If there’s one thing that venture capitalists have taught me, it’s that aligned incentives can kick ass.
It’s a phrase you’ll hear often if you spend time with professional private market investors. But if I summon my collegiate years, the phrase is really just the economic principle that individuals respond to incentives, restated in a slightly more targeted fashion.
In the land of venture capital, the idea works out as follows: Individuals respond to incentives, so you want to ensure that everyone at a company, for example, has aligned incentives.
This is why startups often offer a dusting of equity to employees, giving them a tiny slice of ownership in the overall project. This aligns employee incentives toward aggregate corporate success, something that employers want because they are in the game of paying people as little as they can while still hitting human capital quality benchmarks and not having too much employee churn.
There are less crassly capitalistic reads of why venture capitalists allow startups to sell equity to employees at below-market rates through options. I don’t buy them. Investors like return, and they optimize for it, thanks to their own incentive structure.
VCs have a good gig. They take money from existing capital pools, invest it in work that others are doing, and then get a cut of deal profits while also ripping a few hundred bips per year of their total investing vehicle. Here again, we see aligned incentives, with venture capitalists profiting when their backers profit. Teamwork.
I drag you through all of that to explain that the concept of aligned incentives is marrow-deep in the startup and venture capital worlds, something that can, at times, blind folks to other ways of doing business.
Games, for example. Crypto games in particular.
You see, the crypto community and its myriad backers are pretty hot on crypto games. Here, it seems, is a place where incentives can be aligned in a new, exciting manner, translating gaming into related economic activity. All the fun of games, but with aligned economic incentives! What could go wrong?
Play to earn?
Through the lens of aligned incentives, the concept of play-to-earn games on a blockchain excites venture capitalists. Users will play the game, generating both fun and economic activity. The user gets some of the value, and the company the rest. Everyone is happy, and the game can go on making money forever, right?
I don’t think so. A key element in gaming is that it’s a way to have fun. Very few folks make money gaming. Very many people have shown a willingness to pay for games. That the latter group is going to swap over to play-to-earn games strikes me as a stretch.
I’ve been pondering this for a few weeks as a gamer and someone aware of the huge popularity of the crypto game Axie Infinity. Seeing it grow encouraged me sit back and think through gaming and why it’s popular. After a long think, I’ve come to the conclusion that I am bearish on crypto games as they currently exist for a few reasons, even if the incentives are more aligned than they appear in traditional gaming.
Why?
On-ramps to crypto games are still very steep, and fees to use blockchain-based tokens are prohibitive. This will naturally limit the reach of crypto games. Breeding an Axie Infinity critter, the game notes, “require[s] a gas fee which is variable based on usage of the Ethereum network.” That’s a lot of coin — $70 or more as I write this — to execute an Axie breed. At that point, you’re running the numbers about what offspring could be worth, allowing for you to recoup what you paid to have your Pokemon-derivative spawn — not having a blast gaming.
Crypto games that feature play-to-earn will include deep economic value loops to ensure economic value generation. To align incentives between company and gamer, they both have to profit. This doesn’t fit well into the model of many games, where fun takes precedence over any sort of productive activity.
Gamers are opposed to pay-to-win as a general concept. Games like Axie allow for folks to rock up, buy powerful critters, and then play the player-versus-player portion of the game. That’s my read from going through its documentation, mind. But the ability to win based on non-game economic prowess is rather unattractive to the gaming community; evidence for that claim can be found in the fact that “pay to win” is a known term — and one that is often used in gaming circles as a pejorative. I think that games that generate economic value for both player and game company will nearly always have to let players sell their efforts to other players, in essence opening the door to pay to win for most aligned-incentive crypto games.
Games that generate economic profit will attract a different cohort of players. The grinders doing it for a living, in particular. Axie is actually proud of its economic impact among certain players, something that I am fine with! But gaming amid a wave of grinders won’t be as fun as gaming with enthusiasts.
Play-to-earn games have different design incentives than traditional games, and I don’t think that they will be better. One really neat thing about the games I favor is that they feature active modding communities. This means that the original developer created easy hooks for other parties to build atop their game. And what do I pay for these mods? Nothing. What do the modders have to pay the original game maker? Nothing. It’s all done in the spirit of love. I can’t even find donation links to most modding groups that I want to thank. That’s because folks are building atop, say, Crusader Kings 3, because they want to. This leads to some awesome art being created and shared.
Will play-to-earn games look the same? I think that when economic capture by monetized play is part of the equation, there will be less extensibility and community investment; who is going to try to do art atop an engine that is busy creating rents for others? It just feels a bit weird. In contrast, I own Crusader Kings 3, as do many other folks. Modders are building atop something that they own. Which is different than I think what we’ll see in crypto-based play-to-earn titles.
This is a partial list, but I think it’s a good sketch of why “play to earn” feels like a dressed-up version of “pay to win,” which makes me fundamentally uninterested in the titles that the economic model will create.
By taking the concept of aligned incentives to gaming — paying folks to play, in essence — turns gaming from recreation into a chore. Sure, it may drive near-term engagement, but the longevity of such titles will be more predicated on their ability to generate ducats than fun. And that’s a risky proposition, given how quickly markets, and especially those in the crypto world, can turn.
Ironically, the aligned incentives already kinda exist in the gaming world. They are just really hard to nail. If a developer makes a good game, I may buy it. The better the game, the higher the chance that I will pay up. So, publishers are incentivized to make games that I like, and because my incentive is to enjoy games and play them for fun, we’re on good terms. But the problem is that that model is hard. It’s hard to make a game that is so compelling that folks will pay to play it.
Enter play to earn, where game quality can be lower as there are other rewards on offer, in theory, for playing. I think the result will be games that are less fun. And because fun is what I want, and not a shot at flipping the output of my gaming activity in hopes of having more money, I just can’t get that hyped about these titles.
If you can only see the world through the lens of money, it will distort how you view pleasure.