Why We’re (Still) Investing in Web3 Gaming

With game tokens down 37% overall in 2024, there’s been some trash talk saying Web3 gaming is dead. But crypto is cyclical, and the current downturn is nothing we haven’t seen before. As angel investors focused on seed and pre-seed, we think this is a wonderful time to invest. Having emerged from the Crypto Winter, but not yet priced out by the utter madness of the crypto bull run and its ridiculous valuations, this is a special time when builders are pitching mind-bending new ideas and shipping intriguing MVPs. And, guided by the thesis that Web3 gaming will move us further forward in terms of innovation, adoption and impact than any other use case, we’re putting our money where our mouth is.

This op-ed is part of CoinDesk’s GameFi Theme Week.

Today, our company Emfarsis is investing in and advising early stage Web3 projects with a focus on gaming. We originally became interested in blockchain way back in 2016 because we saw the potential for the technology to empower marginalized groups and champion inclusion, redistribute wealth and power more fairly and transparently, and improve the lives of billions of people all around the world. Ultimately, we believed that Web3 could be a force for good.

It wasn’t until late 2017 when we went all in on Web3, joining a crypto payments startup that sought to level the playing field for business operators that were fighting tooth and nail with the banks for a fair go. We got to go around the world giving talks and running workshops, while Leah wrote red pill-styled opinion pieces on everything from peer-to-peer (P2P) payments and crypto-asset backed remittance to decentralized identity and reputation. But, OMG, the education effort was a hard slog. Yes, of course, people would nod emphatically as we told them they could be their own bank, and transact permissionlessly — yada yada yada — but only a small number actually converted. Even then, they were more likely to buy on a local, licensed CEX and HODL, rather than self custody and go off exploring the decentralized ecosystem.

We found ourselves asking: what’s the point of world-changing tech if you can’t get people to use it? Not just check the balance on their wallets once in a BTC moon, but really use it? At the time (circa 2018-19), we felt the learning curve was too steep, the UX sucked, and quite frankly, talking about wallets, payments and remittance put people to sleep. Not to mention that most people weren’t overly enthused about investing their savings into “magic beans” that they viewed as volatile, risky, and possibly scammy. Few normies wanted to gamble on that.

But making money by playing a video game? Now THAT was a different proposition altogether. This was the promise of play-to-earn and we discovered it before most, when “blockchain gaming” was still an oxymoron. When Leah first wrote about it for CoinDesk in August 2020, Axie had less than 500 DAU, was still on Ethereum, and suffered all of the same UX and on/off ramping issues as the rest of crypto. But that didn’t stop a tidal wave of new users, when word got around about the game that paid you to play — particularly in the Philippines where we’d relocated in 2018 in the belief that the country would see a crypto adoption miracle thanks to its young, digitally-savvy but mostly unbanked population that was highly proficient in English.

At its peak in July 2021, Axie counted nearly 3 million daily active users (DAU). Largely, they were poor, low-skilled service sector workers hailing from emerging economies in Southeast Asia, Latin America, India and Africa — exactly the kind of people that we’d hoped might one day find personal empowerment in crypto. This community had previously been ignored by crypto marketers due to their lack of disposable cash, and here they were, finally, and legitimately, competing in the global decentralized digital economy as equals. It was the miracle we had predicted; we just never dreamed a video game would be the catalyst.

It’s critical to note here that Axie’s developer, Sky Mavis, had achieved this great adoption feat without needing to make blockchain easier to use or understand. It didn’t even lower the cost of participation, as you still had to buy the NFTs you needed to play (at least, you did in the early days — more on that later). Instead, Axie changed the game entirely, by delivering an unapologetically Web3-native experience that was unparalleled. It financialized gaming in such a way that anyone who contributed real value to the game’s virtual economy (not just the developers and the publishers) could reap the benefits. And people wanted it so bad, they jumped through hoops to have it.

At the time, countless articles cited Axie’s crazy growth but possibly the biggest contributor to this was the rise of scholarships. You might remember this as a commission model whereby the owner of an Axie NFT could rent the asset to another player and take a cut of their in-game earnings. But, what many didn’t realize was that scholarships were not the brainchild of Sky Mavis; they were a business model invented by and for the Axie player community in response to the problem of rising NFT prices and stunted in-game productivity, and ultimately designed to onboard more new players into their world of financialized fun. Scholarships were built without permission, leveraging tools supplied by the game’s developer in a way that wasn’t necessarily intended.

Scholarships are now largely redundant because most Web3 games have implemented a free-to-play model, so NFT ownership isn’t a requirement for players to get started. But we still think of them as a harbinger for what could be possible when newer and more sophisticated trends around composable “modding” including fully onchain games (FOCG) and permissionless user-generated content unlock unbridled entrepreneurial creativity in Web3 games. FOCG have been criticized for their early stage of development, slow progress, and low DAU, but we see these games as Web3’s R&D sector. We believe their tinkering will lead to wildly experimental combinations of Web3 primitives, fusing new types of NFTs like soulbound tokens, and new standards like ERC-6551, with DeFi, DAOs and more, to come up with unique tokenomics around ownership, incentives and governance, while delivering totally novel user experiences that were never even thinkable let alone achievable in Web2.

We began angel investing when we realized that mass adoption was possible without having to dumb down the Web3 elements, and while making crypto more fun to play with and learn about. That epiphany continues to guide all our decision making, particularly as we are quite sure that it represents a massive total addressable market (TAM). The mind boggles at how to calculate the potential TAM for a new category of video game that is underpinned by crypto’s open, decentralized rails, and has given rise to a whole new breed of gig economy.

We’ve come a long way since the early days of CryptoKitties and Axie. As of July 2024, there are over 994 quality, playable web3 games across 70 blockchains, spanning multiple genres, according to BlockchainGamer.Biz. This is remarkable when you consider that most of these startups were funded around 2021-22, but it can take traditional gaming studios around eight years to build a AAA game.

From where we are, we see consistent building, measurable progress and boundless originality from Web3 game devs, driving promising growth across the sector, with every L2 clamoring for a slice of the growing pie. Even when the DAU is low and the token prices are down, gaming is one of the few corners of Web3 where you can find real, genuinely active, thoroughly engaged crypto users. As such, we remain convinced that gaming is still, by far, the best use case we’ve ever seen for blockchain.

Now all the investors want to know: what’s the next Axie to kickstart the next bull run?

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.

The authors hold a number of cryptocurrencies, including Web3 gaming-related tokens YGG, AXS and RON, and are angel investors in 17+ Web3 startups. See an overview of the Emfarsis investment portfolio here and see the Emfarsis transparency and disclosure statement here.