At the end of 2021, blood wasn’t just on the wall in the crypto space. It was smeared all over the furniture, dripping from the ceiling after hitting the fan in spectacular sprays. The dance floor was unusable. Anything that touched crypto or blockchain seemed to be waiting at the end of the domino chain, preparing for the inevitable tumble.
Except, as it turns out, Web3 gaming.
A DappRadar report in January 2022 proclaimed that blockchain-based games and NFTs were relatively unharmed by the crypto downturn, with activity still up almost 200% in the 12 months since January 2021.
Of course, that was months before the FTX scandal that ultimately rocked crypto, taking out some of the biggest names in the space over the course of the year. Three Arrows Capital, which graced Wall Street ads for years, fell. Celcius, the king of crypto lending, closed shop. BlockFi, also a crypto lender, followed the bankruptcy train. These were just in 2022.
According to BlockFi, the liquidity crisis was primarily caused by exposure to the FTX scandal, namely through loans to Alameda, the crypto trading company linked with FTX. In its bankruptcy statement, the lender platform cited FTX as its second-largest creditor with $275 million owing on a loan that was made earlier this year.
BlockFi wasn’t the first cryptocurrency lender platform to file for bankruptcy. The company’s biggest rivals on the crypto market, Celsius Network and Voyager Digital, did the same in July 2022, stating that adverse market conditions caused losses to their businesses they couldn’t endure. Start-ups that once managed to pull off astonishing rounds of funding and had a promising future got too close to the FTX virus.
Before 2023 had trudged into June, the line of closures had grown longer. Silicon Valley Bank, which counted many crypto companies amongst its clientele, had folded along with two other major banks in the US, who together held over half a trillion dollars in assets.
Bittrex in May finally sank into Chapter 11 woes, but the months before that saw:
- Blockchain.com laying off a third of its employees and closing down in Argentina
- Coinbase decimated 20% of its staff and restructuring, while settling a $50 million penalty with US regulators for KYC/AML failures
- Crypto.com shedding a fifth of its staff, with some only discovering when they got booted from company emails
- Digital Currency Group (Barry Silbert’s mega empire) shut down departments, bankrupted Genesis, and received buyout offers for CoinDesk
- Luno, big in Africa and Southeast Asia, dropped over a third of its employees
We could go on, but you get the picture.
How has Web3 gaming fared in the crypto bear?
So how has Web3 gaming done since the happy findings of DappRadar in early 2022?
Lest we forget, we’re still in a crypto bear. That’s neither a surprise nor an anomaly. Crypto bears tend to last for years after a bull run, and in a global scenario where the world’s major economies are on the brink of recession, there really is no market that’s safe from a contraction – real estate, commodities, even precious metals are battling against the trend (sure, gold is at a near all-time high but it has only just recovered from a fall at the end of 2022).
FTX had a direct impact on some crypto games – notably its own game, Storybook Brawl, which finally laid down the wreath on its own coffin recently.
This closure didn’t even reveal the months of infighting, doom and gloom, and general booing happening within its communities, which we’ll delve into later.
Naturally, other game titles that received investment from Alameda or FTX, such as Decimated and Yuga Labs, bore the immediate brunt of the fallout. However they managed to recover, thanks in part to the quick actions of Yuga Labs. They moved their funds from FTX shortly before withdrawals were halted, mitigating potential losses.
Solana, which was thriving in Web3 gaming before the FTX incident, suffered a significant setback. It had established a strong partnership with FTX and its sister research arm, Alameda Research. However, a Solana-based decentralized exchange (DEX) called Serum was the first to dissociate itself from FTX after realizing that their system keys were actually owned by FTX.
This move affected numerous games that relied on Serum for their tokens and in-game assets, such as Genopets. Additionally, marketplaces like Magic Eden also had to temporarily halt their services. As a result, it comes as no surprise that the tokens related to those projects experienced a significant decline in value.
Solana, once a titan basking in triumph, was dealt a devastating blow to its very essence. Ascending to ethereal heights in 2021, where it towered above $220, Solana seemed destined to claim the throne as the paramount network for Web3 gaming. Alas, the tides have turned, for in the present day, its worth languishes at a mere fraction, not even grasping 10% of its majestic pinnacle.
Why Web3 games failed (so far)
It is important to note that not all failures can be attributed solely to the crypto bear market. Some failures are the result of intrinsic issues that Web3 gaming needs to address. The point of this article is to say that yes, crypto contagion is real. But that’s not a bad thing.
If Web3 gaming can enjoy the success of a bull run, it should also be prepared to experience the quicksand of a multi-year bear market.
Web3 gaming was supposed to embody decentralization, which was meant to be the revolution of this gaming era. It aimed to eliminate unfair middlemen, create transparency, and foster democratic principles. Yet, the failures of numerous titles indicate that Web3 gaming has a long way to go in achieving true decentralization.
Let’s discuss some of these issues:
a. Mismanaged funding
First of all, we should remember that companies in Web3 gaming rely heavily on the performance of their tokens and NFTs for perceived success. Regardless of the game itself, if the token price performs well, the project is considered a success.
In this aspect, we can attribute many failures in Web3 gaming to a lack of confidence from players and token owners when the token price underperforms. However, there are also cases where crypto games mismanaged the funds they raised. For instance, NFT Vikings gambled with Luna and lost, while Untamed Isles lost all their funds without providing any returns to their backers.
Web3 gaming must find better ways to manage funding, and the implementation of DAO treasuries could offer greater transparency and improved fund management.
b. Centralized servers and networks
The Solana crash and its impact on Web3 gaming projects highlighted the fact that Web3 games are not as decentralized in terms of infrastructure as they should be. A decentralized exchange (DEX) like Serum should not entrust its upgrade keys to an investor (as Serum did with FTX). Similarly, games should not rely on a single company for their servers.
Decentralization should extend to the underlying infrastructure to ensure resilience and avoid single points of failure.
c. Centralized and community-less development
In the case of Storybook Brawl, the failure may have been ultimately caused by FTX’s collapse, but there were deeper issues at play. When FTX founder Sam Bankman-Fried took over the game and introduced NFTs, the existing gamer community expressed their disapproval. It wasn’t that gamers hated NFTs per se, but rather they disliked arbitrary NFT implementations and money-driven decisions made without their consent or input.
Web3 gaming is meant to be community-based and community-led.
Web3 gaming has a future, if it learns its lessons
In conclusion, crypto contagion affects every sector in blockchain and Web3, including gaming. However, this period of market downturn can be an opportunity for the sector to learn from past failures and fulfill its true potential (we truly believe in).
Building a great game should be the primary focus, but it should also be accompanied by a different approach. Funding and development processes should be decentralized, democratic, and transparent, leveraging DAO treasuries to enable better financial management. The infrastructure itself should embrace Web3 principles, avoiding reliance on a single entity to prevent central points of failure.
Above all, the community should be at the heart of Web3 gaming. Gamers’ feedback and preferences should guide the decision-making process. When a significant portion of the community, as in the case of Storybook Brawl, voices strong dissent, it is crucial to pay attention and respond accordingly.
Web3 gaming has a future, but it must address these challenges and learn from its past mistakes to truly realize its potential and deliver on its promises of decentralization and community empowerment.