This chapter outlines possible funding models for building decentralised games. Both the initial funding for a project and the ongoing payment model to cover maintenance costs.
Funding is one of the most important topics for organisations and while this may not appear to be a game design issue, there are several consequences arising from fundraising activities that can impact a game’s economy and its governance.
Funding any piece of open-source software is challenging. Typical open-source business models are about providing a service associated with the code since the code itself is not sold and hence does not generate any revenue. Paying for a service can work for a business-to-business sales model, but consumers tend to take open-source software (OSS) for free. This is challenging for gaming since the users are consumers.
Blockchain technology has changed the OSS landscape by enabling organizations to sell tokens in exchange for funds. Selling tokens may not be appropriate for all OSS organizations, but it does make sense in the case of decentralised gaming.
In this chapter, we review the funding methods that are used in the traditional gaming industry, then have a look at funding methods used for blockchain projects. The latter indicates what can work for decentralised games; however, as seen in recent years, funding for decentralised applications is not as easy as funding the base-layer blockchain protocols.
This chapter is split as follows:
- Contemporary funding models
- Self-funded
- Traditional publishing
- Crowdfunding
- Sequels, Expansions, DLC
- Subscription and Freemium
- Microtransactions
- Funding decentralised games
- Recurring Revenue
- Initial token sale
- Recurring Revenue
- Block Reward
- Transaction fee
As mentioned in the chapter Online Gaming Problems, the global games market is worth more than $100 billion and growing and perhaps the largest entertainment industry in the world.
A dominant and growing market is a sign of good health and one which ought to be bolstered by blockchain technology. While traditional funding methods differ in spirit from that of the blockchain ecosystem, the advancement of decentralized gaming does not mean that traditional developers become extinct. A positive outcome is one where traditional development and funding mechanisms are encouraged to be more transparent and accountable.
Before blockchain funding streams existed, there were three options for the initial funding of a game and perhaps another three methods for recurring revenue (mostly applicable for online games). Most, if not all, games that have received funding in the traditional gaming industry are closed source, so it is irrelevant to mention open source software business models here.
Three main options for initial funding:
- Self-funded
- Traditional Publisher
- Crowdfunding
Three main options for recurring revenue:
- Sequels / Expansions / DLC
- Subscriptions and Freemium model
- Microtransactions
There are no hard rules that prevent these various methods from being used together, especially in the modern-day where crowdfunding is popular and players prefer to download games. A game could receive some funding from a traditional publisher, as seed capital to the company, while also seeking crowdfunding to finish the product. Moreover, a company could offer the freemium model (free + subscriptions) plus sell items as microtransactions.
These options can still work for decentralised games although the implementations will be different since payment is most likely going to be transacted in a cryptocurrency.
Historically, small development studios rarely attempted to self-publish their games but rather they partnered with large publishing companies.
When small development studios partnered with large publishing companies, the developers receive a cash advance for the product and then receive a share of the sales post-launch. For single-player games there is a one-off purchase, while multiplayer games typically require a subscription. Some online games may also offer some amount of free content (freemium business model). Originally, games would be sold as closed source and published in physical formats such as floppy disk, CD, DVD, and eventually Blu-ray. In recent years, physical formats have been greatly reduced for PC games in favour of digital downloads.
A relatively new funding model is crowdfunding. It enables small and independent game developers to do the initial round of fundraising on platforms like Kickstarter and then continue to raise additional funds via their website. Players who fund the game early receive benefits for being an early backer, such as a set of items only available during the initial fundraising. It is also a form of funding that is most similar to the Initial Coin Offerings found in the blockchain space.
Popular crowdfunding platforms include Kickstarter, Fig and Indiegogo.
Two fairly prominent examples are Star Citizen and Shroud of the Avatar. A brief comment on these games can be found in the economics chapter, as their crowdfunding campaign has had (or will have) a large impact on their in-game economy.
While equity crowdfunding could also fit in this subsection, where a company sells shares in its company to the public, there are few known examples of this. Shroud of the Avatar also did a round of equity crowdfunding in addition to their Kickstarter and ongoing sales on their website.
Before online games became popular traditional publishers would rely upon sequels and expansions to generate further revenue from an already released title. This is still a popular choice in today’s market where all content is digital. In addition, there are digital add-ons (called Downloadable Content or DLC) that tend to be small additions to a game but help to customize the player experience. The add-ons tend to be expensive given the size of the gameplay added, but the total cost is relatively low such that they are easily affordable.
The subscription model, where players pay for gameplay every month, is one that’s commonly associated with online multiplayer games. One popular variation of this business model is the freemium model where some content is available for free but premium content requires payment. The freemium business model has been around since the 1980s, although it became a popular business model for MMOs in the early 2000s. One example is Runescape, which is free-to-play but premium content has been available via membership since 2002.
