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For the Index Ventures Gaming Summit 2022 event, I moderated a fireside chat with Ryan Wyatt, head of Polygon Studios, and Jeff “Jiho” Zirlin, a leader at Sky Mavis, the maker of the popular blockchain game Axie Infinity. They’re among the biggest believes in Web3 gaming and the benefits of decentralization.
It was an interesting conversation as the bear market is upon us, with stock prices weakening, inflation rising, cryptocurrency values plummeting, and non-fungible tokens (NFTs) crashing. It’s unclear what the exact impact will be for blockchain games, which accounted for a third of all fundings in the first quarter, according to Drake Star Partners. On top of that, game-focused VCs said that most of the pitches they are getting focus on blockchain game startups. (You can watch the Index Ventures Gaming Summit 2022 here).
Wyatt left his job as head of YouTube Gaming to dive in this sector, and Zirlin was among the early believers who figured out how to make a popular NFT game with Axie Infinity. I asked them how the blockchain game industry could still steer a path to a bright future, given the challenges. They didn’t shy away from the tough questions, and we tackled the bear market topic head-on.
Here’s an edited transcript of our interview.
GamesBeat: Hello, my name’s Dean Takahashi, and welcome to our web3 gaming session here. I’m the lead writer for GamesBeat at VentureBeat. I organize the GamesBeat summit event and the Into the Metaverse events as well. I’m happy to be joined by Ryan Wyatt, the CEO of Polygon Studios, and Jeff Zirlin, also known as Jiho, the co-founder of Sky Mavis and the maker of Axie Infinity.
I’m sure some people here are already familiar with the two of you, but would you like to say a bit about the company and how you got to this point? Let’s start with Jeff.
Jeff Zirlin: Thanks for having me. It’s awesome to be here. I’m Jeff, or Jiho, a co-founder of Sky Mavis. We invented Axie Infinity. I grew up collecting insects and fossils and playing games. The first thing I did on the internet was playing StarCraft with my Korean cousins that were halfway across the world. From an early age, I knew games could be a great way to introduce people to new technologies.
A lot of the early team members, community members, and founders of Axie Infinity were early to NFTs. Around 2017 we saw experiments happening like CryptoKitties. We thought this was a really interesting way to bring digital ownership, free markets in a sense, to game economies. A lot of us had grown up playing video games where it was simultaneously very easy to monetize your time in games, but also very hard. Easy because there was substantial demand for in-game assets, but hard because you were constantly skirting terms of service violations. There were no financial rails that allowed for trustless transactions between people in different parts of the world.
This idea that NFTs could radically change gaming, that was very clear to a small group of people in 2018. But how could we build a brand that people would love to engage with? Things like Pokemon and Tamagotchi instantly came to mind. That was the mission. How can we bundle something that’s this new technology, something a bit scary and complicated, with something that’s nostalgic, that reminds you of games you played growing up. That’s what started as the seed or the kernel of our mission. Four years later we’re still building. Axie is the number one NFT project of all time, with more than $4 billion in total traded volume. More than 2.5 million unique addresses own Axies. We have around 600,000 daily active users. We’ve built infrastructure as well, like the Ronin side chain, which accommodates our growth needs. We’ve built a lot of other things in-house as well.
GamesBeat: Ryan, you had a very interesting position at YouTube Gaming. You were very successful there. Then you took the dive into blockchain. I’m curious about what inspired you to do that and what you’ve found now that you’re at Polygon Studios.
Wyatt: My whole career was always around creator economies, before the creator economy was even a thing. In the beginning I played competitively in esports tournaments. I was a commentator. I streamed content on Justin.tv. I got to really build and focus on what the creator economy was going to look like, from how we work with creators, how creators inevitably started to monetize, what products you build to support an ecosystem outside of that. How do you think about building infrastructure at scale to support hundreds of thousands of creators across an ecosystem?
I really enjoyed that. I had a blast doing it. But I did that, and I was ready for something else that was a new challenge in the space, something that excited me, something that interested me. I looked at web3 as this interesting opportunity to jump into a game space where there was a unique factor of democratizing game development. I saw this collision of us spending more time and money on digital assets in a digital world within the game industry, and I thought about the dynamics that would change over the next decade that would be really interesting.
When I jumped into web3, my point of view was looking over 10 years. If we had this conversation in the early days of the creator economy, 99 percent of people I spoke to were just saying, “Who’s going to watch people play video games?” It was a stupid idea. “People play video games. They don’t watch them.” When we tried to sell esports to the big game publishers they said it was a waste of time. “Nobody wants this.” And that was obviously proven wrong. They all ended up leaning into that. The creator economy ended up being a pretty big thing, and did a great job of helping grow the game industry overall.
