Dmitriy Berenzon

Research Partner @ Zenith Ventures // Alum @ CoinFund, Blockchain@Berkeley, Berkeley-Haas

Network Effects in Blockchain Games: Content is Still King

The past two years have been filled with much hype but little traction around blockchain games. 
In addition, while many “general purpose” smart contract platforms, such as Ethereum, have launched, the market is trending towards use-case-specific platforms, as in the announcement of Flow by Dapper Labs and Immutable by Gods Unchained. These “first-generation blockchain gaming platforms” exhibit similar characteristics to the early days of gaming consoles (a new creative industry, a two-sided market, and constraints around compute and storage).
The console gaming industry has been around since the 1970s and offers rich data for anyone seeking to gauge the success of different market approaches:
This post will:
- Explore two pivotal moments in console gaming history to understand who won and why.
- Draw parallels to “blockchain game platforms” to understand what is required for success.
- Explain why sandboxes are a great fit for blockchain games.

Atari vs. Nintendo

Let us look at the two most important companies at the dawn of the console gaming industry — Atari and Nintendo.
Atari’s value collapsed in 1983 primarily because the market was oversaturated with low-quality games (like E.T.). To call Atari a failure, however, would be overstated, because it did have seven years of growth. The strategic decisions that Atari took were in the context of the market it was operating in. In order to win the platform competition, Atari had to make their system open and give control to game developers so they would not go somewhere else. It did this by licensing much of its content, such as Space Invaders from Taito and Pac-Man from Namco. While this decision helped them grow their network fast and win platform competition, Atari lost control of the network.
Nintendo took the opposite approach: a closed network with content developed in-house. The benefit of this approach was that Nintendo maintained control over the network, but at the cost of slow growth.
This strategy worked because of brilliant games, such as Donkey Kong, Mario, and Zelda. They used this high-quality content to bootstrap their user base, which then drew developers to their platform. In fact, by 1987, Nintendo had so much power as a platform that they commanded relatively harsh terms to game developers (e.g. pay Nintendo upfront for producing content on their platform, a maximum of five titles per year, and mandatory two-year exclusivity agreements).
Nintendo did this to maintain control over the quality of their network and developers agreed because Nintendo’s network was valuable.
“Why did Atari not implement similar terms?”
Because they had no power; developers would not have accepted these terms and Atari would have lost the platform battle. In addition, Atari did not have the internal talent to replicate the success of Space Invaders and Pac-Man. Because of this, Atari’s later consoles mostly had games are based on already established arcade classics, which gave them a “been there, done that” feeling.
“It wasn’t about the content — Nintendo built a better system.”
Let us explore this argument. The Nintendo Entertainment System (NES) and Atari 2600 are often considered the founders of gaming consoles. Since the 2600 is several years older than the NES, it’s worthwhile to examine consoles that were contemporaries: Both the Atari 7800 and the NES were released in North America in 1986.
Both systems had similar processor speeds, the 7800 had more memory and a slightly faster graphics card, and the NES had a much better sound chip.
While the 7600 looked better on paper, the real power of the NES came from the Memory Management Controller chips which greatly expanded its capabilities.
More complex games with better graphics and sound were built into the cartridge itself, making it possible to create NES games with features the original console could not offer alone.
That said, while this was a wise architectural decision that provided tangible benefits, it was not an order-of-magnitude improvement and thus was not the key aspect of the system’s success.

Nintendo vs. Sony

Content is extremely important in bootstrapping a new creative industry, but is it equally as important down the line? To answer that, move ahead a decade and compare the Nintendo N64 with the Sony PlayStation (PS1).
While debate continues around which is “better”, the PS1 clearly won the market in terms of units sold (102 million for the PS1 vs. 33 million for the N64). Consider the technical capabilities of each system:
While the Nintendo 64 had more powerful hardware, the PlayStation had one important feature — the CD-ROM. By sticking with cartridges, the N64 gave up the large storage capacity of the CD format.
For context, around 650MB of data could fit on a PS1 CD as opposed to around 64MB on an N64 cartridge — an order-of-magnitude difference. Later PS1 games even expanded on that by using multiple discs.
This constraint limited the N64 on audio, graphics and video storage.
It turns out that this feature was critical for developers because it allowed them to make longer, deeper, and richer titles. In addition, CDs were cheaper to manufacture, write games on and distribute, giving developers a chance to rapidly experiment in a cost-effective manner.
In addition to the larger design space and cost savings for developers, they also had to pay fewer royalties to Sony than Nintendo.
As a result of these differences, Nintendo lost the third-party support of prominent developers including Capcom, Konami, and SquareSoft. While Nintendo continued to produce high-quality in-house titles, it floundered in the diversity of those games.
The N64 had 388 games while the PlayStation had 1,284 games released in North America alone, one of the highest totals in console history.
“This sounds like Atari’s strategy — why did Sony win but Atari lose?”
There are three key differences.
- The market: Compared with 1986, the 1996 console gaming industry was much more mature and had a larger number of high-quality third-party developers.
- The architecture: The PS1 architecture (i.e. the CD-ROM) provided an order-of-magnitude value-add for developers, while the 7800 architecture was at a disadvantage relative to the NES (i.e. cartridges were a strength in the old paradigm).
- The developer focus: Sony made the jobs of third party developers as easy as possible. The PS1’s straightforward hardware architecture, development tool suite, and C language support made it easier for developers to program 3D graphics.

