Blockchain Gaming

Blockchain Gaming

Blockchain Gaming Research Report | February 4, 2023

Thesis Statement

The implementation of blockchain gaming will unlock massive amounts of value within the gaming industry that has traditionally been sequestered to secondary dark markets.

Additionally, the proliferation and viral nature of web3 play-to-earn mechanics will drive a blockchain gaming narrative bubble within the crypto market which will be incredibly lucrative for informed market participants, and financially disastrous for the un-educated.


Like the real world economy, in-game economies are extraordinarily complex and largely unsolved.

This research report will serve as an educational resource and blueprint for understanding how token systems work within the context of blockchain gaming, and how to best position oneself to benefit financially from a blockchain gaming narrative.


Almost all games have in-game digital items.

Some games like World of Warcraft, Diablo, and RuneScape have robust in-game economies where you can spend gold earned in game on digital weapons and armor.

World of Warcraft
World of Warcraft

Other games, like Fortnite, Call of Duty, and Counter Strike have skins, a cosmetic upgrade that changes the appearance of in game characters and items, but does not improve performance.


The tradability of these in-game items varies from game to game.

For example, in World of Warcraft you receive gold (in-game currency) for killing monsters and completing quests. This gold can be used to purchase materials, weapons, and armor (gear).


The same goes for RuneScape. But in most cases you can’t trade items and gold for real money, despite the market placing some real financial value on these assets. Some players would happily pay real dollars for in-game gold or items to short-cut some of the grind.

Because of these trading limitations, secondary black markets have popped up to satisfy demand for in-game items trading using real money.

For example, players can buy World of Warcraft gold from numerous third-party websites.


Pay for gold online, and someone from the site will send you the gold you purchased.

There are several issues with this. First, there is no guarantee that you will actually receive your gold. The site could take your money and never deliver, and you’d be left with no recourse.

Many of these sites want to maintain a positive reputation and will follow through with good service, however, a lot of real-world trading is facilitated through forums where scams and ripoffs are common.

Another issue with this type of trading is that these types of transactions directly break the the game’s rules and can result in a permanent ban, in which case the player would lose their account, items, money, and purchased gold.


Yet another issue is that there are third parties benefitting from these trades (taking a fee) and the developers of the game are not making any money from these transactions.

The existence of these black markets can also disrupt the in-game economies and disrupt the overall playing experience. If there is significant real world demand for buying in-game gold with real money, then ambitious individuals will often prop up bot-farms or gold-farms to extract as much gold from the game as possible.

Bot-farms run automated scripts (bots) across a multitude of accounts to collect in-game resources (like gold) at scale with minimal human assistance with the intention of selling for real money. This can disrupt gameplay for honest players by making the in-game resources more difficult and competitive to acquire.


It can also disrupt the in-game economy by flooding the market with a particular resource, crashing the price of that resource, or by introducing unnatural amounts of gold to the game, causing inflation of the in-game currency.

Gold-farms use cheap or free labor in developing countries to extract and sell virtual resources from games like World of Warcraft or RuneScape.

If the hourly cost of labor is cheaper than the output of the in-game gold, then there is profit to be made.


These secondary markets can also be used to facilitate money laundering at a small scale. Let’s say you need to launder some money from a stolen PayPal account. You could use that money to buy World of Warcraft gold, trade the gold across a few different WoW accounts, then sell it back for a small loss. This is quite difficult for regulators to trace.

Why do markets like this even exist?

The same reason any market exists. Demand.

Why not just play the game like normal instead of buying your way to the top with money?

Many MMORPGs require long grinds of leveling up and acquiring the best gear before you can access “end-game content”.

Many people are willing to pay to skip the grind so they can access the content they view as more fun. Additionally, some people want the clout of flexing the best, most expensive gear or coolest cosmetic skins on their in-game characters.

Alternative solutions:


Steam, a video game digital distribution service and storefront, has an online marketplace where players can buy and sell in-game items like cosmetic skins. The problem is that players can only deposit money to buy and trade items, but they can not withdraw money.