Mobile games have taken another twist on the freemium model where subscriptions are replaced with item purchases where each purchase is small in value (often called microtransactions) but add up to be significant due to a large volume of purchases. Players that spend more essentially subsidise those who play for free.
Funding models for decentralised games are more complex than for traditional games, although there are parallels between the two. However, despite the increased technical complexity there are indications that funding a game in the blockchain space is ultimately easier and that small independent games have a better chance of survival in the blockchain space. There are benefits of implementing a decentralised network over a traditional centralised one, such as less reliance on the developers to host all of the data. This should reduce hosting and bandwidth costs for the development team. Ideally, the network should be able to incentivise players to run a node and help sustain the network.
In 2017, it was popular to sell tokens as an initial round of funding (so-called Initial Coin Offering), but little attention was given to building a sustainable business. There must be considerations for the initial funding as well as for the long-term development costs.
A presale of a decentralised game is most akin to the crowdfunding method of funding mentioned above.
In 2021, we see very few public token sales. The main reason is probably due to the risk of being classified as a security sale under US, such regulation has affected teams globally. That’s not to say a public sale is impossible, but rather greater care is required. Further avenues of funding include grant funding and selling tokens to large investors privately.
Any initial token sale does not need to occur in a single sale period but can be spread out over multiple periods. This was seen with the Nine Chronicles fundraiser, as well as with Polkadot.
One option for obtaining early funding is via one of the numerous grant programs, which tend to be administered by a foundation. A few grant programs are also administered via a DAO.
The advantage of grant funding is that it is non-dilutive, so the risk is minimal and allows a team to experiment with an idea before meeting with investors.
Due to the general difficulty of doing a public token sale many teams in the blockchain space have decided to undertake multiple private raises before launching their project without a public sale.
Raising privately involves selling tokens to accredited / sophisticated investors. Doing this does not preclude a team from also doing a public sale. If anything it is easier to do a public sale once funds have been raised to cover legal costs.
One of the biggest challenges is to implement subscription-style payments. For decentralised projects it isn’t possible to pay the developer and then receive tokens to play the game. Developers don’t have the power to create new tokens and simply insert those into the game state. The latter is a challenge for decentralised game development since the developer team is not supposed to have excess privilege over the network, which makes it a challenge to obtain a maintenance fee. Options do exist, such as taking a portion of the block reward as will be discussed later.
This is a challenge both for new players who want to purchase tokens to play the game and for developers who need to receive recurring payments to maintain the game. It is possible that the protocol itself can issue some amount of new tokens to the developer with every block, as we saw with ZCash in its first four years. The developers could sell these tokens for fiat payment, however the amount of tokens available is limited. In the traditional space, game developers can sell as many subscriptions as they desire, but if the developers only have a limited number of tokens to sell each money then the number of new players would be limited. This poses a challenge. One potential solution is fully free-to-play on the player side, but developers take some share of the block reward and/ or transaction fees. Free-to-play is also technically challenging as blockchains use fees to protect against spam. Currently, the decentralised game Nine Chronicles is pursuing this approach of free-to-play. All players have a certain number of actions (styled as energy) per day. Playing a decentralised game will typically require tokens, but it isn’t necessary to purchase those tokens from the developer as it will be possible to buy tokens from other players.
One method that’s proven to work in a decentralised protocol is to take a percentage of the block reward and pay that to a developer’s wallet. The percentage will be available to see in the code and can always be changed via governance.
Both ZCash (non-gaming) and Nine Chronicles use this method of funding development work. Naturally, the development team will need to sell the tokens to cover costs.
This method is transparent but gives some privilege to the development team. Certainly, the community would be free to fork the code and remove this fee, but they will likely lose out on the network efforts of the main chain. Development work has a cost which means that players are less likely to pursue a zero-cost option. Jesse Walden wrote about this phenomenon in his blog “Crypto’s Business Model is Familiar. What Isn’t is Who Benefits”. Forking and switching incurs a cost that doesn’t necessarily make sense for the users.
The Xaya team has implemented a revenue model that takes transaction fees as a means of payment in their game Taurion. Xaya also gives players the option to burn the transaction fees instead of paying them.
One unexplored idea, which came up in the chat channel of the Decentralized Gaming Association, is to implement areas of the game that have high reward but also have higher fees. This puts a greater burden of the costs on to the top players rather than a flat rate which is more burdensome to new players. The higher rewards provided is the incentive for players to try these areas.
A further logical step to explore is the combination of free transactions for low-level players or low-level areas with a high-fee system for high-reward areas. This is essentially a way to implement a sponsored transaction free system.