The play-to-earn model is a business model allowing gamers to farm or collect cryptocurrency and NFTs that can be sold on the market. This model has become a standard already in the “crypto gaming industry,” where the blockchain-based games enable token economics to kick in as an incentives mechanism at scale for users to play and be engaged.
From paid games to the free-toplay new standard
For decades, as gaming consoles took over, razor and blande model has been the standard from most gaming companies.
The razor blade business model, also known as the razor-razorblade model, involves selling a product at a lower price to then selling a related product later for a profit. The razor and blade business model has been popularized by King C. Gillette, founder of safety razor company Gillette, which sold a durable razor at cost while selling disposable blades at a premium.
In short, think of Microsoft’s Xbox, selling the console mostly at cost, while selling the games at wide premium. Yet, as new hardware platform came to the market, there has been a shift in the last decade. With the advent of mobile consoles, with iPad and iPhone leading the way, the gaming industry has transformed.
The gaming industry, part of the entertainment industry, is comprised of three main types of players. From game engines, which help developers build their games. To publishing gaming houses. And gaming consoles. While the prevailing business model for decades has been that of selling the console at cost, and make money on games. Digital games changed the way games are distributed and sold, and it opened up the way to free-to-play models.
Therefore, the gaming industry moved from a premium model, where games would be sold at wide margin, to a free-to-play model.
A free-to-play is a model that became particularly popular in gaming. Free-to-play is also commonly referred to as free-to-start. For instance, companies like Epic Games have launched popular games like Fortnite’s Battle Royale, which had ingrained a free-to-play model. This is a model that become extremely popular in the digital age of gaming.
Companies like Epic Games, with Fortnite, mastered this model. In fact, as most of the distribution for these games passed through mobile marketplaces, like the App store, a free-to-play logic helped those games to gain traction, and wide distribution very quickly. While the games got monetized through custom gaming experiences.
Epic Games is a gaming company, that develops, publishes, and distributes games. It comprises the Unreal Engine, making money through licensing agreements with developers and creators. Its games (like Fortnite) mostly follow a free-to-play model on PC and an in-app purchase model on the digital marketplace. And its storefront Epic Games Store, taking a 12% cut on games’ sales.
Yet, as new technologies, like blockchain, which enable incentive mechanism at scale, picked up, another shift is happening, that of the play-to-earn model.
Beyond free-to-play and into play-to-earn
Gaming has traditionally been a one-sided relationship, where game developers and owners reap the financial rewards while players simply have fun or are encouraged to keep spending.
However, a new paradigm is emerging in the gaming industry. The play-to-earn model allows gamers to earn in-game rewards simply by playing the game. Rewards take the form of digital assets, cryptocurrency, and in-game resources that are tokenized on the blockchain.
Giving gamers ownership of in-game assets and then allowing them to increase their value through gameplay are the key components of the play-to-earn model. Gamers who participate in this economy are rewarded for putting time and energy into the game, creating value for other gamers and the game developers in the process.
The gaming industry itself has experienced tremendous growth in recent years with the global games market become already a multi-billion dollar industry. To some extent, growth has been driven by the COVID-19 pandemic. But it has also been driven by the emergence of Web 3.0 and the Metaverse.
The play-to-earn model can be very powerful, as it adds up an incentive layer for users, which might work as further enhancement for network effects to pick up.
How does the play-to-earn model function?
Technically, games operating under the play-to-earn model with a mixture of gaming and finance fall in the GameFi category.
Each game provides financial incentives to play and progress, with the gamer usually required to repeat specific actions over time. Income is generated in three main ways:
Earning or trading in-game NFTs
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.
Each NFT may represent a character, item, or some other game collectible. They may be purely cosmetic in nature or fulfill a purpose.
Earning in-game cryptocurrency
In the online game Axie Infinity, users earn Smooth Love Potion (SLP) cryptocurrency when they complete daily quests or battle monsters and other players.
Staking
Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.
Some play-to-earn games allow players to lock up NFTs or cryptocurrencies in smart contracts to earn rewards.
Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.
For instance, staking tokens on the MOBOX GameFi platform rewards users with a MOMO NFT Mystery Box. Each box contains a random NFT with variable scarcity that can then be sold on the secondary market.
Blockchain and the play-to-earn model
According to Joel Monegro, former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others).
In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).
However, according to blockchain investor Paivinen due to ease of forking, incentives to compete and improved interoperability and interchangeability also in a blockchain-based economy, protocols might get thinner.
Although the marginal value of scale might be lower compared to a web-based economy, where massive scale created an economic advantage. The success of the Blockchain will depend on its commercial viability!
It’s important to note that the play-to-earn model is not a new concept. Various online role-playing games incorporate fiat currency-based auction houses or markets maintained by gold farmers.
However, cryptocurrency game assets exist on a blockchain. This means ownership and legitimacy are easy to prove. The security of a blockchain network also ensures assets are never duplicated, hacked, or exploited in ways commonly seen in traditional games.
Perhaps most importantly, blockchain games increase the value of in-game items through scarcity. When items are tied to the blockchain, they are unable to be duplicated to such an extent that the value of the item is reduced.
Key takeaways:
The play-to-earn model is a business model allowing gamers to farm or collect cryptocurrency and NFTs that can be sold on the market. The model represents a new paradigm in the gaming industry because users are financially compensated for playing games.
To make money under the play-to-earn model, gamers must earn or trade in-game NFTs, cryptocurrency, or lock up these assets in smart contracts in a process called staking.
The play-to-earn model is not a new concept in gaming, with online role-playing games utilizing the framework for years. However, blockchain-based games are immune to being hacked or exploited and in-game item scarcity is protected from duplication.
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketingorganizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
Cloud business models are all built on top of cloud computing, a concept that took over around 2006 when former Google’s CEO Eric Schmit mentioned it. Most cloud-based business models can be classified as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), or SaaS (Software as a Service). While those models are primarily monetized via subscriptions, they are monetized via pay-as-you-go revenue models and hybrid models (subscriptions + pay-as-you-go).
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.
The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