Steam enforces this rule to protect themselves from money laundering laws.


Diablo 3, a heavily anticipated RPG game launched in 2012 implemented a Real Money Auction House (RMAH) within the game for almost 2 years before shutting it down. The Diablo 3 RMAH allowed players to buy and sell in-game items for real money, minus a whopping $1 + 15% fee for Blizzard, the studio that developed the game.


Blizzard cited gameplay degradation as the primary reason for removing the auction house.

Instead of playing the game as designed:

kill monsters → get cool loot

…players started:

farming gold → buying loot

This attracted farmers who would play the game simply to make money, rather than for fun. As discussed, this can flood the market with certain items and throw off the in-game economy for normal players.

It also made the game quite difficult to re-balance. When a game is first released, it’s almost impossible to get everything right on the first go without seeing a large population of players play the game.

Some items, spells, attacks, attributes, etc will be too weak or too powerful, making the game less fun overall. Game developers seek to ‘balance’ the game over time and need to be able to make changes in software patches as time goes on. Adjusting the stats for in-game items, making them stronger or weaker, can drastically change the value of those items.

If you have people spending hundreds or thousands of real dollars on those items, they will not be happy if a change is made that reduces the value of their items.

Another problem with the RMAH, is that it is both expensive, risky, and difficult to operate.

Blizzard is a video game developer. Not a payment processor.

In order to cover the cost to process the payments, Blizzard had to take large fees.

By facilitating in-game transactions for real money, they also took on legal and compliance risks related to money laundering.

In today’s time, the implementation of the RMAH would likely incur the need to comply with AML and KYC regulations and potentially geo-restrict certain countries based on their local laws, as is common with many crypto exchanges and DeFi protocols.

Lastly, the RMAH was centralized. If they wanted to, Blizzard could have created tons of expensive items from thin air to sell to players, and there would be no way for players to tell if that was or wasn’t happening.

In short order, the frameworks for facilitating in-game transactions with real money did not exist in 2013.

The frameworks that orchestrate fast, decentralized, low fee in-game transactions via cryptocurrency, smart contracts, and NFTs are being built today and starting to come online.

Let’s stop and highlight some of the issues with the current non-web3 model of gaming and in-game asset trading.

  • Players do not truly own in-game items.
  • In-game items have real financial value, but can not be easily traded for money.
  • Players complain when the game is rebalanced and their items lose value as a result.
  • Game creators can ‘print’ items out of thin air.
  • Players can lose their items if they get banned.
  • Legal implications surrounding in-game digital asset trading.
  • Bots and farms degrade the gaming experience as they swarm in to extract money.

So which of these issues does web3 gaming actually address and solve?

By introducing transparent blockchain based technology:

  • Players can truly own and trade their in-game items, creating a model where players can earn money by playing the game (play-to-earn).
  • Games can be rebalanced with a democratic, decentralized approach rather than by the game developers directly.
  • Game developers cannot ‘print’ items out of thin air as code, transactions, and events are transparently recorded on the blockchain.

But web3 play-to-earn models do not necessarily solve issues around bot farming or legal compliance issues, which are still quite ambiguous in many countries.

Key Take-away

At the end of the day, play-to-earn has been technically possible for some time (as evidenced by the Diablo RMAH), however, recent developments in blockchain technology and the popularization of NFTs have made play-to-earn models more efficient and decentralized.

Let’s discuss the implications of play-to-earn models.

Play-to-earn models allow players to earn money by playing the game by assigning value to the game’s in game currency, which is directly related to the demand for said currency. That’s great. But as we know, this incentivizes bots and farmers to come in, which disrupts game play and drives earnings down for everyone (same amount of earnings divided by more players).

In order to discourage bots and farmers, many games have introduced NFT requirement systems to unlock and/or boost earnings. For example, users may need to buy an NFT to unlock the ability to earn from the game, making it expensive for an army of bots to farm earnings.

