Crypto is Exciting Because It Changes Incentives

March 05, 2022

ugc-gaming

Most of the talk around crypto is the argument around legitimacy. Is there a there there? Is it hype? Is it a fad? Is it the next internet?

The second big conversation around crypto is about the tech itself. Bitcoin, ETH, and the thousands of others trying to carve a path.

The way I’ve seen crypto until now has been as a set of ideas, which are:

  1. Decentralized compute, with lots of integrity built-in (Blockchain)

  2. Digital currency not tied to a government (Cryptocurrency)

  3. Digital ownership of novel items (NFTs)

  4. Linking digital governance with digital ownership (Web3)

These are powerful ideas that I see as separate from implementation.

Maybe all this “crypto” stuff gets us there on some or all of them, or maybe blockchain and crypto will fall on their faces. I don’t know, and nobody else does either. But I am confident that these ideas are compelling enough to mold our future in some way, at some point.

So that’s the way I have been thinking about it. But in conversations with my friend Andrew Ringlein, I’ve added another layer on this understanding, and that layer might be far more powerful than the ideas themselves.

Incentives rule

I remember when I first learned about real economics. Not “money” economics, which is how I thought about the field in my 20’s, but uppercase Economics. Like, “why people do stuff” economics.

At the center of all of it were incentives, and even today they fascinate me. I have two favorite examples:

  1. A town in India had too many cobras, so the city decided to pay people to bring them in off the street. But instead of fixing the cobra problem, people started cobra farms and they ended up with way more than they started with.

  2. You can’t generally predict human behavior, but if you drop a $100 dollar bill on a busy sidewalk you can virtually guarantee it’ll disappear through human action.

In both cases, there’s a stimulus (a cobra policy or dropping $100), and there’s a response (cobra farms or picking up a piece of paper).

Maybe crypto is best understood as a new set of incentives.

The gaming use-case

I was on a walk with Andrew around our local lake when we stumbled into this crypto-incentives idea. It all started with a simple question. I asked him:

How do you see the intersection of crypto and gaming?

This resulted in a 45-minute conversation that I wish I had recorded, but we’re reproducing it soon in a podcast. Anyway, here are his primary points, which I’m now calling the Five Principles of Crypto Gaming.

There’s a lot of overlap here with crypto in general, but this is a gaming-specific list.

  1. Companies can raise money through NFT launches, which massively accelerates how quickly they can access capital.

  2. Those NFTs can have special privileges within the company’s ecosystem, which can raise their value over time as well as function as their own marketing and community-building.

  3. Companies can take a small cut of transactions using those NFTs, including when they’re bought and sold.

  4. User-Generated-Content (UGC) within games can become novel items (NFTs) or real-estate that earns income in various ways (Web3), giving users far more incentive to create within an ecosystem.

  5. Distributed ledgers (Blockchain) have enabled or streamlined many of these dynamics.

I will perpetually cringe when using synergy unironically.

In other words, crypto-gaming enables and incentivizes the following activities in a synergistic way:

  1. Raising money quickly (through the NFT)

  2. Users interacting more with your ecosystem (the NFT incentivizes this)

  3. Users creating awesome content in your ecosystem (UGC powered by Web3)

  4. Users talking about your ecosystem (Communities rise around use of the NFTs)

  5. Making money over time through NFT transfers (A steady income stream as ecosystem use grows)

So you can bring ideas to market faster, create a community faster, get people using your services faster, have content for the game created faster, have more people want to participate because they’re also making money and enjoying people using their stuff, and finally you get a percentage of the money from key transactions happening in the ecosystem.

In other words, forget the technology. It’s a distraction. What’s exciting about all of this is a set of interconnecting incentives that feed off each other to propel ideas, ecosystems, communities, and user bases. With the result being more companies launching more ideas, creating better games, with better content, created by more and more people, who get more and more of the benefits.

Examples

Here are some real and potential examples of how this is—and will continue to—play out.

