Intro: The Third Wave of Gaming
Coffee connoisseurs often describe coffee culture in three waves. The first wave came with the 1970s coffee: highly accessible, low in quality, and with a tinge of factory-produced aftertaste. The second wave came with Starbucks and Peets, where coffee quality, origin, and experience became more valued. The Third Wave came more recently with independent roasters like La Colombe and Intelligentsia, where culture and connoisseurship are celebrated. Each wave represents a new way of consumer engagement with coffee and opens up new business opportunities.
Like coffee, gaming is also entering a “Third Wave”; but with respect to coffee connoisseurs, the social impacts of the gaming “third wave” will be much more profound.
We should first define what we mean by “waves”. We can break gaming into epochs using many different razors: console generation, graphic fidelity, device, and so on. While none of these markers are wrong, they also feel incomplete in capturing the industry’s evolving business model. Take console transition for example: games on fifth-generation consoles (PS5) are fundamentally similar to ones in the fourth. Many are sequels of existing franchises.
Instead, we’re going to use a more nuanced razor to define these waves: the game’s economic system. The first personal games were sold as $60 boxed products. What players did within those games—how much they progressed, earned, or traded with other players—didn’t really matter to the publishers, as they’ve already made their money on box sales. In other words, the in-game economy was divorced from the game’s monetization. We often call this first wave game-as-a-product.
Over the last decade, with the rise of mobile devices and the corresponding access to wider player bases, publishers began to pursue a free-to-play model. To make up for the lost upfront revenue, publishers instead charged for currency and items in-game, gating elements such as progression, power, or vanity. In this world, publishers owned the game economy, and were absolutely interested in how players engage, progress, and earn. We often call this second wave game-as-a-service.
Behind the glizzy headlines and speculative market of blockchain gaming lies the very real and substantive evidence of a new business model. This evidence is fully on display with Axie Infinity and its Smooth Love Potion (SLP). At its highest level, the Axie economy worked as such: players buy Axies (virtual creatures) to play and do battle, and earn SLP through play. The SLP is in turn spent to breed more Axies. None of this is unique so far; every game currency system has “sources and sinks”, ways to create and destroy the currency. What’s unique is that Axie’s earned currency is tokenized and is freely tradeable across players. When one player requires more SLP to breed Axies, he turns not towards the publisher for purchase, but rather to other players. He can purchase SLP on various crypto exchanges, and in turn owns SLP in his wallet. In this world, the publisher is no longer the sole supplier of currency (as is the case in free-to-play), or even a supplier at all. Instead, the publisher facilitates player transactions, between players who “earn” currencies and supply them, and players who need and pay for them. For this service, the publisher takes a cut on certain transactions. In simpler terms, the players own the economy. This represents the third wave of gaming, and together with UGC platforms, forms an entirely new business model: games-as-a-platform. It will likely play an outsized role in the future of gaming.
Part 1: One step forward
A player-owned game economy is not a new idea. In the hopeful days of the late 1990s, when the term “metaverse” was last in vogue before it's more recent rivival, various games experimented with such concepts. Entropia Universe, a multiplayer exploration game, pegged its virtual currency to the US dollar and allowed players to earn, own, and transfer wealth from the game economy back to the real world. It made headlines when one of its virtual properties, “Club Neverdie”, was sold for hundreds of thousands, and then millions, in the early 2000s.
More famously, Second Life introduced its virtual currency, the Linden Dollar, which can be both bought and sold for USD at a floating exchange rate. The currency is used by players in-game to buy property, start businesses, customize avatars, and more. Players can sell their Linden dollars to others for real world currencies using LindeX, a company-built exchange. Indeed, some players started in-game businesses and became real millionaires.
Yet the challenges of operating these businesses with thin margins, small player bases, impractical technology (all managed on centralized servers), and regulatory hurdles meant that these games never took the main industry stage. One can argue that they were many years too early.
Even outside of these frontrunners, the popular MMOs of the time also had flavors of player-owned economies. Games like Eve Online and World of Warcraft charged flat subscription fees for play, and so the publishers had no incentive to own the game economy. Players freely traded with one another, and in many cases formed “autonomous organizations” in the forms of guilds and in-game corporations to pool resources. Capital Ships in Eve Online, for example, were often constructed as many players pool time and resources today, as it would take most single players decades to build.
