Do or Die: Blockchain Game Studios Must Find New Ways to Earn Money

By Corey Wilton

Investors have spent the past year pouring serious money into Web3 gaming studios despite declining user numbers and game token prices. The expectation appears to be that well-funded studios will spend 2023 building the top-quality games of tomorrow, just in time for a revival in the space. But studios who think they can simply replicate the blockchain gaming infrastructure of the past are in for a rude awakening. Why? The numbers simply don’t work: If game studios try to monetize themselves as they did in the previous bull market, they will run themselves into the ground.

This isn’t just being dramatic – two years of failed experiments and millions of dollars lost have proven that existing blockchain gaming monetization models fail. Therefore, the builders that will succeed are those that can rethink revenue models in a way that will create momentum for studios.

Game Builders Must Kill Their Darlings

A key change that game builders can make involves the use of blockchain itself.

There was a time when the Web3 gaming industry waxed poetic about decentralization and fully on-chain infrastructure – even when the tech was criticized as a solution looking for a problem. And when I say, “they,” I actually mean “we” – I was part of leading the charge. In late 2021, Pegaxy was taking off. And despite caps on the number of users who could play the game, growth was explosive. 500,000 active players jumped in without a dollar spent on user acquisition.

We were navigating totally uncharted territory. There was no existing proof-of-concept; there were no experiments to look to as examples, no previously established predictive data to run. We were figuring it out as we went, operating on tenets we believed to be correct. But as it turns out, many of them weren’t. That’s why – at this stage – builders must accept what hasn’t been working and move on.

After all, many criticisms of blockchain games have proven to be valid. And while plenty of players have benefited via money made through play-to-earn models, game creators have run into infrastructural roadblocks when they tried to keep everything on-chain. Excessive onboarding friction, the inability to publish on app stores,  and other blockchain-related impracticalities are burdensome to players – and what’s more, they prevent studios from generating sustainable revenue.

It Doesn’t Matter How Much Money You Raise if You’re Losing It

Why? Picture this: you’re a Web3 gaming studio with 150-200 staff. As is the standard practice in all Web3 games, your main source of revenue comes from trading fees, which are something between 3-10% of the traded amount. Web2 games, which primarily pull funds from in-app purchases and ads, typically collect 70% of revenue and pay the app store the remaining 30%.

You have users playing your games – enough to generate, say, $5 million in trading volume per month. On the low end (3%), this creates roughly $60,000 in monthly revenue, and $200,000 on the high end. All told, your game generates something between $720,000 and $2.4 million in revenue each year.

Sounds good, right? But suppose the operating costs of this organization – paying devs, tech support, and keeping the lights on – are expected to be somewhere between $6 and $8 million per year. The result? A massive financial loss.

Blockchain Can’t Support Increased User Demand, Even When it is There

One solution could be to gain more users. Surely, the difference in revenue could be made up if transaction volume were higher. It’s a tall order – because Web3 games make just collect 3-10% of trading fees compared to web2 games’ collection of 70% of in-app revenue, web3 games .games would need 10x more transaction activity than their Web2 counterparts to make the same amount of revenue. But it isn’t impossible, right?

Wrong. If there were a secret formula to increase user spending by 10x – or bring in 10x the players – for the same user acquisition spend, it would have already been exploited by the web2 space. Web3 games simply can not sustain 10x the revenue as their web2 counterparts without spending significantly more on marketing, design, and more.

That’s why, with old revenue models, there simply isn’t enough capital to keep studios running. We’ve seen and experienced it ourselves: in its first year, Pegaxy turned $200 million in trading volume. If it were a Web2 game, this would have produced something like $140 million in revenue. But because of its ineffective revenue model, this created just $6 million. 

Creating Sustainable Blockchain Gaming Revenue Models

Setting aside the undiscovered approaches that may work in the future, what would a sustainable revenue model look like in the here and now?

First, Web3 needs to get its priorities straight – which means that games need to build the monetization infrastructure that will keep them alive. And because improving revenue means prioritizing distribution, making your game as accessible as possible is critical. Web3 games should be every bit as easy to access as their Web2 counterparts, which are available on every distribution platform and in every app store.

Web3 game creators should also focus more on revenue sources that they can easily measure, including core revenue derived from studio-to-player in-app purchases and in-app ads. These provide clear, data-informed revenue results.

And instead of using blockchain tech at all costs, studios need to prioritize user experience – which means employing blockchain with a very measured hand. Although decentralization is cool, it really only adds value to your game when users experience clear benefits. So if it doesn’t help players or improve the game, don’t use it. Instead, focus on making players’ onboarding and early gameplay experience as smooth as possible. You can reintroduce blockchain (and the friction it brings) later on, when players are already invested.

Regardless of which Web3 studios will stand the test of time, we can expect big changes in the year ahead. And the studios building today have the benefit of hindsight from others’ successes and failures. The winners will be the ones who take these lessons to heart.

Author Bio

Corey Wilton is the co-founder and CEO of Mirai Labs, the international gaming studio behind Pegaxy.