, which perhaps makes some studios feel like they are replaceable. However, without captivating worlds, games will not resonate with gamers. AI can be a useful tool for artists and writers, but it is dangerous to view it as an alternative for them.
Square Enix found its own AI trouble, as it tried to introduce NLP to its remake of The Portopia Serial Murder Case game. While the studio thought it would improve gamers’ experience the test seems to indicate the opposite.
AI and associated tools will likely continue to rapidly get better, so it is unwise to get hung up on their short term technical limitations. However, it is important to start thinking about the ethical and economic implications of their adoption.
The Search Sustainable Open Game Economies
The past week was rich in thought pieces, and another interesting one came from Economics Design’s Kiefer Zang. The paper detailed his proposal for a reserve utility token model. The model involves locking game tokens behind an NFT as a reserve, with the player having the option of unlocking it by burning the NFT.
The model is somewhat reminiscent of NFT token offerings when NFTs were sold with fungible tokens locked inside. It is an interesting approach for trying to limit the sell pressure of game tokens by tying them up in NFT assets.
Nevertheless, the approach also presents a number of challenges. The model addresses velocity of a game token, but does not affect its utility. If the utility of the token is unclear, limiting velocity may only delay the inevitable.
Moreover, if the token has in-game uses (with one-token models dominating the scene, the asset often has hybrid functionality) locking it in another asset may create friction that negatively impacts gameplay.
Also, we see studios currently being reluctant to create too many NFTs. Often commonplace items are kept off-chain, and only rare items get minted. This may create challenges for emission schedules.
Furthermore, merging assets with different utility profiles may create challenges down the line. Consider the case of the Onyxia Scale Cloak in WoW that recently saw a spike in price because of its utility for getting the Blazing Shadowflame chest.
If this was an NFT item with game tokens locked in it, the price jump could be further exacerbated, or, alternatively, all of the items could have been long burned making it impossible to bring it back into focus in the update.
Nevertheless, the reserve utility is a creative approach to the game token, as merging game economics and token economics remains a challenge in the web3 space. I recently hosted a WaypointWeb3 talk on the matter, which remains an open question.
Sui Makes its Play for Gaming
Sui mainnet went live last week and it was an important milestone for the network and the web3 space as a whole. Sui is a big budget network, with Mysten Labs having raised $300M in just its series B for its development. The blockchain looks to be a cornerstone of the MoveVM ecosystem.
Also, Mysten Labs appears to have one of the most focused gaming strategies in the web3 space. The approach is starting to yield results as the network unveiled a whole host of launch partners including: Project Elune, Worlds Beyond, Cards of Ethernity and the crown jewel, Orange Comet’s The Walking Dead.
It’s important to remember that despite the surrounding excitement, Sui is a very young ecosystem, and as such, requires patience. There is a lot that still needs to be tuned or improved in terms of the core infrastructure and surrounding tooling.
One of our portfolio teams, BlockVision, is actively supporting the network with a live RPC and SDK. It has also recently rolled out a V2 of the SuiVision explorer.
This wraps it up for this entry. As always, if you are working on something exciting in the web3 gaming space, or are a traditional gaming team looking to explore the possibilities, don’t hesitate to reach out to any of us at Sanctor Capital. Have a great rest of your week!
Ilya Abugov (@AbugovIlya)
Disclaimer: This commentary is not investment advice. It does not purport to include any recommendation as to any particular investment, transaction or investment strategy, or any recommendation to buy or sell any investment. It does not reflect any attempt to effect any transactions or render any investment advice.
This post is solely for informational and entertainment purposes. It is inherently limited and does not purport to be a complete discussion of the issues presented or the risks involved. Readers should seek their own independent legal, tax, accounting, and investment advice from professional advisors. The views reflected in this commentary are subject to change at any time without notice.