A battle of Capital Ships in Eve Online.
And though the virtual currencies within the MMOs were not freely exchangeable to real world currency, they had a quasi monetary value. In both Eve Online and WoW, players could trade in-game currency for game subscriptions with other players, in effect giving them some semblance of real world value. In the grey and blackmarkets, virtual currencies were given real prices. “Cash farmers” earned and sold virtual currencies to players who wanted to buy them in these black markets (mostly eBay), claiming the title as the true pioneers of “play-to-earn”. For the average player, it was the satisfaction that one’s account was worth something, even if one never intends to sell it.
Part 2: Two steps back
The trend towards open virtual economies would not be linear. A few interconnected innovations led the industry away from boxed products into free-to-play around a decade ago. The most important shift was the proliferation of mobile phones, which were essentially portable mini-gaming devices with built-in digital stores. Device accessibility and digital distribution opened gaming to many millions of “casual” gamers. To access these players, publishers charged nothing upfront, and instead baked monetization into the game economy. Today, free-to-play has become the industry standard.
But with free-to-play, publishers were now incentivized to control the game economy—after all, it’s how they derived revenue. Control meant centralization: if players were earning too much “grind currency” so as to not spend real dollars in the game, the publisher would dial back the game’s generosity. If the players progressed too quickly, or not quickly enough, the publishers would adjust difficulties.
Above all, players could not freely trade within one another, because trading would be against the publishers’ interests. After all, why would players buy stuff from the publisher when they can buy them from other players, probably at a discount? The solution was to silo every player, so that the only economic relationship each player has is with the publisher, rather than with other players. The expansive player economy was thus replaced with the cloistered intimacy of the publisher’s storefront, where data scientists and product managers huddled to engineer discounts, rotations, personalized offerings, and other hacks to maximize sales.
Sure, some publishers allowed gifting to friends or kickbacks to guild members, but these were carefully manicured stage acts to induce further spending with the publisher—albeit with the added flavors of friendship and camaraderie. True player-driven economy was dead. For the generation that grew up on Fortnite, Apex Legends, or any number of free-to-play and mobile games, it never existed at all.
Part 3: Coming full circle
The free-to-play model feels more and more incongruous with the course of progress. The entertainment world is moving towards a “creator economy”, in which individuals claim ownership over content and attention; elsewhere, small entrepreneurs are empowered through Shopify and social platforms like TikTok to build, market, and distribute their goods and services. Yet within gaming, this supposed bastion of the “metaverse”, players are kept disempowered in favor of the publisher-owned store.
This is why the Third Wave of gaming is exciting. Those who refer to Axie Infinity as simply a “play-to-earn” game are missing the broader point of the game’s innovation. Sure, there are elements of play to earn, just as there are incentives for cash farmers in World of Warcraft to earn and sell gold. But no one would refer to World of Warcraft as simply a “cash farmer” game.
The bigger story is that these games are giving ownership of the game economy back to the players. For the first time in a long time, players can freely earn, own, trade, and exchange value with one another, independent of a central publisher node. It lays the foundation for more complex virtual player-to-player interactions, that may in time, and with other innovations around UGC, form the complex virtual societies that so many have dreamed about for so long. After a decade of free-to-play microtransactions, this feels like a breath of fresh air.
Of course, the journey is not without challenges. Long-term innovation is not mutually exclusive from short term speculation. As in many things crypto, bubbles may form that both exacerbate the short term euphoria and also mask true long-term paradigm shifts. Run-ups in virtual asset prices may push more to “play to earn” even if the assets are priced above long term equilibrium of true supply and demand.
Player-owned economies are also not all rosy. The cutthroat worlds of Entropia Online and Eve Online can plenty attest to that. Scammers and backstabbers run amok in these worlds. Balancing between true player ownership and a genuine culture of kindness within the game will not be easy, and will require deliberate effort. Finally, many of the gaming monetization practices will have magnified implications when deployed within player-owned economies, both from a player perspective and from a regulatory perspective.
The path to the Third Wave of gaming will not be easy, but it’s a journey well worth taking on. It may very well be the most important industry innovation in a very long time. And that journey is just beginning.
Like the article? Subscribe to the mailing list to receive notifications of new blog posts