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Play 2 Earn, Part 1: The Future of Gaming & Rewards Programs
By Elliot Koss
Technical Level: 🛠️
The next five weeks we’ll be focused on Play 2 Earn (P2E), a fairly wide-ranging subject that will play an increasingly big role in the crypto space. If you think P2E is only about games, then you have a lot to learn. Today, we’re going to cover Games & Rewards Programs. Next week we’ll explore social media. Then Tokenomics 101, followed by Axie Infinity & other failures, and wrap up with the expanded story of Creepz, a P2E NFT, I wrote a massive tweet thread about last year.
Let’s dive in.
WTF is Play 2 Earn?
The basics first. Play 2 Earn (P2E) is the concept where you are rewarded for your contribution, engagement, purchases, or playing time.
You’re already familiar with the concept, even if the name doesn’t ring a bell. Ever played a video game and received coins in a game? If you have, then you’ve probably had some fantasy where you could take those coins and trade them for something of value outside of the game.
The same concept is true with something like airline rewards. You spend money on your designated credit card or fly a certain airline, and you’re rewarded with airline miles. If you’ve earned airlines miles, you’ve probably also wished that you could use your American Airlines miles with Delta (or some other airline).
Today, you can’t use your coins from a game for anything outside of the game just like you can’t move your airline miles from one airline to another. One reason is the existing technology simply doesn’t allow for these sort of exchanges from one thing to another. Another reason is how do you prevent counterfeits. The last one is that the economic incentives from the initial providers of the coins or miles means that they’d likely take some initial hit despite the benefit customers would have.
For all those reasons, today’s technology is inadequate and there is no force-function to push this forward, especially since companies may not have the incentive to fulfill the promise that we’ve all dreamed about.
Play 2 Earn resolves these challenges.
As you likely already know (or at least suspected), P2E is a crypto concept. Every ‘point’ or ‘coin’ you earn in a P2E experience is actually a token of a cryptocurrency. That cryptocurrency is tied directly to the experience that you’re playing. So if it’s a game, then you’re earning tokens that are (likely) exclusive to that game. If it’s an airline, you’re earning tokens that are exclusive to that airline.
What makes P2E special is the interconnection with DeFi exchanges. Once something is a cryptocurrency, there’s an inherently public record of it, and there’s also a way to openly exchange that cryptocurrency for any other cryptocurrency. This is a tad of an oversimplification, but it’s how P2E and DeFi exchanges enable a new world of possibilities.
For the first time ever, P2E enables a proper infrastructure to enable anyone to make money from playing games or participating in rewards programs.
P2E Gaming Unlocks A Growing Industry
Games have seen an explosion in usage over the past 15 years thanks to innovative smartphone operating systems by Apple and Google. We’ve witnessed the rise of professional gamers who are taking home serious money. Arenas are packed with fans. And even high schools are creating their own competitive teams.
Gaming isn’t going to slow down.
So it makes sense that a new technology would allow even more players to find a way to monetize something that they already do for fun.
In my view, it’s inevitable. You may spend tens or hundreds of hours playing a game, only to eventually get bored with it. What can you do with all this time and effort you’ve spent? Today, you have no real options. You may be able to sell your account to someone who wants to get ahead, but that process is not standardized and you’re in a position to figure this out on your own.
This presents an opportunity.
P2E Rewards Expand Upon A Groundbreaking Success Story
The same is true with rewards programs. Before the internet was even a thing, airlines were among the first who created loyalty programs, allowing their customers to earn a small fraction of their money spent in the form of a point that is then redeemed for free benefits such as a free round-trip flight. This was a great way to generate loyalty for specific airlines, and it helped grow these businesses.
Eventually, the internet came about and comparison shopping for flights became substantially easier. Instead of remaining loyal to a single airline, you may have found yourself flying on multiple airlines, earning miles from multiple airlines. So what do you do if you’ve earned miles on one airline but don’t have enough to redeem for a free flight. Or what if you have a specific trip you want to take, but you just wish you could convert one set of miles for another.
When airline miles become P2E tokens (which I’m confident is coming at some point), you’ll have the opportunity to exchange one airline’s miles for another.