Game history and models

First, let’s look at the pre-crypto evolution of games, which Andrew describes as:

  1. Pay to Play

  2. Free to Play

  3. Pay to Earn

I like those, but I also like the following breakdown of gaming.

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Gaming V1 (Old School)

  • Content Size: Small

  • Content Created By: Gaming Company

  • Content Dynamics: Company doesn’t add content

  • Interaction: Single-player

  • Money: Customer buys game, plays game

Gaming V2 (Everquest)

  • Content Size: Medium

  • Content Created By: Gaming Company

  • Content Dynamics: Company slowly adds content

  • Money: Customer buys game, plays game

Gaming V3 (Minecraft)

  • Content Size: Large/Infinite

  • Content Created By: Users

  • Content Dynamics: Mostly User-generated

  • Money: Customer buys game, plays game

The money axis doesn’t quite fit here because most games are now Free to Play, which is a separate variable than how content is created. Anyway. The point is that we seem to be heading into a future where:

  1. Games are free to play, but you pay for other stuff

  2. Content is largely user-generated

  3. Users get tremendous benefits for being creators

A good example of where this didn’t work in the past was a Minecraft mod that created the Fortnite genre. It was a survival mod that was cool, but the game owner didn’t want any of it, so it was stifled. Crypto-gaming readjusts those incentives so that gaming companies would love to have someone invent a new, wildly-popular mod!

So an example would be a user signing up, creating a cool city or island in a game, standing up a government, creating really cool magic items, etc., and making money when people decide to come there and spend time (because they like how the system works).

The larger vision here is, of course, the ultimate example of the Metaverse, which is Ready Player One.

In that model people will create entire planets, or universes, in which they can define how the rules work. The physics. The magic system. The amount of magic, tech, etc. The combat system. How items are created, who gets rewarded for what. Everything.

This is what The Sandbox does, by the way.

So it’s basically a platform for people to design their own realities, and of course people are competing to create the best ones because 1) it’s fun, and 2) because of crypto/nft/web3 they’ll become rich if people love what they made and decide to play there.

That’s how crypto intersects with gaming, NFTs, Web3, and the Metaverse to become Ready Player One.

Andrew’s Disney example

Andrew is a huge fan of Disney. He’s also a gamer and is working at a startup in the crypto community-building space. So not only did he explain all of the above to me, but he also has examples for more traditional companies like Disney.

The example he gives is imagining that Disney comes out with a Disney Shield NFT—or whatever they’d call it. Let’s say you pay like $4,500 or something for it, which is a lot. Let’s look at all the stuff it could do.

  • You get to pick an awesome piece of NFT artwork for it

  • It gets printed on a super-high-quality badge, which includes an NFC component

  • You can display the NFT on Twitter, Facebook, etc.

  • You get 25% off family Disney trips for life

  • You get 25% off your Disney+ subscription for life

  • You get special swag related to your specific NFT every year, for free

  • You get auto-VIP status at any Disney park or store, allowing you to jump the line

  • You get 25% off all Disney swag at Disney parks and stores

  • You get access to a Disney Shield Discord where you can nerd out with the other die-hards

  • YOU CAN SELL YOUR SHIELD AT ANY TIME

  • NEW BENEFITS ARE CONSTANTLY BEING ADDED

…and—wait for it—Disney makes a small cut whenever these are transferred between people.

Just like with the crypto stuff above, where you have the various components playing off each other when bringing a new idea to market, the same model works for existing businesses with existing intellectual property. In fact it works better the more you have.

Summary

  1. Crypto is exciting as tech, but the real power is in changing behavior by incentivizing desired activity.

  2. Most important in that behavior is a) quickly raising money, b) incentivizing user-generation of quality content, and c) energizing ecosystem use through NFT club-like features.

  3. This ultimately gets us to a Ready Player One situation, only where the creators of all those worlds are the users themselves, and where the users actually co-own the worlds they create and benefit from their existence and use.