Content is King

So far, history has demonstrated two important points:
- Open networks have the benefit of quick growth, but sustainability depends on the quality of content on that network.
- Rarely does the best hardware win a video game war, but superior architecture often leads to better content, which does.
Most importantly, the network and architecture model is the means to an end: content that delights users. In the blockchain industry, scalability and decentralization are sometimes treated as ends in themselves.

Scalability

Scalability (i.e. transaction throughput) is unlikely to be the winning factor for blockchain platforms. The NES showed us that quality content could be created despite the technical constraints of the underlying platform. In fact, the content itself is tailored to the capabilities of the platform. For example, the N64 had more exploration-focused games like Mario 64 because of its fast transfer speeds (loading information from static storage into RAM), while the PS1 had more slow-paced but detailed games like Resident Evil because of the large static storage capacity.
That said, having a platform architecture that gives developers a sufficient design space to implement their ideas is important. Just as the PS1’s CDs provided an order-of-magnitude increase in possibilities, platforms that offer this will be more easily able to attract developers.

Network Model

An open network alone will not be the winning factor for blockchain-based gaming platforms. The market is still too immature for a critical mass of high-quality “blockchain-native” third-party developers, and the NES showed us that developers follow users, who follow content. Most likely, the early winner will have their own in-house development studio or exclusivity agreements with traditional third-party developers to bootstrap content on the network.
It is also possible that a closed network will emerge as an early winner here. For example, a permissioned blockchain run by a group of well-known game development studios could create a platform that combines a relatively more open economy for players with immersive game design from developers.

Developer Tools

The quality of developer tools on the platform is important; just as the PS1 made it significantly easier for developers to build on it, so too will developer-focused platforms result in more experimentation and ultimately more diverse and quality content. That said, this is a means to an end and success first requires a critical mass of developers who understand how to create great content.

Blockchain-native Content is Different

Let us revisit some of the proposed value propositions of blockchain games:
- Ownership of provably scarce digital assets: Players have real ownership of in-game assets without worrying about the game developer diluting its value.
- Open game economies: Players have the freedom to transact directly with each other, creating markets for digital assets and incentivizing actions for both players and developers.
- Composable games: Developers could layer new games and assets on top of existing games and assets, creating new possibilities for engaging and immersive gaming experiences.
- Play-to-earn: Players can monetize their skills and engagement with the game through token rewards and digital assets.
- Micropayments: Players could use cryptocurrencies for low-value payments for digital assets and in-game experiences, such as micropayments for unlocking content.
While blockchains uniquely enable these benefits, the development community as a whole has not figured out what kind of content works best for this platform.
Like virtual reality (VR), blockchain-based games opens a new design space that creators need to tailor experiences to.
In VR movies, for example, the audience has the freedom to choose where to look, whereas traditionally the director “tells” the audience where to look, so directors need to create content which takes into consideration that degree of freedom.
In VR games, as another example, putting a 2D user interface in a 3D space is not intuitive, so designers are having to reimagine even the most basic UI patterns, like game menus.

The Sandbox is the Killer App

While there are dozens of game genres, few could integrate these value propositions at the core of their design. Perhaps the most promising genre is sandbox games, which allow players to freely explore, create, modify, and/or destroy their environment.
In these games, players often have the same tools as a designer of the game, allowing them to change or adjust the gameplay to suit their needs. Minecraft and Roblox are two popular examples.
Sandbox games allow for a wide variety of digital assets, from fungible currencies to non-fungible items. Almost everything could be tokenized in a sandbox, which increases the design space for developers and gives players a monetary incentive to remain engaged with the game.
In addition, sandbox games allow for vibrant in-game economies, with players forming marketplaces and trading assets with the same degree of freedom as the gameplay itself.
Furthermore, sandbox games are naturally extensible, which further increases the design space for developers and consistently provides new content for players.
Game designers could also incentivize extensibility through token rewards to developers.
Lastly, sandbox games do not compete with AAA titles on detailed storylines or sophisticated graphics, which lowers the barriers to entry for developers.
A blockchain may not be necessary to compute game state. Instead, a blockchain can function as the data layer while the game state is executed off-chain.
This allows blockchains to do what they do best — maintain an append-only log of cryptographically connected data. More simply put, blockchains work well as the value layer for sandbox games.

Conclusion

People play games because they are fun, not because they are built on blockchains. This means that there is a very high bar for success because the competition is not only with smart contract platforms but also with beautifully designed AAA game titles on powerful hardware.
Sandbox games are the most promising content application for blockchain game platforms. It’s likely that the winning platform will have an architecture and tooling that maximizes the design space for developers and immersiveness for players for these types of games.
Many thanks to Kevin Chou, Brian Flynn, Evan Mair, and Tony Sheng for their feedback on this piece.
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