Two years after the bubble burst, are play-to-earn games still relevant in South-east Asia?

THE heyday of Axie Infinity now seems like a distant fever dream, filled with tales of people quitting their jobs to earn a full-time living from this colourful, Pokemon-like cartoon battle game.

During the last crypto bull run amid pandemic shutdowns, play-to-earn (P2E) games surged in popularity as alternative income sources, especially in emerging economies such as the Philippines. Leading the pack was Axie Infinity, a game developed by Vietnamese studio Sky Mavis. At its peak, players from the Philippines made up 40 per cent of Axie Infinity’s user base.

The earning potential was so significant that it created a new category of workers known as “Metaverse Filipino Workers” – in July 2021 alone, their in-game earnings totalled roughly two billion pesos (S$46 million), equivalent to the remittances sent home by all overseas Filipino workers from Hong Kong.

Despite the initial hype, the shine on P2E games has waned since the 2022 crypto winter, driven by declining token values and regulatory uncertainties surrounding virtual assets.

However, the rise in crypto token prices since the beginning of 2024, with Bitcoin reaching a historic high of US$73,794 in March, has reignited interest. But questions remain on whether the legions of players – many of them from developing South-east Asian countries – will return, and what lies next for the evolution of the P2E gaming industry.

Winter is over, but is spring here yet?

Launched in 2018, Axie Infinity was a front-runner in the P2E model, where players earn digital assets including non-fungible tokens (NFTs) by completing tasks, battling other players, and participating in the in-game economy.

These assets can be traded outside the game environment for crypto tokens, which can then be cashed out, allowing players to earn real money.

As a subcategory of Web3 games, P2E games leverage blockchain technology to create secure, tradable tokens. Unlike Web2 games, which are controlled by central authorities such as game developers and companies, Web3 games operate on decentralised platforms.

Dr Ernie Teo, senior lecturer at Nanyang Business School, highlights: “The crucial value of incorporating blockchain into gaming is to remove intermediaries and give more control to gamers by giving them true ownership over their digital assets.”

“This means they can trade their items in a peer-to-peer manner via smart contracts without the intervention of third parties,” he explains. The value of sought-after items is determined by demand and supply, rather than set by game developers, he adds.

For instance, in Axie Infinity, players can trade their “Axies” – in-game NFT creatures used in battles – directly with each other through the marketplace, while the developer takes a 5.25 per cent cut from the seller.

However, the decentralised nature of the blockchain means that players are free to trade outside the official marketplace, thereby avoiding the transaction fees.

Although crypto tokens represented by Bitcoin have experienced a significant price increase since the start of the year, the impact of cryptocurrency prices and trading volumes on Web3 gaming is expected to be limited.

“Unlike in the past, market participants now have a higher level of understanding and knowledge, making it difficult to drive active participation in blockchain games solely through token price increases,” explains Jay Jo, an analyst at Tiger Research, a South Korea-based consulting service provider focusing on Asia’s Web3 market.

Alexander Cooper, North American chief executive officer of blockchain data solutions provider Footprint Analytics, pointed to many indices that signal a recovery in the Web3 gaming market.

From January 2022 to this June, the number of Web3 games has more than doubled, rising from 1,400 to over 3,200, while the market capitalisation of blockchain game tokens increased to US$19 billion by June after hitting a low of US$10 billion in January 2023, despite the fluctuations.

These days, the most popular Web3 game is Pixels, a browser-based farming game that has more than 454,000 daily active users (DAU).

Since the fourth quarter of last year, the DAU count of Web3 games has been steadily increasing, surging from less than one million to over three million by June 2024, with Pixels driving a significant portion of this recent growth.

Gabby Dizon, co-founder of the Philippine-based Yield Guild Games (YGG), a P2E gamers community with an online reach of more than six million, noted that the influx of new game entrants is likely due to the 2020 boom led by Axie Infinity.

“Axie Infinity showed the world that there was a viable business model within crypto gaming, so many Web3 game developers got their start after Axie’s success. Since a decent game takes about two to three years to develop, the bigger projects that began during the peak of crypto’s last bull run are now entering the market,” he explains.

Cooper adds that there have been more blockchains focusing on Web3 gaming, including Ronin, Avalanche, Immutable and Oasys. The enhancement of infrastructure and support for Web3 games contributed to the market’s recovery.

Additionally, developer giants such as Square Enix, Ubisoft, Sega and NHN have entered the Web3 gaming space, signalling more releases and continuous development in the sector.

For the money or for the fun?

Axie Infinity has faced criticism for its gameplay mechanics, which focus on repetitive tasks – known as grinding – rather than emphasising significant skill involvement.

While the influx of new games from different genres and with different play styles is said to have improved the playability of P2E games, Tiger Research’s Jo notes that most players still participate to earn money, and genuine interest from players who actually enjoy the game remains minimal.

A Philippines-based investor and active participant in Web3 gaming, who prefers not to be named, tells The Business Times that the ability to earn will always be important to players and it is the financial aspect that makes P2E games unique.

“P2E could create a new gaming category without cannibalising other genres, similar to how the free-to-play model that monetises through in-game micro-transactions – initially rejected in the West for being financialised – was pioneered in Korea and expanded the gaming industry significantly,” says the investor.

Jo notes that while overall participation in P2E games has decreased since the last boom, the proportion of participating countries in South-east Asia, with the Philippines and Indonesia showing the highest interest, followed by Vietnam.