The problem with this is that if the NFT price is expensive, and earnings potential drops after they purchase it, players could actually lose money playing the game.


This is exactly what we saw unfold with Stepn, the “move-to-earn” blockchain game where users walk, jog, or run and earn money by tracking it with the Stepn smartphone app.

Stepn players can buy digital sneaker NFTs with various stats. Better stats translate to better $GST (in-game token) earnings.

At the height of Stepn’s virality, earnings were very high due to the high price of $GST, which meant people were willing to spend a lot of money buying and upgrading the sneaker NFTs in order to maximize earnings.

The problem was that the high earnings were a results of fast, unsustainable user growth. New players entering the game had to buy NFTs and $GST tokens to upgrade those NFTs. And at first, there were a lot of new players entering the game, pushing up demand (and prices) for sneaker NFTs and $GST.


Once growth slowed down, $GST price (and therefore earnings) plummeted, leaving those who had recently purchased expensive NFTs with a no ability to earn and re-coup their investment into the game.

Key Principle

In current play-to-earn models, blockchain gaming earnings will almost always approach minimum wage or below. So long as users can earn a decent wage from playing the game, more entrants will continue to enter, diluting the earnings per player.

While earnings per player will vary depending on the stats and levels of each players in the game, the formula below:

Total earnings (as dictated by current demand) / # of players = earnings per player

Key Take-away

The hype around blockchain gaming has a lot of people excited, but with the tendency for earnings to rapidly dilute as new entrants enter, there is significant risk of losing money.

This means a nuanced investment strategy is required to avoid losses and maximize returns.

In the case of Stepn, the $GST token was destined to trend towards zero as it is highly inflationary (increasing supply), and demand decreases as user growth decreases. Understanding this as an early player was vitally important to avoiding large losses.

Web3 Gaming Investment Strategy

This section will outline a set of strategies, rules, and guidelines for maximizing returns and avoiding risk while investing in web3 gaming.

Games need to be fun in order to attract user growth and create long-term value.

Just like stocks, cryptocurrencies, and NFT project, play-to-earn games need a constant flow of new players coming in to provide new demand. Once a game’s initial spike hype and earnings plays out, it will have no financial advantage in attracting new players.

If players can earn $8/hour playing Game A and $8/hour playing Game B, they will ultimately play the one that is more enjoyable. If a game is not fun, it will be difficult to attract new players and new demand.

Understand the game, it’s valuation, its tokenomics, and all the levers that affect its token and NFT prices.

In the case of Stepn, the $GST token was destined to trend towards zero as it is highly inflationary (increasing supply), and demand decreases as user growth decreases. Understanding this as an early player was vitally important to avoiding large losses by buying in when new user growth rate had already peaked.

Understand circulating supply fully diluted valuation. Here is a chart of Illuvium’s market cap:


At one point, the game’s market cap was over $1B, while only 10% of the tokens were circulating. This meant that the total fully diluted valuation was over $10B, for a game that had not even been released yet. The risk here was egregious, as a 10x return would require the FDV of an unreleased video game to go to $100B, making it a top 5 cryptocurrency. Not going to happen.

Avoid overvalued vaporware like the plague.

As an investor and/or player of the game, you need to take the time to gain a deep understanding of how token and NFT values are derived.

What does the token supply look like? Any upcoming unlocks?

Many games have multiple levels or type of NFTs. Which ones are rarest?

Do the earnings associated with the rarer NFTs scale according to their price?

The team just announced a special incentive for a certain type of NFT. How will this affect the market for the rest of the game?

Understand the token sinks and faucets.

Where do tokens enter the game (rewards, loot, etc.)?

Where do tokens leave the game (players spending tokens on gear, repairs, upgrades etc.)?

Are their more tokens leaving the game than entering the game? If so, token price should increase. If the opposite is true, price should decrease.

Taking the time to understand the game’s tokenomics at a deep level will help to avoid massive losses as well as optimize strategies for maximizing earnings, especially when changes to the game are announced.