I find this space to be fascinating. It’s unexplored. There are a lot of new challenges. I like tackling challenges and looking at different opportunities. From my perspective, it was fun to pivot and do a different thing in the game industry. There’s no shortage of skeptics, no shortage of problems that need to be solved, and no shortage of opportunities to create early product-market fits. And it’s just fun to me. I’m thoroughly enjoying it. I’m glad I made the jump over.
I loved my time at Google. I learned a lot. I got to contribute a lot. I’m grateful for my time there. But at the same time, YouTube Gaming is the biggest gaming platform in the world, with billions and users viewing gaming every day. It generates billions of dollars. It was time to go do something different. I felt like I had climbed to the top of the creator economy mountain. I was ready to get my hands on something else. I’m an operator at heart. This space was well-suited.
GamesBeat: Let’s get to those skeptical views. We’re in that bear market now. Last year we saw huge progress in this category, billions of dollars flowing into it, and lots of startups being created. DrakeStar said that even in the first quarter, about a third of all funding that went into games was blockchain-related. About 187 blockchain gaming companies were funded in Q1, and that was at a time when some of this tech malaise was already starting. The larger U.S. venture capital market was starting to decline already, but games were still doing well.
But in this bear market, where we’ve seen the price of Bitcoin fall, where we’ve seen inflation in the larger economy, what makes you think that this market will stay strong? Or if it doesn’t stay strong, what is the right path to survive?
Wyatt: The market will stay strong in the long term. I think this is going to be a pull-back we’ll see, where we’ll start to unveil what is real versus what is not. A lot of people started building, and now we’ll see what are the true fundamentals. What products are actually coming to life? It’s a good test for the market. I do think this downward pressure, although it’s unfortunate–it’s impacting millions of people’s livelihoods. You have to handle this conversation with a lot of tact. I know this is an opportunity for skeptics to be delighted by what’s happening in the macro markets. But I try to stay on an even keel relative to both sides of these things.
The other reality is that we’re seeing billions of dollars being deployed into the games industry, but we haven’t seen even a fraction of those games yet. We talk about what’s going to be on the other side. A ton of games that are backed by the largest, most prestigious venture firms in the world have not come to light yet. They’re web3 games. I do think what you’re going to see is a lot more games coming to market that will showcase the uniqueness of what you can do in web3 games.
That’s a big question that a lot of people ask. How are people going to use this? What does blockchain app development do? What can you do in web3 that you couldn’t do before? A lot of these conversations have been coming up, and you have to be able to point to products that are out there in the market. My excitement and enthusiasm is long-term. There’s an opportunity to put your head down, build, and add value. On the other side of this there will be products that are exciting for those who’ll enter web3 for the first time.
Zirlin: First, I want to say that bear markets are never easy. This is my second bear market. It’s tough. In 2017 I came to this space bright-eyed and excited. Ethereum was at $1100. Then it came down all the way to $70. Our team had around $20,000 in the bank. People weren’t getting paid. It was a very painful experience.
That’s the reality, and it’s the interesting consequence of co-mingling web3 and gaming. Traditional gaming is recession-proof. Consumers tend to spend more on traditional gaming during a recession, because it’s a nice way to relax and get your mind off of things. With web3 gaming, there’s this wealth effect that happens. People see crypto prices going up, and so they’re more excited to spend on collector’s items and things like that within these economies. All that is interlinked.
But what I believe is happening in the long term is that our digital lives are starting to become more and more important to our physical lives. Is that a trend that stopped in the last couple of months just because the macro environment started raising rates? No. We might have had a pause or a consolidation in that trend. In my opinion, COVID ending and people going outside and things like that, that was actually the catalyst for this kind of short-term pull-back in gaming and the metaverse theme. But in the long term, everyone is aligned that people are going to be spending more and more time in front of screens and getting a lot more of their fun, their status, their social connections from these digital environments, more so than physical environments. It’s written. But timing is always difficult.
GamesBeat: When I look into the subject of NFTs and blockchain, I have these great arguments with myself about all the pros and cons. I wonder what, within the sets of arguments that you’ve heard over and over again–what, to you, feels like one of the most important debates that happens within this space?
To me, just going by my impression, there’s a lot of talk about centralization and decentralization. What we have, in effect, is a different kind of centralization, rather than decentralization, within the web3 space. We have different entities like, say, OpenSea possibly becoming the marketplace that disrupts the other app stores, but it’s still a centralized entity in some ways. The other thing that I think will be the big opportunity is that when you’re not paying those fees to those stores, not paying all this money for user acquisition, then you have this great opportunity to share more of those proceeds with your users. The business model could be very appealing in that way.
Those are a couple of things that I gravitate to. But let’s start with Jeff on this one.
Zirlin: In terms of centralization versus decentralization, I typically think of it in terms of–we’re starting to see the rise of these grassroots communities that are aligning incentives with the developers of these web3 products. We’ve been at the forefront in terms of calling Axie a digital nation. If you look at these communities and their relationships with these applications as the rise of nations, I think we’ll actually get an entire spectrum of types of governance. You’ll have some products and communities that are more aligned on the Athenian model, and then you’ll have some products and communities that are more on the Spartan model, or maybe in modern-day terms the Singaporean Lee Kuan Yew versus a pure democracy.