The Philippines remains the top-playing country for Axie Infinity, accounting for 23.8 per cent of global web traffic. In the current most popular Web3 game, Pixels, Indonesia leads with a global traffic share of 33.3 per cent, followed by the Philippines at 18.1 per cent.

One reason for these countries’ continued participation in P2E games is that even modest earnings can be significant, says Jo.

Despite a drop in average earnings, P2E games such as Pixels can provide daily earnings of 20 to 50 tokens for four to eight hours of play, potentially reaching 200 to 400 tokens for higher-tier players, equivalent to up to US$80.

Given potential token price increases, this income remains meaningful for players, especially in countries like the Philippines where daily minimum wages hover around US$10.

Jo adds that the Philippines has witnessed numerous success stories from the Axie Infinity era – in May 2021, for instance, John Aaron Ramos, a 22-year-old university student, announced that he had purchased two houses solely with his earnings from the game.

“Such examples can influence current P2E players in the country by showcasing the potential for substantial financial gains,” he says.

Risks and benefits

Risks certainly exist. The crash in token value and a cyberattack by North Korean hackers that caused Axie Infinity to lose US$620 million in crypto in early 2022 prompted many players to quit playing.

P2E gaming also blurs the boundaries between gaming and trading, and may not yield the financial benefits players expect.

There have been instances in which declining popularity has forced games to near-shutdowns, rendering in-game assets worthless. For example, Crabada, a promising game during the 2021 bull cycle, lost popularity, with its native token Crabada Coin now worth close to nothing.

Yat Siu, co-founder and executive chairman of Hong Kong-based Animoca Brands, and both a developer and venture capital investor in Web3 games, recalls that his company had to compensate players for the shutdown of a game due to the non-renewal of intellectual property licences.

Yet, Siu recognises that there are no regulations requiring game developers to compensate for asset losses. Doing so is still a matter of goodwill, meaning that players can end up shouldering the loss when P2E games shut down.

While the ability to earn remains a key incentive for players, industry watchers believe the main reason to be bullish about Web3 games is the strong community they build through decentralised ownership and user empowerment.

The development in the P2E space reflects this sentiment, with more games becoming available for free, removing barriers to entering the community.

Axie Infinity requires players to assemble a team of at least three “Axies” – in-game NFT creatures used in battles – before they can start earning, which could cost more than US$1,000 during the height of the crypto market. These high barriers prompted the emergence of “scholarships”, where players with extra assets lend their “Axies” to those who cannot afford them, taking a cut of the borrowers’ earnings.

“Now that most Web3 games are free-to-play, gamers no longer need scholarship programmes to participate in the gaming ecosystem,” notes YGG’s Dizon.

The world’s largest crypto gaming guild is now focusing on fostering stronger social bonds within the Web3 gaming ecosystem.

“We have many players who might have joined YGG because they were curious about earning rewards from playing games, but they ended up staying because of the community, and continue to be active today,” Dizon observes.

“Although earnings will always work as a way to draw people into games, having a group of people to play games with is an even stronger incentive to keep coming back,” he adds.

Siu says that one advantage of Web3 games is that players can build their on-chain reputation, an online verifiable record based on their past behaviours, which can be ported over across different games.

The on-chain reputation will also help game developers move to more sustainable models to retain gamers and filter out speculators, whose trading activities may exacerbate the price volatility of the in-game assets.

Siu explains: “If I know that you typically take tokens and sell them immediately, I might not give you as many tokens next time because I know you’re not a genuine player.”

For example, YGG captures players’ credentials through Soulbound Tokens (SBTs), which are a form of non-tradeable NFTs earned through special quests and stay with players across different blockchains.

Ample room for growth

Industry observers add that another reason to be optimistic about the development prospect of Web3 gaming is that the space has yet to see a clear leader similar to how Clash of Clans dominated the Web2 free-to-play gaming market.

“Developers are still experimenting with how to integrate tokenomics into their games,” says Dizon.

Even at the peak of its popularity in late 2021, Axie Infinity’s DAU only reached up to 2.7 million. In comparison, Roblox, currently the most popular Web2 game, boasts over 77.7 million DAU worldwide as at Q1 2024. There exists significant differences in reach between Web3 and Web2 games.

The still nascent nature of Web3 games suggests that, in terms of expanding the games’ outreach, “there are enough curious people so the industry doesn’t have to chase after the sceptics,” says Siu.

Within South-east Asia, industry observers agreed that the Philippines, Vietnam, Singapore and Thailand stand out for their adoption of blockchain technology, with gaming being a notable use case.

For example, Singapore is a leader in key industry trials for asset tokenisation and the use of digital currencies, according to Dr Teo.

He adds that Thailand’s relatively high purchasing power among South-East Asian countries makes it an important revenue-generating market for Web3 games.

But these developments are subject to regulatory challenges. P2E games are banned in South Korea and China due to concerns over promoting market speculation and volatility. While no such crackdown has been implemented in South-east Asian countries yet, there remains a risk due to policy uncertainty surrounding Web3 games.

Notably, the Philippine National Police Anti-Cybercrime Group issued an advisory urging caution regarding P2E crypto games in August last year, signalling stricter regulatory oversight in the P2E space.

For now, a crucial focus for the Web3 game developers will be enhancing the quality of games.

Footprint Analytics’ Cooper notes that the focus should be on game playability. He observes a shift towards play-and-earn models with less emphasis on earnings and reduced financial risks.

He says: “I prefer incentivising gamers to play because it’s enjoyable, fosters social engagement, and offers passive rewards – small returns that encourage reinvestment in the game rather than trading for another chain token.”