Do marketplaces want to destroy web3?
Why games—and marketplaces—need to think differently
When you think about ownership of things, it’s pretty ridiculous to recognize that we, culturally, expect that physical goods we own are ours to do with what we want, but digital goods are not. If I buy a Star Wars t-shirt, I can wear it till it disintegrates, give it to a friend, rob a bank wearing it, or sell it, maybe even at a profit if it’s a collector’s item. But when I buy a Star Wars outfit in Fortnite, I functionally and legally never own that batch of code. Both cost me $10, both have the same Star Wars logo and the same Luke Skywalker picture. But I can’t take the digital one out of the game, I can’t transfer it to a friend, and I certainly can’t sell it. The fact that we’ve accepted this arbitrary dichotomy is pretty wild, and it’s one of the reasons why ownership is a tenet (albeit a slightly shaky one) of web3.
Regardless of the spiritual ethos of “ownership” in web3, the thing that this technology expectedly allows someone to do is transfer or sell items to other people. To date, the standard for this process has been a reliance on third party marketplaces like OpenSea, Blur, and others. They function like eBay, enabling the selling of “secondhand goods” between individuals. More recently, as the speculative trading bubble died, marketplaces have adopted more of an Amazon strategy, aiming to be the place where brand-new items are sold from a business to a consumer in a primary sale, in addition to secondary sales.
Third party marketplaces wielded significant power over the NFT trading ecosystem for a number of years when the primary motivation behind NFT purchasing and selling was to get rich, and these platforms’ choices around content featuring, fraud, royalty enforcement policies, and as aggregators of eyeballs and users made them de facto tastemakers and rather weak policers of the web3 ecosystem. But that power is about to be upended. Let’s explore the future of item trading and where third party marketplaces will fit in, particularly through the lens of gaming.
Change is coming
Looking at the landscape of 2021’s NFT trading craze, it’s easy to see how marketplaces became what they were, and it’s also easy to see why they’ve become what they are now. With very few exceptions, users during that cycle were investors buying into and then flipping assets as projects popped up. When the primary purpose of an NFT was trading (despite any claims to the contrary by project creators), the marketplaces held almost all of what a trader needed: discoverability for new projects, liquidity in the form of lots of sellers and buyers, and a centralized destination to get it all done.
And then something happened. Marketplaces sprung up left and right with very little differentiation, all vying for a cut of the goldrush. To appeal to professional volume traders for whom margins would be razor thin, marketplaces started to cut their fees on each trade. Blur, a new entrant, launched with zero marketplace fees. Here’s how that went for OpenSea (hint, very not well):
And other marketplaces followed suit. Then, because speculators are really greedy, Blur decided to not enforce any of the secondary royalties that project creators asked for on their trades. And other marketplaces followed suit. Suddenly, one of web3’s most pleasant-sounding promises—that original creators should get rewarded for their hard work in perpetuity—went right out the window.
When you’re a rag-tag team of a few PFP collection founders, this is a mega bummer. But when you’re a business who intends to have its future revenue streams based on web3 items, this is a nonstarter. It’s akin to PlayStation saying it has no intention of paying developers for any in-game purchases after the primary download of the title. Absolutely bananas. But this is just one of the reasons why third party marketplaces’ incentives are increasingly at odds with how game developers are used to doing business and engaging with players.
This is unique to web3, where the open and “permissionless” standards of the space mean that anyone can basically become a marketplace for any collection, and the primary focus for third party marketplaces has therefore been about winning users (traders) rather than project owners or developers. PlayStation, for example, must hold a balance between serving players and developers, aiming to appeal to both because of an obvious tension: without content, PlayStation has no users, and without users PlayStation has no benefits for developers. This is not so with marketplaces, where the content is freely accessible by anyone. Therefore, the only crowd you need to cater to is the users.