Supply and Demand. Always.

Remember, web3 gaming simply enables monetary value to be assigned to a game’s currency by providing an off-ramp to other currencies (sell your GST earned in Stepn for SOL or USDC).

That’s really it. It’s simple.

The value, or price, of a game’s currency simply comes down to supply and demand, just like every other asset in the world.

So by investing in a game’s currency, you are betting on price appreciation of that currency.

In order for price to appreciate demand has to to be greater than supply.

Supply is dependent upon the specific game, but generally most play-to-earn models have high supply emissions, and thus high inflation.

Demand for a game’s currency will come predominantly from two places.

  1. Speculators - Crypto market participants who are looking to capitalize on a bullish narrative around blockchain gaming and its future. As evidenced above with Illuvium’s pre-launch pump to and FDV over $10B, this is not sustainable, but can still be highly lucrative. Buying blockchain gaming cryptocurrencies during periods of low speculation (bear markets) and selling into high speculation, is
  2. Players - Players create demand by purchasing the in-game currency to skip content, improve their gear, or level up. However, the end-goal for most players in play-to-earn games is to earn, not pay. This means that new players who need to level up in order to earn more are commonly sources of demand, while old players who have already leveled up are commonly sources of supply (sellers). Obviously this will vary a bit from game to game depending on the exact token mechanics.

Therefore, the value of a game’s token should generally appreciate rapidly when a lot of new players enter the game in a short period of time, and decrease when new player growth stalls or decreases.

Supply for a game’s currency can come from a few places:

  1. Investors - Venture Funds, IDOs, ICO, private sales, team allocations, etc. As these tokens vest and unlock, the circulating supply grows and the owners are likely to sell and create downward pressure on price.
  2. Emissions - The main source of token emissions for most games are in-game rewards for actually playing the game. Earning tokens for killing monsters, completing quests, or int he case of Stepn, walking/running. Some of these tokens will need to be used in the game to repair gear, level up, or purchase in-game items, but some will be sold as additional supply.

Assuming lower demand, the value of a game’s token should generally decrease if there are a lot of tokens vesting and/or a lot of players selling the tokens they earn due to emissions in surplus of what they need to continue playing the game.

Be early, and play the hype cycle(s).

Remember our principle from earlier:

In-game earnings for the average player will eventually trend towards minimum wage or lower.

Some players may be lucky enough to secure rare NFTs or in-game items that unlock higher earnings, but in most play-to-earn models, even those earnings will dwindle once new demand subsides and the growth curve flattens.

Look at Stepn’s growth curve. The # of new players entering the game began to decrease (in late April and into May of 2022).


As soon as new player growth peaked, the $GST token price crashed:


If you are not an early adopter, and you are buying into hype, you are at risk of losing money. Understand this, and be willing to pass up an investment opportunity if you feel that you are not early.

Most play-to-earn games start with low circulating supplies and have high inflation in order to distribute tokens via in-game earnings. This means that there will be heavy dilution which will push price down as soon as demand subsides.

Ride the hype cycle, and secure the initial investment as soon as possible. Get out with profits while hype is high. The attention span of a speculative market is low. And so are the attention spans of gamers.

Even the most successful games struggle to maintain hype for extended periods of time:


The lifespans of many successful games look like ‘Among Us’ in the chart above.

This makes a multi-year HODL thesis for any blockchain gaming play quite risky.

Rapid price appreciation comes from two places: speculation and user growth (real demand).

Speculation does not last forever, and neither does new user growth. The goal is to catch a ride on either, or both, of these waves and cash out before they slow down, because as soon as they do inflationary tokenomics take over and causes token price to crash.

Consider limiting your exposure to in-game assets as soon as possible. For example, if you spent $30k on Stepn sneakers, but only took $20k in profits before the sneaker NFT value went to $1k, then you lost money. Secure the initial investment early, so in-game earnings are actually profit.