GamesBeat: One good thing I see there is that you seem to be able to locate your primary customers much more easily, because they’re already coming to your Discords. In the age of mobile gaming you had to fish for the whales. You’d spend all this user acquisition money to find maybe the two percent of people that would ever pay you anything at all. That seems so inefficient. Whereas you have communities coming to you.
Zirlin: User acquisition, especially in the early days, has been a bit different. But I do think that most industries start from a very grassroots place. I think of it as a bit like a political campaign. In the beginning you need a lot of grassroots organizers. You need to figure out ways to unlock your true potential. But once the campaign has gotten some momentum, you get some funding, and then you try to figure out how to scale the campaign to increase your reach and broaden the strength and size of your movement. I do think that UA will still play a role in web3. But it’ll be more like adding fuel to the raging fire. That’s one thing that makes me incredibly bullish on the size and scale that this industry will eventually get to.
GamesBeat: Who are going to be the mainstream gamers that take us to a much higher scale of gaming? You’re at 2.5 million in this space, which is awesome, but how do we get to 10 or 20 or 100 million players, the really big audiences?
Wyatt: If you think about it, right now there’s a relatively small subset of games in web3. Polygon has about 280-some games, but some of the games that are going to be on the horizon in the second half of this year are much more triple-A polished. You need those games. When you look at the top creators on Twitch and YouTube Gaming, what are the games they’re playing? They’re largely playing games that have big user bases attached to them. They have to play those because that’s how they’ll have the best chance of driving viewership. There’s a bit of a chicken and egg problem here. Which one’s going to come first? You see games like Among Us that are driven out of nowhere by the creator economy.
There need to be far more products available to the general gamer. It’s a pretty daunting onboarding process right now, getting into web3. How do I buy crypto? How do I use it? What does staking mean? What’s an L1 versus L2 mean? What does this game do? What’s the barrier to entry? There’s a lot of what I would call critical user journeys that are very flawed in web3 right now. It’s going to take a variety of things, with people working on many different fronts to reduce friction, to make the onramps much easier, and to have games that resonate more.
If you look at a lot of games–the irony of it is, even though I’m a huge gamer, there’s not one web3 game right now that’s really drawing me in on a day to day basis. But I totally believe that there will be. There will be a tactical shooter I enjoy and that I’ll start participating in. That’s where it starts to happen.
The other thing that’s interesting, I think the economics for content creators – YouTubers and Twitch streamers – are going to be so much better for them when they find games that genuinely resonate. Now they can get participation and ownership in the actual game and IP. That’s huge. Instead of just getting a check from Activision as a Call of Duty streaming partner to play for X amount of time and do X amount of commercials, that’s going to change to where they’ll be aligned with the incentives of the game in the long term. Creators will have a completely different perspective on the space.
Web3 games are not going to be for everybody, though. We talk in absolutes far too much around this kind of thing. There are 3 billion gamers. It’s okay if only a fraction of them play web3 games. If web3 gaming doesn’t take over the entire industry, that’s not a failure. It’s okay if it serves 10 or 20 percent of the entirety of gamers around the world. That would be hundreds of millions of people playing and participating in a new subsection of the game industry.
My biggest issue I have with all of this is how much gatekeeping we like to do around web3 games. Let people play what they want. Let people create and develop what they want. That’s always been the beauty of the games industry. You have so many options as a gamer. If you want to play single-player narratives, you can. If you want to play mobile games, you can. If you want to play crypto games, you can. That’s my big thing around all of this. Allow these things to play out and allow gamers to participate in what they want.
A lot of the backlash you see around NFTs and gaming is pretty well-positioned, and rightfully so. If you think about a lot of the core issues, it’s people saying things like, “I don’t see games that appeal to me. I see predatory practices around NFTs across the space.” True and true. “I see chains that are not carbon neutral.” That’s problematic from their point of view. You have to let the dust settle on some of these things and see who’s going to resolve these core issues. I’m optimistic that time resolves a lot of things. That’s what I’m orienting myself around right now.
Zirlin: One of the issues that we’ve seen is that you can have this first wave of adoption, which is driven by hobbyists and some speculators. But when we look at these as real economies, real economies are driven by consumers. Who are going to be the consumers that populate and help drive sustainable economies in these virtual worlds? A lot of the building is of course around friction and onboarding. That’s going to improve. But also finding the best gacha mechanics and upgrade systems and crafting systems–once we have loops like that in these web3 economies, those will be the things that drive real consumer demand, which will then allow for a healthier economy. The sustainable gacha mechanics, for me, that’s going to be one of the key catalysts that gets us – us as Axie, and us as the industry – to the next level.