Ironically, and especially when it comes to gaming and other utility-based items, third party marketplaces’ dominance has now set up a really tiring user experience that isn’t benefitting player nor developer. Let’s look at the user journey of a player in web3 as it stands in most cases right now:
User buys a pre-launch NFT “founders’ pass” or avatar or some such item on a minting site or third party marketplace; developer gets primary sale, loses all secondary revenue.
The game launches, a small fraction of pre-launch NFT buyers convert to players.
User buys an item to use in-game on a third party marketplace; developer loses all secondary revenue.
If the user wants to sell that item, they go to a third party marketplace to do so; developer loses all secondary revenue
Poor remuneration for a game developer who has done a lot of hard work. Here’s an analysis we did at Sequence: a AAA game publisher recently launched an NFT collection for an upcoming game as a free mint. This is what the publisher actually earned in royalties from the few users who opted-in to rewarding the studio with royalties vs. what they would have earned with a royalty-enforcing marketplace. In short, they missed out on 400% more money.
In addition to presenting a horrible player experience that’s completely incongruent with how gamers want to play games and the kinds of experiences developers want to offer, third party marketplaces come with a host of other issues, too. In addition to the lack of royalty enforcement:
You’re forcing a player leave your ecosystem for one that doesn’t look or feel native to your game, breaking immersion and lowering retention
You don’t control the content or curation of the platform, meaning your Happy Rainbow powerup could be next to explicit items or even scam collections
You don’t own the technology, so you can’t guarantee that the tech running your game (like your wallet) will work seamlessly with a third party platform indefinitely (and, increasingly, it doesn’t)
If you presented the above issues to a traditional game developer, they’d want absolutely nothing to do with the platform. But in web3 developers have had to rely on these third party marketplaces because building your own with any sophistication is a nontrivial task, and also because developers have wanted to appeal to the larger trader audience for the sake of liquidity in a market that’s still dominated by traders rather than players.
The new wave of more thoughtful web3 game developers, however, are focusing on player experiences as fundamental to their success, and that means keeping players in the game for longer, offering more holistic and curated visual and user experiences, and keeping an eye on long-term sustainability and revenue. What does this mean? In-game marketplaces.
Building an in-game marketplace used to be extremely difficult, and indeed it’s a fool’s errand to try to build one completely from scratch for many reasons (it’s not where your capital and developer time should be placed, it requires arduous security audits, etc.). Most developers are instead looking to leverage existing stacks like Sequence’s to create either white labeled marketplaces or use something like our marketplace API to build a custom-designed UI but powered by that technology in the background.
Some developers worry that by encouraging players to use their in-house marketplace, they’re forsaking activity because users would rather be on third party marketplaces where they’re doing other trading of other collections. They also worry that marketplace fees will create price sensitivity for users, who will want trade places with zero royalty fees anyway. These are objectively misled worries. We know from our own game, Skyweaver, that 90% of transactions happen on the in-game marketplace. This and similar examples from our partners demonstrate a universal truth: players are lazy and would rather stay in a beautiful experience you made for them, even if they have the option of a slightly higher trading margin somewhere else.
As developers use this year to focus even more on “true gamers,” the standard around in-game marketplaces will be cemented.
How third party marketplaces must adapt
It sounds like the days of dominance for third party marketplaces are numbered. This will absolutely be the case if, as we all imagine, gaming will become the primary vector of web3 growth for the foreseeable future and these platforms don’t evolve. Given the momentum behind gaming—as opposed to traditional NFT collections—over the past year, this looks likely. But these marketplaces can also adapt to find new ways to fit into the space by rewarding developers and players, and not just traders.
Increasingly, marketplaces are trying to be launchpads for games, helping bring a first flush of buyers (read: speculators) and attention (in active secondary activity) to games. That’s nice and all, but the conversion of that audience into actual players is staggeringly—and expectedly—low. Which is to say that as launchpads these marketplaces are good for a quick burst of activity via users who won’t be players and dollars that won’t grow beyond the first few days of post-launch frenzy. Even if the marketplace does help attract actual players, its importance is quickly over since the marketplace is not where the utility of the game unfolds.