Remember, in many games, leveling up and acquiring the best gear requires spending the in-game currency tokens that you earn. Older players who have already leveled up generally have the benefit of earning the largest surplus of tokens, while new players have to spend the majority of their tokens to level up. Therefore, being a new player is often a disadvantage and a risk.

Being early is not always enough though. Some games are so hyped up before launch that it is impossible to be early from an investment standpoint. For example, Illuvium was massively over-valued before it even launched.

Bigtime was another game that was completely overhyped initially. The NFT values from it’s pre-launch sale have gone down drastically.

You’re not actually early if there is a line out the door to be early.

Most blockchain gaming is not suitable for passive investing. Games are inclined to reward players, not passive investors.

Most games will optimize their mechanics towards rewarding people who actually play and contribute to the game, rather than people who are looking to flip a quick investment.

Throwing darts at a variety of web3 games without know the mechanics may work if and when the market sees a broad blockchain gaming narrative, so long as you are disciplined about taking profits in such a narrative.

However, if you’re looking to reduce risk and maximize gains, actually getting involved with a few games you are particularly interested in from an investment perspective is ideal. You’re more likely to know exactly how to play the game to yield maximal rewards, and more likely to score rare NFTs and high earnings early on before a blockchain gaming narrative even hits.

Early Stepn users were able to secure highly sought after sneaker NFTs that yielded higher rewards before the FOMO hype even kicked in. They were also able to level all the way up before everyone else, meaning while everyone else had to spend most of their $GST tokens to level up, they could sell 100% of their earnings.

Scarcity is your friend.

Take time to study the NFT supplies of games. Which ones are the most rare? Do they have a maximum supply?

Rarer in-game NFTs will often translate to higher earnings. But there is a problem if those ‘rare’ NFTs do not remain rare and do not hold their value.

For example, in Stepn, because the sneaker NFT supply is inflationary, the sneakers that were considered rare early on are no longer rare, don’t earn much any more, and did not hold their value long-term.

Look to acquire in-game NFTs (skins, cosmetics, armor, weapons, etc.) that have fixed supplies according to the game documentation. If you can score these scarce NFTs early on they are likely to appreciate in price as the game grows.

Limited edition cosmetic skins are an attractive play as the price will be correlated to demand from the player base, rather than earnings, which can be volatile. Skins that are rare may fetch high valuations from collectors.

In 2021, a CSGO cosmetic skin was sold for $150k:

This is in a game that is well past its peak hype cycle, though still fairly popular, particularly in the eSports space.


Cosmetic skins are a large market in the web2 gaming space and makes up the majority of Fortnite’s revenue:


Many web3 games will have skins that will trade similarly to pfp NFT collections with rarer skins fetching higher prices.

It is also quite likely that existing pfp NFT collections will be usable in web3 games, possibly adding additional value and utility to premiere NFT collections like BAYC, Azuki, and DeGods.

Keys to Success

As a player, be early. Level up before the masses and sell surplus token earnings to speculators during times of peak hype.
As an investor, invest just like you would in the rest of the crypto market. Buy during peak bear market boredom and sell speculative hype, but beware of high inflation diluting your positions.
As a trader, play the hype cycles and understand the game’s token mechanics at a deep level. Trade around announcements and gameplay changes that will effect token price in ways the broader market does not understand.
As a collector, understand the NFT rarities of in-game cosmetics and if applicable, their performance boosts. Leverage this knowledge to collect rare skins ahead of time and sell during speculative pumps.


Blockchain technology unlocks decentralized ownership of digital items in games, and enables the efficient trade of those items with in-game currencies that can hold real value. The market is excited about this application of NFTs and cryptocurrencies to the large gaming sector, and a speculative blockchain gaming narrative is likely to emerge.

This will create positively asymmetric risk:reward opportunities for market participants who understand tokenomics and how in-game mechanics affect supply and demand of a game’s digital assets.

Blockchain Gaming Watchlist

We will be adding a watchlist to the Research Hub of highly anticipated web3 games that will likely see high speculation in a blockchain gaming speculative bubble. Stay tuned.