The Ten Commandments of Open Economy Games

Transcript

[Music] foreign my name is Richard Kim I'm a general partner at Galaxy interactive we have a venture fund and we're currently investing our third fund with over 800 million under management and today I want to talk to you about uh the idea of games and open economies so I would say we're about five years into this movement now uh when I first started investing in web 3 games it was 2018 and I got excited uh from coming from a financial and markets background where I was the CEO of Foreign Exchange and

Emerging Markets trading at Goldman and JPMorgan for several years and I looked at gaming as a space and I thought hey this is a really interesting idea the idea that we could combine open markets and trading together with you know what were previously closed-loop economies uh in Virtual Worlds so that was the thesis in 2018 and here we are it's 2023 and uh unfortunately I I struggle to name a single whole game that met the original premise and so you know we're about 5 billion plus of investment into this space and seemingly no further along and and so I kind of want to talk about why today um for me the best mental framing to

understand why is this idea of what is the difference between a country and a current and a and a company because to date you know if you think about what the whole point of web3 was it was the idea of rewarding users of a network for their contributions and you think about tokens and nfts and some of these web3 gaming Primitives and you ask yourself the question have have we actually done that and I would submit to you the answer is fundamentally no and I think the biggest reason why is because if you think about the business model of a country right it's really three things it's to issue a currency uh foment GDP and then tax citizens basically but to

get to that point you can't also have the mentality of being a company and focus on selling apples uh to your customers right and I think the problem with web3 gaming over the last five years is we've kind of double dipped uh everyone wants to be a country in the sense of issuing their own currency and creating these virtual ecosystems with billions of dollars of GDP but they're in such a rush to sell things through pre-sales of tokens nfts and even in-app purchases for Fiat that you really have this fundamental conflict between the idea of a newly created currency of a country a virtual country versus a for-profit company and just like oil and

water I would submit to you that these two things don't mix very well so what is then you know a potential roadmap for a path forward in my mind as an investor I I kind of separate the word world into kind of a bimodal distribution I get excited about two things one of them I'll talk about today and the other um I I I'll only briefly touch on so let's start with the latter um I I think very simple game Loops where you have really almost Casino style games um that are primarily skill based games where there's a risk of loss um where as you play the mental model is something of a player-owned arcade as you play this game you kind of become

co-owner in an arcade or if you're a bit more pessimistic in the casino as you play I think these types of simple rewarded incentive models for games with very little live Ops so don't think World of Warcraft or RPGs but you know more casual type of game Loops I I think there's a real potential for these games to really take off I kind of view them as like uh virtual vending machines where a lot of what can come out uh is is very much a function of just who interacts with the thing and how much of a flow is going through them so I won't talk about that kind of simple end of the spectrum today but it's something that I'm personally quite interested in exploring particularly with some of

these more crypto native Primitives like ZK and trustless um kind of models where you don't have to you know rely on a developer or any one entity for the game to succeed on the other end of the spectrum though going back to the country versus company thing I'm really fascinated by this idea of okay if you wanted to build a country and a currency for that country that's sustainable what would you have to do and um I a few months ago I wrote a Blog um I on what I called The Ten Commandments of open economy games and to me these are the necessary kind of conditions precedent for sustainable economic flows because fundamentally how

I think about token-based economies is um if you abstract away any speculation at all uh it's neither positive nor negative and all you're left with are Organics players or other users what is the reason for these people to buy your currency because fundamentally if there's no reason for organic payer demand um there's just not a lot of sustainability in your model so you know in the case of um you know a game the way I put this is is what I call the first principle of GDP before gmv so if you think about what is the GDP in a game it's um you know some of the intrinsically

motivated did loops around you know crafting exploration buying building selling um and doing so not for speculative profit uh um and these kind of extrinsic make a quick Buck by flipping an nft type of flows we've seen but more kind of the intrinsic game Loops where you have players feeling rewarded um for uh for for all that Joy in the game and and so um you know I was talking to to Hilmar at CCP and he put it quite well one time you know because if you remember about a year ago there was this um this meme that oh it was never about play tour and it was about play and earn because the game has to be fun uh as if

you know you were saying something insightful by saying a game had to be fun but that's actually you know not really interesting at all because saying a game has to be fun is a bit like saying uh food should be tasty right it's so obvious as to be functionally uh meaningless and so you know for me it's more about what are the the verbs um that get people excited to play your game whether it's learning acceleration frustration um and inspiration and how do you tap into these player emotions in a way that doesn't just boil down to money and so that's what's kind of hard in an open economy because um money is a very hard uh motivating factor it's a very hard extrinsic motivator and a lot of times when you

think about games like you know I play a lot of clash Royale on my phone if I had to be thinking about oh well what is the value of this kind of purchase going to be in seven days based on you know what the market price is going to be it's just a fundamentally different mindset that you know not a lot of Gamers want to be in so I think it's very important to build up that kind of GDP as I say before GMB or or just the the kind of trading layer of the game and unfortunately in crypto we've done the exact opposite if you if you just plotted GDP to gmv as a ratio for almost any web 3 game uh it's basically the gmv is so high that you basically have no real activity so I think we need to play more with

ecosystems that don't have full tradability day one um and kind of de-emphasize liquidity a bit and more about the idea of earning into a stake in some Network um just like you know as a seed stage investor you wouldn't necessarily expect to be able to flip your equity on day two right and so I think retail just fundamentally is not very ready for that that idea of constantly being able to sell and so designs need to be adjusted accordingly um I I think fundamentally these types of open economies they work much better in multiplayer environments that that maximize for intrinsic motivators as I've said as opposed to kind of like

