P2E Game to Drop Bitcoin Rewards to Become a Pyramid Scheme
What does it take to break even when the business model is unworkable?
(I wrote this post shortly before Russia invaded Ukraine and held off on publishing because it didn’t feel right. Please feel free to ignore the post).
A few weeks ago, we talked about the economics of play-to-earn (P2E) games. I argued that P2E games need recurring revenues from subscriptions, ads, micro-transactions, etc, to fund rewards for players expecting to earn income. If a P2E game has no revenue or its revenue is mostly from the sale of crypto assets with no use other than to generate yet more “rewards”, the game is a pyramid scheme or facilitates one. It’s a vehicle to redistribute wealth from late adopters that never recover their “investments” to early adopters and game developers. The variety of NFTs, tokens and currencies in your typical P2E obscures these basic economics, but they hold just the same.
The story of first-person-shooter game Light Nite beautifully illustrates these ideas. The game pays players in bitcoin – which is appealing and unusual – but is very unprofitable for Satoshi Games, the game studio. To try and break even, Light Night will move to Solana and pay rewards in a “native-token” that the company can print endlessly. The change will almost certainly transform the unsuccessful game into yet another P2E pyramid scheme. Their story could be a Harvard Business School case study. It just tells itself. Enjoy!
Light Nite
Unlike many play-to-earn outfits, Light Nite is an actual game. It has multiplayer battle royale and deathmatch modes with a bunch of weapons and items, health points and armor. You can snipe people from the top of a building or catch them up-close with a shotgun. The game runs on the bitcoin side-chain Liquid and its characters and game maps have this cartoony, low-polygon look. The game also has a COVID-19 survival mode. Light Nite is buggy and miles away from “AAA” games like Fornite and Counter-Strike. But it’s a real game.
Light Nite is free to play (although it used to cost $20) and has a simple rewards system. If you complete activities in Light Nite’s game modes or win tournaments, you earn crypto and occasionally NFTs (like character skins), which can then be sold to other players on the secondary market for additional income.
Crucially, P2E rewards are denominated and paid out in bitcoin, not a “shitcoin” issued by the game company. This is important because bitcoin has real value outside the game. Unlike other crypto assets, the supply of bitcoin is capped. It can only be obtained through mining or a direct purchase from another holder. So what’s the catch?
Light Nite’s rewards are incredibly low. Earnings on the battle royal, for instance, are capped at 0.000005 bitcoin per hour (twenty US cents) according to the most recent rewards update on their developer blog. Hourly earnings sound higher when expressed in “Satoshis” (units of a hundredth million of a bitcoin) but that won’t fool anyone. Earning 500 “sats” per hour, it still takes two full 9-5pm workdays to buy a McDonalds happy meal.
This is a weird business model. Light Nite will entertain you for an hour or two, but it’s much worse than big titles like Fortnite and Counter-Strike from traditional game studios. It just isn’t competitive as an entertainment product. On the other hand, the P2E rewards system may pay bitcoin, but it still takes 100 hours to break-even on the game’s old $20 purchase price at a rate that’s one thirtieth of the US minimum wage.
The value proposition is awful and as a result, the game isn’t doing well financially or in terms of player growth. Mark Diego, a marketing manager at Satoshi Games, is candid about all this in the weekly tournaments that he live-streams and posts to YouTube:
We’re already thinking of ways […] to change the rewards system, the P2E system, so it’s profitable for the company. Because if it’s not profitable for the company, well, obviously, we won’t be developing Light Nite. It needs to be profitable for us, and then for you guys [the players], of course. We’ll see.
The Madrid-based game studio is paying salaries for at least 21 developers and employees (according to LinkedIn) and unsurprisingly, it’s burning through cash. To try and break-even, Light Nite will pivot to Solana sometime in March or April and will start paying players in a “native-token” that can be easily printed and is controlled by the game company, Satoshi Games.
Light Nite X
The blog post on the transition explains that Satoshi Games will launch a new version of the game, Light Nite X, and will maintain the original version under a new name, Light Nite Legacy. They plan on running both versions with their distinct reward systems in parallel. However, Satoshi Games won’t just continue losing money on the legacy BTC version, as Mark Diego explains:
If we see red numbers [losses] in Light Night Legacy, then, of course, we will have to close Light Night legacy.
