By @MixWeb3, Organized and created based on [@Louis Liu](https://twitter.com/louisliubj\) speech content
Builders encountered many difficulties in the process of advancing Web3, and many of these difficulties were covered up during the bull market, and few people were willing to spend time grappling with the actual difficulties of Web3. Now that the bubble has passed, those who persist in the industry are mostly idealistic and accumulated builders. So the bear market created an environment that enables actual progress in Web3.
The theme of today’s speech is “The Mainstream Path of Web3 Games”, with the subtitle “A Journey of a Thousand Miles Begins with a Single Step”. I believe that the path to mainstreaming Web3 games is long and challenging, but it doesn’t mean we have to passively wait. There are still many things we can do and some of them will yield benefits now.
Web3 and Tokenization: Two Intertwined Trends of a Common Origin
In this public speech, I would like to express my thoughts in a natural and comfortable way, while also being precise and suitable for a formal article.
“We have encountered many teams who are engaged in game development and blockchain, but they do not fully understand the concept of Web3. They might say they are ‘working on Web2.5’, which is actually a transitional stage of Web3 and implies two different yet related trends.
One is tokenization, which is the process of converting specific asset rights (such as ownership, revenue, or debt interest) into standard tokens. Tokenization actually existed before the emergence of blockchain, but at that time, rights were transformed into some form of digital data. With public chains such as Ethereum, rights can now be transformed into standard tokens, such as tokens based on ERC720 or ERC721.
Nowadays, many blockchain game teams are actually doing tokenization, turning the assets in the game into tokens on the chain. This is very meaningful, but it is not Web3.0.
Web3.0 is a platform economy in which users participate in the allocation of ownership. Note that it is not a standalone platform, but rather a platform economy that is always linked to the economy. It refers to a business model that creates value by promoting transactions and interactions between users.
The core of Web2.0 is platform economy (internet giants are all platforms), and the core of Web3.0 is to allow users to participate in the allocation of ownership in platform operation.
In addition, blockchain technology has brought about a branch — pure chain games, which is also worth paying attention to. Pure chain games run both the game state and game rules on the blockchain, which is a completely new way of building games.
Pure chain games are a new type of game, tokenization is the process of turning assets into tokens, and Web3 is a new internet economic form, all at different levels.
The Significance of Tokenization
Let’s talk about tokenization first. Currently, most blockchain gaming teams are in the tokenization phase, which is indeed meaningful and considered Low-Hanging Fruit, requiring minimal effort to reap its benefits. The first advantage is capital legitimization. Previously, ownership rights of assets were recorded on the game company’s server, but after being standardized as a public chain token, they are now recorded on a decentralized ledger, which is a significant step. Market economy has two pillars: an open market and property rights system, which emphasizes that asset owners can dispose of assets according to their own discretion. In the field of development economics, there is a book called “The Secret of Capital” written by Peruvian economist Hernando de Soto. The most important viewpoint in the book is why capitalism works well in developed countries such as Europe, America, and Japan, but has not progressed in developing countries such as South America. The core issue lies in the fact that these developing countries have not established a clear property rights system. In Peruvian rural areas, there are a lot of assets, but they are not centrally recorded or have an open market to trade and use as collateral, so capital cannot be expanded. Therefore, without asset legitimization, capitalism will become ineffective.
Getting back to the game, tokenization is the first step of “asset authentication” and the second step is “opening the market and liquidity premium.” Almost all blockchain games will provide an in-built market, which may be on-chain or off-chain, but if it is on-chain, then the asset utilization is unlimited. The game development team cannot develop all the possible trading protocols, such as collateralized lending, options, NFT fragmentation, etc., but only by connecting to a large public chain, there are thousands of teams to do this, this is the true open market. Liquidity premium is because a large number of small markets become a unified large market, which aggregates all the trading intentions. For example, the game asset that can only be sold for 100 yuan locally can now be sold for 300 yuan globally on the global market. The impact of tokenization on the game experience is very small, the game can continue to run according to the Web2 logic, and let some people who have the willingness and ability to use Web3 bring the game’s assets onto the chain and become tokens, which is equivalent to not setting a threshold for the user. In addition, for the game, the compliance risk of tokenization is lower than Web3, as there is no token sale fundraising. NFT fundraising is more like crowdfunding and the compliance risk is much lower.
