Play-to-Own: A Web3 Gaming Thesis


At Algo Capital Millennials Multi Strategy fund, one of the key narratives that guide our investment strategy is Web3 Gaming. With this definition we group those business models and blockchain technologies that, combined, are deeply innovating the gaming industry.

With this newsletter, we aim to provide a framework to understand the evolution of the gaming industry and how the incorporation of blockchain technologies is bound to disrupt the industry.


Key Takeaways

  • The events of 2022 highlighted a fundamental contradiction in combining the two verticals: Gaming and Web3. Gamers play games to have fun, while people participate with financial incentives to make money.
  • The critical question remains: How can Web3 Game titles be built to be sustainable? 
  • We believe that Play-to-Own, the latest evolution of the sector featuring sound economy management and deep gameplay content, will be much more sustainable compared to Play-to-Earn, generating revenues for developers and community over a much longer period of time.


The Current Landscape of Web 3 Games

Video Games have evolved tremendously ever since the first labels were shipped to the open market in the 1970s. From the release of pay-to-play single class titles for the console and PC to freemium mobile games in the last decade, the gaming experience and business models have transformed in line with technological advances. Today, the gaming market is worth over $300B (according to both Accenture and BitKraft) with an expectation of 12% annual growth rate from 2022 to 2028.

We believe that the integration of Web 3 elements into gaming will likely usher in a new era of gaming dubbed “Play-to-Own”. We posit that unlocking the economic activity within games will drastically expand the Total Addressable Market (“TAM”) for the gaming industry as well as supercharge the value creation.

In 2021, the industry caught a glimpse of the potential of Web3 Gaming via Axie Infinity’s rise to fame. Popularizing the Play-to-Earn (P2E) model most of us are familiar with, Axie has grown from 10k Daily Average Users in early 2021 to a peak of 3 million DAUs and brought in $1.3B revenue in 2021 according to Nansen. What’s more surprising is that Axie was still in its infancy; the simple battle game was just a Beta version.

Axie’s parabolic growth signaled to the gaming industry the untapped potential of Web3 Gaming, inspiring a great influx of gaming talent into crypto. Games that integrated NFTs have experienced much greater success in terms of player retention, growth and revenues compared to their Web2 counterparts. We are already beginning to see a myriad of projects launching with innovative P2E mechanics embedded within their gameplay. 

The pitfalls of the current P2E model are well recognised, namely the challenges with managing an inflationary economy and attracting value extractors rather than real players. Most leading entrepreneurs in the Web3 gaming space are moving beyond this model to make it more sustainable. We expect rapid experimentation in the coming months and it is our firm belief that the next generation of successful Web3 games will not require the P2E model to be successful.

Paradigm Shifts in Business Model — Pay-to-Play, Free-to-Play, Play-to-Earn, Play-to-Own

To predict the future of Web3 games, we can look back into the history of business models in gaming for insights and the cumulative changes that brought us to this inflection point. 
Looking back at the last 50 years of gaming, one can see multiple distinctive periods where business model innovation occurred along-side technological advancements.

The very first commercially successful video game business model was the Pay-to-Play model that was popularized by the arcade game Pong — gamers inserted coins into arcade machines, and played for a set amount of time or until they failed in-game levels. Arcade games tended to be simple but fun games that had competitive elements in the form of highscores that kept players coming back to play again and again.

Later on, Pay-to-Play boxed retail games took off alongside the rise in adoption of personal home computers and console gaming and allowed gamers to play from the comforts of their home. The drawbacks of Pay-to-play boxed retail games was that the revenue opportunity is once-off in nature — the only way for game developers to capitalize on this was to launch multiple series in cycles that typically took a few years.

The advancement of digital distribution technology that allowed live-service games alongside the desire of game developers to earn recurring revenue gave rise to the subscription-based Pay-to-Play model. In this model, gamers pay a fixed monthly fee to gain access to game content that is updated and enhanced regularly.

With the rise of mobile apps and the subsequent increase in preference for casual games, the Free-to-Play/Freemium model became popularized. In this model, the game’s basic gameplay is completely free, however game publishers monetize via microtransactions, .

This produced a fundamental issue of incentive misalignment. Decision making of an entire game ecosystem was made by developers who may not take into consideration the views of the community. There is rarely any intention or ways to compensate players and creators who contributed to the success of the games through their efforts.

Play-to-Own — The Future of Web 3 Gaming

From Axie Infinity, we learnt that in the initial bootstrapping phase of the game economy, early believers and participants who are mainly driven by financial return take on the risk to acquire assets and work to mine resources to sell them to later entrants.

However, as incentives cannot subsidize growth forever, game developers will have to find ways to convert yield seekers into consumers in a sustainable game economy.
Organic spending can only be sustained via a constant stream of novel fun content and experiences that players would want to pay for without any expectation of financial return. Building immersive worlds and characters that are loved by the community is the most sustainable way to grow a game.

We believe that Play-to-Own will be the next evolution in gaming business models. Games are not jobs and should not emphasize the ability to earn money from playing. This terminology reflects the need to align both players and owners of a game as well as an understanding of NFT technology, which are all about improved ownership.

We predict that player spending will be an order of magnitude greater than revenues seen in Web2 games and Web3 games transition to Gross Merchandise Value (GMV) as a metric to measure all transactions within the virtual economy.
With sound economy management and deep gameplay content, Play-to-Own will be much more sustainable compared to Play-to-Earn, generating revenues for developers and community over a much longer period of time.

Conclusions - The Bull Case

From the level of talent we see coming into the space, we are reasonably confident that the next generation defining franchises will be built on Web3 — flipping around the prevailing negative sentiment on Play-to-Own games that utilize NFTs.

We believe that having games built on open peer-to-peer networks will unlock greater economic value and drastically expand the Total Addressable Market (“TAM”) for the Gaming industry — with expectations of a trillion dollars in economic output to surface within the next 10 years.

Web3 Gaming as all Digital Assets technologies are in constant (r)evolution; stay tuned to stay updated.