Others want to go a step further and become game launchers, i.e. platforms from which users can actually launch and play a game. This is what Steam is. Lots of people want to be the Steam of web3. Unless you’re ready to do nothing but eat, breathe, and sleep gaming, you will fail. Serving game developers and players is not a hobby, it’s a full time commitment because the needs of those people are hyper unique, and we already know that optimizing an experience for the trader archetype is completely different than for players. There is also the reality that, eventually, Steam will decide to be the Steam of web3, and what then?
Even those marketplaces that have tried to delve deeper into gaming haven’t further differentiated that user experience for the sake of gaming. For example, when categorizing by game genre type, the marketplace displays collections, not games. That’s like Playstation’s storefront showing me a random list of in-game items across different games. Why do I care if I don’t know or care about the game they’re attached to?
Let’s break down how third marketplaces can play a role in gaming, based on the major needs of game developers and players: discoverability and user acquisition, monetization, and retention.
Every developer—web2 or web3—is constantly wanting for new players. Players are often on the lookout for great new games. Marketplaces can serve to fill this gap, but only by becoming destinations for true players. How do they do this? Helping players navigate new games—not new collections. Properly segmenting titles by type (and even more-so, leveraging the benefits of on-chain information to curate the featuring of games based on what’s in a player’s wallet). Building structures for fostering conversation and community around gaming.
Give players the inside scoop and help them find their friends and games and you’re in a strong position. The chicken-and-egg is getting them there in the first place.
Cross-game loyalty and universal player profiles are going to be some of the biggest trends in web3 gaming over the coming years. Because of the benefits of the chain and the game-agnostic nature of third party platforms, marketplaces can and should help game developers incentivize players to take certain actions across different gaming ecosystems. For example, a marketplace could structure a scheme whereby players who take certain in-game actions in a week are offered free or discounted items for new games. This lets marketplaces help developers cross pollinate players across different experiences, leveraging the chain and using proof of play or proof of ownership to more easily incentivize and reward users regardless of the game or ecosystem, and also earn incremental revenue with gamified offers.
Marketplaces can also become destinations for gamers posturing their status across the gaming ecosystem. Meta-leaderboards could offer players a way to show off their prowess not only for a single game—as the current web2 walled garden structure forces—but across all of gaming. Wouldn’t you want to show off that you’re the best gamer in the world this week?
What about helping players manage their assets? Could a marketplace become a way for gamers to recognize unused or unneeded game items they own and package them up for sale while simultaneously make purchase suggestions that would improve the users’ experience. For example, a marketplace helps a player sell a sword they no longer need because the platform recognizes that the user already owns a sword that is more powerful, while also suggesting a card that would have allowed them to win 3 out of their last 5 rounds of another title.
If marketplaces achieve a quorum of true players and serve as a destination that gamers will repeatedly go back to, they can also be vital retention devices for developers, helping them reach their players and bring them back into their game even when they’ve left.
This is just a smattering of ideas that are each powerful in their own right, but when combined present an offering that many gamers find interesting and many developers would want to leverage. Platforms that start to innovate now may realize that they’re even someone hedged against a major store entrant like Steam trying to come in late and learn the hard way how to foster a web3-based ecosystem for players and developers.
Web2 games, especially mobile titles, have been lamenting the steep financial burden of platforms like Apple, Google, and Steam. The generational struggle for improving monetization and net revenue has been ingrained in developers, many of whom initially looked to web3 as a way to free themselves from the injustices of platform fees, only to find that the analogs in blockchain gaming—marketplaces—simply found other ways to screw them over. But the tides are shifting once again as developers take more control over their destinies with in-game, royalty enforcing marketplaces. For the third parties, it’s clear that the future is pointing towards paths that will increasingly cut out third party marketplaces who fail to adopt structures that benefit game makers and gamers equally.