idler Loops or PVE just like click a button and farm type of Loops um I I really can't understand why so many web free games are trading card games um I think fundamentally it's it's you know I think it's like 90 of of games is being built or trading card games from just my anecdotal observation and I I don't even think that's a particularly good type of loop um so so a kind of designed that uh that maximizes more for emergent interactions I think is going to be quite important um I think this idea of risk of loss is the third principle I would emphasize um you know the idea that you need violence uh to use a bit controversial

of a word at the core of the game I think is very important because if if it's only about earning more of everything then who are the organic players going to sell to so going back to my point about organic payer demand I think one of the most important things in any game with an open economy is real sinks and I would say that you know a lot of the quote syncs I see in web 3 games are more like Transformations like take you know x amount of tokens or gems and upgrade your character with it and I I don't actually view that as a real sync because there's no risk of loss and so you just have this infinite power creep and it just doesn't really work very well

um I think the question on the fourth idea that all player is or all currency as player owned is very important because otherwise you're going to have an issue where you have very lumpy distribution and you have a huge amount of currency being owned by investors team exchanges and I I think that's one of the things that that's really most broken about a lot of web3 games the fifth point is one about how items come into existence so one issue I see a lot is you have a developer of a game and it's completely up to them on what to decide what to sell it for whether you know US dollars or tokens and this question of where does value accrue is

just completely unclear and so an economy where the virtual goods are much more about player crafting um I think is going to be quite uh quite important um the sixth point is about this idea of separation between uh the the fed and the treasury right because if you think about it the developer has two roles one is they need to have a balance sheet to do to do things like fund and develop the game and then the other is more in their role as fed as like being able to adjust the rate of inflation and monetary policy generally based on real activity in the system and I think it's very important that these two roles not be conflated and that there be transparency about when they're acting in what

capacity and under what constraints the seventh point I would make is about legal entity structuring I think one of the reasons that tokens and NF keys don't work is because tokens don't actually give you the right to anything in the vast majority of cases and so having a structure where real economic value can be redistributed to players is I would argue a a real old gating item for the original premise of web3 gaming to attain I'm personally quite fascinated by the idea of legal cooperatives as opposed to traditional corporations given Securities Law issues with Distributing economic value through dividends or otherwise back to users whereas cooperatives the mental model is

almost where your players are like workers in a cooperative and because everything is actively earned there's much less of an argument that these are unregistered Securities offerings so something worth worth drilling into the eighth point is one of alignment of the player and Speculator archetypes basically what's great about D5 and web3 is it's a fully adversarial model and so you know I I don't think any game can survive if you craft this artificial distinction between a quote player and Speculator so you really have to assume that everyone is going to kind of be a specular later and change your design

accordingly to be resistant to that the ninth principle is one of how do these games monetize um I really believe in the idea of vat-based monetization so a taxation on kind of trading activity as opposed to things like pre-sales or in-app purchase sales because again when you are taking a tax on things that are happening in the real economy I would say that the interests of the developer and the players are are aligned and then the last point I would make is one of proof of humanity because you know at scale when these ecosystems get super real and real GDP is flowing through them things like fincen guidance

on a virtual currency issuing and kyc AML all of these things really start to become an issue together with the idea of how do you prevent Bots from creating a bunch of dupe accounts and earning a bunch of money for this or that so so all these things are are complicated problems but I definitely need to be thought through so yeah just uh that that kind of wraps up what I wanted to say uh I think it's really hard to get all of these 10 things right um but I think the ones who do it first are likely to create massive ecosystems that that really excite me and kind of fulfill some of the original promise of web pre-gaming so I'd love to chat with any of you about this more you can find

me on Twitter at Galaxy rtk or telegram k-r-y-p-t-o-l-i-t-e thanks very much [Applause] any questions we have time for a few questions okay hey great talk thanks for sharing your thoughts uh you mentioned that the road to web free gaming has been around for a while like five years we've been thinking about it and it seems like

recently um there are some now high quality games coming out like very competitive multiplayer ones so I was wondering what you thought about onboarding uh like professional and semi-professional Gamers um who can be competitive within like an Esports environment how tokenization can incentivize them and perhaps also some of the regulatory aspects uh surrounding that particularly when you're doing risk to earn models uh gambling betting pools essentially on some of these professional gamers yeah that's a that's a great question I mean the the things that excite me the most is you hit on are the kind of risk to earn type of models the problem with that is uh the rules on gambling versus

skill based gaming are very nuanced um you know one of our portfolio companies is in the space in the web 2 space and if you look at the 50 state legal opinions um you know they all differ right and there's at least four different categories of whether something's predominantly luck or skill and that's just the US right then you have to look at Japan Europe everywhere so um I personally think that uh if you really wanted to experiment with this properly uh I I I'm much more a believer in in the kind of simple Loop model that I didn't talk about today of release of kind of blockchain based vending machine and let the world interact with it and see what emergent things might happen

because uh it's just too hard to get around the regulatory stuff otherwise just practically speaking um you know where you see this come up a lot is a lot of the web three Shooters um it's a space I personally am very bearish on um because uh of the risk of cheating um you know if you look at Riot games they spent one of every six people building valorant was built was was focused on anti-cheat and that's right right I mean what what chance does a web 3 gaming studio have to to Really I'll compete in this space so I I don't think it's going to be shooters thank you time for another question because the

next speaker didn't reach yet okay no question fine thank you [Music]