Founder and CEO Carlos Roldan has a different story:
[Rewards] will be drastically reduced for the [legacy] BTC version. [Rewards will be funded …] by the community or by people that want to run events, [… not the game company]
Either way, it’s not looking good for the old game. So how is Satoshi Games hoping the new game will be profitable? Simple! They are paying players in Lite Nite Coin (LNC) – an invented currency that can be printed for no cost – instead of bitcoin, which has value outside the game.
Paying players in the new Light Nite Coin is like paying them in tokenized grains of sand or on-chain air molecules. It has no value outside the game, and it has little value inside the game, because few people actually want to play the game for fun anyways. LNC’s main use, according to developers, is buying game NFTs and speculation:
Users may keep $LNC for staking/trading. With this mechanism, Light Nite Legacy players can leverage the option of swapping assets [from the legacy game] that may have a low appreciation for assets with much higher appreciation values [in the new game].
It’s not explicit, but the game company is essentially saying we should be interested in LNC because people are likely to make bets on it (and related Light Nite X NFTs) and drive up prices. As I argued before, any game with no revenue and this basic structure is either a pyramid scheme or facilitates one.
This pivot has two main benefits for Satoshi Games. First, it lowers costs. Paying players in tokenized sand is a lot cheaper than paying players in bitcoin, which is expensive to acquire and can’t be diluted with uncapped supply expansion. Second, wild price swings on the new “currency” and game NFTs will probably draw attention from new players and speculators looking to make a quick buck, resulting in free publicity and user growth.
The obvious problem, of course, is that for every dollar gained by someone trading tokenized sand, at least a dollar will be lost by someone else when the price ultimately crashes. Light Nite will become a redistribution scheme attached to a mediocre game. Another downside is that the user growth will probably be toxic. Rather than attracting players that want to play, wild price swings will attract players (and bots) that want to make money.
Web3 is supposed to be about community, but what kind of community forms around a game that’s mostly a money grab? What community forms around a gold rush where one person’s profit is another’s loss? Not one I’m inclined to join.
P2E and Reality
Frankly, it amazes me that Satoshi Games got funded at all. The economics of the original legacy game are unworkable. How can it be profitable to hire expensive developers and engineers to run a game company that is bleeding money through P2E rewards and is constantly diverted from core game development by P2E design, messaging and management?
A bitcoin P2E rewards system seems like (very) expensive and distracting marketing. Worse yet, it draws in players optimizing for rewards, not players that want to play.
Light Nite X, the upcoming version of the game with tokenized sand rewards is arguably worse. If the invented “native token” gets sufficiently hyped, it may unleash a speculative frenzy that will have players and game staff buying at the top, hoping they can sell for even more later. Since there are no sources of demand for on-chain air molecules, their price will eventually crash, and people will lose money.
No value will be created with all this. Value will just change hands in arbitrary and unfair ways. The main way for the game studio to earn profits here is to dump (useless) LNC on the market when LNC prices are high. Do investors want to be associated with that? I wouldn’t.
You hear it again and again on twitter that game companies should reward players for “investing their time” in games. This argument assumes that time spent playing computer games is worth something to anyone other than the player and ad companies monetizing eyeballs. But it isn’t.
Should Blizzard Entertainment have paid me for clocking six months of gameplay on World of Warcraft in 2006-09? Of course not. Like millions of other people, I used their servers for hours on end. I opened dozens of support tickets for trivial issues. Why should I have been paid rather than the other way around?
(Literary aside: In Kurt Vonnegut’s novel Hocus Pocus, there’s an exhibit with dozens of elaborate perpetual motion machines from the 1800s in the school where the protagonist lives and works. Each one has different wheels, magnets, pulleys, levers, exotic materials, etc. And of course, none of them work. Perpetual motion machines are impossible. Hilariously, the protagonist hangs a large plaque at the entrance of the exhibit that reads “THE COMPLICATED FUTILITY OF IGNORANCE.” I am reminded of this scene and the inscription on the plaque by every new P2E game that tries to make positive net payments to players and make money at the same time. It’s just not workable, no matter how byzantine the game’s “tokenomics” are…)
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