How Does P2E Gaming & Rewards Adoption Happen?
This is all great in theory, but when the rubber hits the pavement, that’s when we start to realize there is one big limitation to this idealistic future: Both Gaming and Rewards programs are run by companies who will ultimately make the decision to turn their platforms into a P2E cryptocurrency experience.
One of the challenges with P2E Gaming adoption is that many games today make money by putting limits on the game that require you to spend their in-game currency to allow you to play for longer. When you run out of the in-game currency, you either have to buy more of the currency (ie revenue generation) or you have to take a break from playing the game.
If a player is able to buy more of the currency from an exchange where other players receive the money instead of the game maker, then the gaming model, as it’s known today, will be disrupted.
There are several ways to monetize a P2E model, including taking some percentage of coins that are transferred into the game. We don’t need to articulate all of them here, but know that they exist.
Gaming companies will likely be the first to adopt this concept - in fact, a few Web3 companies have already built P2E-first games. The reason you haven’t heard about them is because the games aren’t great. Over time, more entrepreneurs will build games and experiences, and eventually something will break out, proving the concept. That’s how this sort of thing usually happens.
For instance, Bored Apes Yacht Club (BAYC), one of the most well-known NFTs, is building a P2E game. The business has veteran gaming executives flocking to it, and top-notch investors that drove a $1B+ valuation during the height of NFT fever in 2022.
While, the BAYC game isn’t a break-out (yet), it shows the promise of what many expect from this space (there’s also a major metaverse plan). As more companies and founders take a crack at this nut, someone will figure out a working model. And just like any great business model or technology innovation, others will follow.
Rewards programs will face similar challenges, but for slightly different reasons. While Rewards aren’t generally a revenue generator by themselves (the loyalty aspect which does generate revenue is an indirect benefit that wouldn’t be explicitly disrupted by P2E), the rewards programs are a cost that are only realized when the benefit is redeemed.
Think of this way, if a customer earns 1% of their money spent in rewards points, then once $10,000 is spent, the user has earned $100. BUT, the beauty of rewards programs is that until the user actually uses the $100 reward, the $100 gets to sit on the company’s books. Sometimes, the user never uses the reward, and in some cases, the reward eventually expires. Which means the company could get the benefit of the user’s loyalty without having to pay for the expense of the reward.
This is all to say that transforming a rewards program today into a P2E rewards program where the points can be exchanged for other companies’ reward points means that companies would wind up incurring more costs for their rewards programs, and the benefits to the companies may not be that big.
However, all it takes is one rewards program to do this successfully to kickstart a domino effect. The first company that turns their rewards program into a P2E experience will likely only be able to enable its program to be redeemed for money in a DeFi exchange. While this won’t enable the movement of airline miles from one airline to another, it would allow users to make use of their unused miles and turn them into cash. By being first, this company would likely see a flock of interest, massive press, and an increase in revenue as users try to earn rewards so that they can turn it into cash.
Plus, by being first, they’d likely be the fastest to iterate and grow their program.
The headwinds are already making all of this increasingly realistic, and it’s likely that within the next 3 years, at least one major brand takes the plunge with their rewards program and that at least one major game has a breakout hit.
The next wave of innovation is undoubtably approaching. The only question left is whether your company is going to seize the opportunity and reap the benefits, or be left on the sideline watching a competitor run laps around you.
News of the Week
The iShares unit of fund management giant BlackRock filed paperwork Thursday afternoon with the U.S. Securities and Exchange Commission for the formation of a spot bitcoin ETF. The SEC has notably rejected other fund management company attempts at opening a spot bitcoin ETF. BlackRock, the world’s largest asset manager, however, may not be as easy for the SEC to turn away.
Dmitri Cherniak's Ringers #879, often referred to as "The Goose,” sold for $6.2M at a recent auction hosted by Sotheby’s to notable NFT investor 6529.
ResearchHub, the startup co-founded by Coinbase CEO Brian Armstrong to accelerate the pace of scientific research using cryptocurrency, has raised $5 million in a funding round.