The Virtual Land Problem
Virtual Land is a Trojan Horse for Web2 Corporations
Social UGC gaming platforms such as Roblox, Rec Room, Core, Sandbox and Decentraland all have the same end goal; benefit from network effects by becoming the go-to platform for players and game developers. Content is king but being the dominant content discovery platform is as valuable as content creation as argued by Ben Thompson.
Content created by game developers attracts players who invite/attract new players. A large, growing player base attracts more game developers that want to tap into an existing player audience. This loop grows exponentially/virally thanks to social/UGC network effects as seen with social media platforms.
To tackle the chicken-egg cold start problem of starting network effects, these platforms are aware that they need to initially attract and retain game developers. Sandbox announced a $1bn fund to invest in developers that build on their platform, Decentraland provides grants to builders. These funds will help the cold start problem but the longevity/retention of game developers will still depend on the size and retention of the players.
Unit Economics for Game Developers
Let’s look at options from a game developer’s perspective. For simplicity, I ignored operating expenses, used hypothetical numbers and made some assumptions that might be inaccurate. Do not take it as financial advice and do your own research.
1. Traditional gaming platforms like Roblox, Core, App Store
In this hypothetical scenario, the game dev makes $100 revenue ($50 ads, $50 IAP). The platforms take a 30% cut and the game dev spends $50 on advertising. Ad spend is healthy for the ecosystem as long as the ad networks aren’t monopolized since ad spend is channeled back to other game developers as games would typically want to advertise their games on other games’ ad inventories.
This is the traditional model in web2 and the main problem here is that the centralized platforms and ad networks are monopolized by Apple/Google/Roblox for game platforms and Google/Facebook for ad networks.
2. Virtual land gaming platforms like Sandbox, Decentraland
In this scenario, I assumed that the land owner requests a $15 fixed rent in addition to charging a 30% profit share. There might be different fee arrangements and real figures might be much lower. Due to lower $ left, the game dev spends less on ads which effectively lowers the ad revenue pool that goes to game developers. This results in lower earnings for the game developer and platform, and higher earnings for the land owner.
In other words, earnings that should have gone to other game devs or the platform, now go to a new class of centralized intermediaries who add the least value in the value chain. In the virtual land model, land owners replace the take rate charged by platforms as a reward for taking an early bet by buying virtual land from the platform by providing capital.
Some of the institutions/influencers that bought land on Sandbox include Adidas, Gucci, Softbank, Samsung Next, LG, Binance, Gemini, FTX, Coinmarketcap, Carrefour, The Walking Dead, Atari, Com2us, Warner Music Group, Ubisoft, South China Morning Post, Socios, Metapurse, Republic Realm, Snoop Dogg, Steve Aoki, Winklewoss Twins, Bill Lee, and blockchain gaming guilds such as YGG, GuildFi, Merit Circle.
The corporations’ main priority is not to build/support a decentralized gaming platform that is accessible for game developers and fun for players by solving existing problems such as intermediary monopolization. Their priority is to maximize profitability and growth as that is their fiduciary duty for their shareholders. Just like Zuckerberg whose main intention in pushing the metaverse narrative is eliminating the dependency on competitor hardware (Apple, Google, Sony) and finding new ad inventories to show more ads to users to generate higher ad revenue per user. This has little to do with web3, decentralization and asset ownership.
What’s exciting about DAOs, web3, asset ownership, are that a good tokenomics design with the right incentives and vesting schedules can avoid the emergence of the protocol becoming a profit-seeking monopoly and will enable game developers/players to collectively have significant influence and voting power on the platforms’ strategic decisions in the long-term.
There are different options to solve the virtual land problem; in addition to completely getting rid of the cap on land count, an option that I found interesting is having the platform/DAO own all the land and regularly rent it out through an auction on to avoid deadweight loss. I haven’t spent much time thinking about pros/cons of different options but Lars Doucet has a great article on this topic.
Having a cap on the number of land in a social UGC gaming platform such as Decentraland or Sandbox creates a new class of centralized, profit-seeking intermediaries that add the least value. Blockchain games that plan to implement land should carefully consider how it will impact the long-term economy. Thank you, Lars Doucet and Eric Guan for inspiring me with your ideas. If you want to learn more about blockchain games, you can follow me on Twitter and YouTube