The Logic of Web3
Regarding Web3, we are both researchers and believers, and we will work to promote it despite any difficulties. The platform creates value through facilitating transactions and interactions between users, and its core value lies in network effects; the more people use it, the greater the value. Many games, especially large-scale ones, are internet platform economies because players cooperate and compete within the game’s set scenario, and the value of the game increases as a result. Since players contribute value to the platform, they have reason to receive some ownership. If the organizer of a game guild or the leader of a team could share ownership of the game and exercise their rights within the game system, have a say in the game rules, it would be very attractive. The process of assigning ownership and exercising rights should not be controlled by one person or company, but rather achieved through unalterable, verifiable, decentralized protocols on the blockchain.
The Realistic Challenges of Web3
Web3 has encountered many practical difficulties in its advancement, mainly four. The first is the challenge of proof. Verifying a user’s contribution to the platform on the chain is often a difficult task. In a gaming scenario, it’s difficult to quantitatively assess a player’s contribution to other players’ gaming experience. The second is the compliance challenge. Web3 projects distribute ownership tokens, which are actually securities. The regulatory system has rules for the issuance and trading of securities, which are incompatible with Web3. The third is the governance challenge. After distributing tokens that represent ownership to users, how to form a continuous, active, and widely participatory community governance is still a question to be explored. The fourth is the over-financialization challenge. After tokenizing the game, a player’s gaming behavior will have an economic impact. Some players will keep counting the accounts, thereby damaging the gaming experience. This is why many experienced players do not accept Web3 games. Many researchers and teams are working on the above four challenges. With time, I believe there will be good solutions.
Prospects of Web3 Games: Separation of Ownership and Management
Due to the fact that games are complex self-organizing systems, they typically require top-down design and maintenance. Most Web3 games cannot get rid of the “center” (or intermediary/central planner) of the game manufacturer. Therefore, I believe that the future mainstream model of Web3 games will be the separation of ownership and management, just like the system of public listed companies. A hundred years ago, an entrepreneur might have thought, “Since the company is doing well, why issue stock?” But now, few entrepreneurs would deny the role of the capital market in the enterprise. If you have read “The Great Game” which describes the history of the American capital market, you will find that the state of the early American capital market over a hundred years ago was similar to the current crypto market, a market where industrial giants and bankers use the speculation of the public to make money together. It was not until after the Great Depression that the American capital market slowly got back on track after the Securities Act of 1933 and the Securities Exchange Act of 1934 were enacted.
So, how will Web3 games develop? First of all, I do not endorse DAO directly controlling games. Games are a complex and creative activity that requires a main body to continuously operate game services and innovate, rather than be carried out through decentralized and unstructured collaboration. Therefore, Web3 game developers should hold a large amount of tokens, while investors and some players can jointly form a chain-based DAO to control chain protocols.
The hardest part is the integration of incentives between game developers, players and investors. Game developers hold the power to control game services, which may allow them to engage in malicious activities. What do communities and investors do then? There are two ways to constrain game developers in making decisions, one is community supervision, the other is external regulation, just like the CEO of a listed company must disclose when selling stocks.
Additionally, blockchain itself is a new regulatory technology, it is much better than current regulation, as it can make many things transparent, but truly separating ownership and operational rights will take a long time, and many attempts will emerge in the process.
Outlook on Web3 Gaming Infrastructure
Lastly, let’s discuss the outlook on Web3 gaming infrastructure. Web3 games are not suitable for small/casual games as they don’t evolve in terms of gameplay, and you can only do a tokenization scheme. On the other hand, heavy-duty gaming platforms require a chain-based economy. The chain can be changed according to the evolution of the game, but if it’s a public chain, it loses autonomy and flexibility. Once the application chain is launched, it must be connected to a financial center public chain where there are plenty of asset trading protocols that can give unexpected usage to in-game assets. As for how to connect, the IBC protocol is a better solution than cross-chain bridges because it’s a scalable open-source protocol with a lively research and development community. After several years of polishing applications across several dozens of chains, its security and usability far exceed single cross-chain bridge projects, and this gap will only continue to widen. These are some of my views on the Web3 gaming infrastructure. Octopus Network is a foundation network for application chains and we’re the first to extend the IBC protocol to the Substrate and Near ecosystems. We hope to exchange more with everyone, thank you!
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The Path to Mainstreaming Web3 Games was originally published in Octopus Network on Medium, where people are continuing the conversation by highlighting and responding to this story.