Wagering and “Pay-to-Earn”
In web3, money can flow not only from players to the developer but also (i) from the developer to the players and (ii) between players. We previously divided microtransactions into two; Pay-To-Progress/Win and Cosmetics. In this piece, we add two more revenue streams that are exclusive to web3 games:
This piece will explore the concept of wagering in Web3 and introduce “Pay-To-Earn”. We will also discuss the trade-off between randomness and skill in game design.
Note: We are migrating to Substack and will use it as our main publishing platform. Please subscribe if you haven’t already!
Wagering is nothing unique to web3. Mobile real money wagering has been a growing industry under the name of skill-based gaming. Leading companies in this vertical are Skillz, MPL and Rush Gaming Universe.
The concept is very simple. You and I play a PVP video game; I bet $20, you bet $20 — the winner gets $35, the platform gets $5. The concept can be expanded to multiple players and even in the form of tournaments.
Web3 enables much more sophisticated wagering models such as
- Both players burn $20 worth of gear NFT. The winner gets $35 worth of hero NFT.
- Player buys $100 worth of NFT. As an NFT holder, you are eligible to play 5 PVP matches per day with other NFT holders. After 30 days, the player must pay for NFT repairing costs to play another 30 days. Prices for unrepaired cards are trading at $50. If you hit a 60% win rate after 30 days, you will earn $75 worth of tokens.
- Player buys $1k worth of tokens and stakes it for 1 year. Gets access to staker-only tournaments that take place on a monthly basis with each tournament rewarding $10k worth of genesis NFTs to the winning players.
There is a tradeoff between randomness and skill. Chess is a game of 100% skill whereas roulette is a game of 100% randomness. Blackjack, poker, ludo and backgammon are all in-between skill and randomness. As randomness increases, the likelihood of skilled players winning decreases.
There are 3 factors that prevent web3 wagering models from being purely skill-based. These factors can be minimized at the discretion of the game developer.
- Game design-level randomness → chess vs roulette
- Reward-level randomness → probabilistic rewards (loot boxes) vs deterministic rewards
- Market volatility-level randomness → pick assets with price stability utilities as cost/reward or peg the ratio between them vs pick volatile assets with value accrual utility and let the price float
Introducing “Pay-To-Earn”. This is very similar to Pay-to-Progress/Win. The microtransaction purchaser obtains a gear/hero that results in a clear gameplay advantage over its opponent in a PVP game. However, unlike Pay-to-Progress/Win, the purchaser can actually earn a monetary reward (aka real money) from the game outcome.
- Both players burn $20 worth of gear NFT. The winner gets $35 worth of hero NFT. Player A buys a strong weapon worth $10 with the expectation that this weapon would increase his win probability.
- The player buys $50 worth of NFT and gets access to 7 matches per week. The player pays $20 to upgrade the hero NFT with the expectation that this could increase his win probability. If the player wins 5 matches out of 7, he earns $30 worth of tokens.
Both wagering and pay-to-earn are economically sustainable models as monetary rewards are financed by those who lose the wager or over-spend on pay-to-earn microtransactions. Some players will even spend more on microtransactions than the monetary rewards as they just want to psychologically win. These expenditures will finance the rewards of the skillful players.
Incorporating player wagering on their gameplay skills can provide a profitable revenue stream for web3 games. By tapping into the psychological aspect of convincing players that their win rate could be higher with certain gear/hero, even if their actual historical win rate is 45%, developers can entice both gamers and speculative-driven players to spend more money. Keeping cost & reward calculations complicated and opaque can also result in more spending.
Pay-to-Earn and Wagering models could enable game developers to better monetize their player base. Players who already spend on Pay-to-Progress/Win microtransactions could potentially spend more if there is a monetary reward. They could spend even more if they aren’t fully aware of the economic implications, leading them to act less rationally.
This post includes what players who actually play can spend money on. We exclude speculators who don’t play the game. There are various ways in which web3 games can monetize speculators in a sustainable and profitable way. We might be discussing these in another piece.