AAA GameFi: How Big Could NFT-based Gaming Be?

If you are unfamiliar with GameFi, here is a good primer. If you are unfamiliar with the Avalanche project and what it offers as a scaling solution, here is an overview of the ecosystem. 

There are a number of factors that have made blockchain-based games unenjoyable to play: high costs, slow response times, poor graphics, and bad game mechanics. Avalanche has positioned its subnets as a scaling solution to address these issues by lowering fees and speeding up time to finality, all while providing decentralized infrastructure. With the traditional video game industry currently valued at around 200 billion dollars, investors should be asking: how large is the total addressable market for NFT-based AAA games?

First, let's take a high-level look at the macroeconomic environment to better understand the state of GameFi. GameFi hit its peak towards the end of 2021 when United States Federal Reserve interest rates were near zero. The low cost to borrow money resulted in soaring speculative markets, GameFi included. During this time, the most well-known blockchain game, Axie Infinity, reached its peak valuation at around $160 per $AXS token – putting its fully diluted market capitalization at $43.2b. However, as you can see in the following chart of The TIE’s GameFi price index, the market has fallen well off that high. 

Against the broader macroeconomic backdrop, the cryptocurrency (and therefore GameFi) industry is challenged by a scalability bottleneck. In general, major cryptocurrency platforms have low throughput resulting in high fees and lengthy time to finality. 

In recent months, however, several cryptocurrency platforms have made major strides in scaling solutions for hosting AAA games including side-chains, zero-knowledge proofs, roll-ups, and in the case of Avalanche, subnets. 

Now that computationally expensive games can be hosted more effectively on cryptocurrency platforms, AAA game developers are onboarding such games - each accompanied by an NFT marketplace. NFT marketplaces enable players and traders to trade in-game items represented as NFTs on open markets.  These items incentivize different financial actors in a set of games including liquidity providers, players, the protocol, and NFT creators. 

To create a framework for evaluating on-chain GameFi, we will draw from trends in traditional games and GameFi games. Additionally, we will examine the relationship between in-game social interactions, market types, and price per player. With that in mind, let’s take a look at traditional gaming figures across several flagship games. 

League of Legends (LoL) is a free to play multiplayer online battle arena game published by Riot Games in 2009. LoL is monetized entirely through purchasable character customization through the in-game store. LoL is often cited as the world’s largest esport and had an average monthly player count of 122 million players in 2021. In the same year, LoL earned 1.63 billion dollars in revenue. With no in-game player-to-player social interaction outside of a text chat and a closed market, LoL earns an annualized revenue per player of $13.36. 

Counter Strike: Global Offensive (CS:GO) is a first-person multiplayer shooter released in 2012 by Value and Hidden Path Entertainment. CS:GO is an especially interesting game for comparison because it has its own secondary market that behaves very similarly to NFT markets. Players are free to trade items with other players for money, cases, keys, cosmetics, weapons, and more. While initially the game was pay-to-play, it transitioned to a free-to-play model in late 2018. At its peak popularity in 2018, CS:GO generated $414 million in revenue with an average monthly player count of 12,292,263. With an open secondary market and no in-game social mechanism, CS:GO earned an annualized revenue per player of $33.67 in 2018, a more than 2.5x increase compared to League of Legends. 

Fortnite is a free-to-play battle royale game developed by Epic Games that quickly became a cultural phenomenon. From dance trends to esports, Fortnite continues to percolate into American culture. While there is a more recent version of the game called Fortnite: Save the World that is pay-to-play, a large percentage of revenue comes from in-game purchases for cosmetics, dances, game modes, and battle passes (early access to game updates). In 2021, Fortnite generated $5.8 billion dollars in revenue, with a monthly active player count of 83.3 million. With a closed market and in-game social mechanisms for players to interact and flaunt their items and customizations, Fortnite earned an annualized $69.62 revenue per player in 2021, more than 2x that of CS:GO.

Of these successful AAA games, Fortnite, which has in-game social mechanics and unique player customizations, saw by far the highest price per player. Of the games that did not have spoken in-game social mechanics, the open market game, CS:GO, generated more revenue per player than the closed market game, League of Legends. 

NFT Marketplaces in GameFi combine the revenue generation benefits of open markets and extend game-specific social contexts to all digital social contexts. For instance, if an Axie Infinity player wants to flaunt their Axie NFT online, their online audience is expanded. Not all GameFi players will recognize the Axie NFT, but everyone online recognizes an NFT with an open market value of several hundred thousand dollars. 

Now that we’ve established a range of roughly $10-70 of revenue per player per year in traditional gaming, we can begin to estimate the total addressable NFT Market for a AAA game on Avalanche. Avalanche has recently been on-boarding traditional mobile games to their platform. Games that combine elements of traditional mobile games and GameFi are known as web2.5 games. Such games include Castle Crush and Pocket Worlds, with key statistics shown below. 

Obviously, in reality games don’t reach their earnings apex instantaneously. In the years leading up to CS:GO’s peak in 2018, the revenue per player grew at an average rate of 5.76% with the largest rate hike at 16.67% and the largest rate drop at down 14.81%. 

If we apply the CS:GO average revenue per player per year growth rate to existing web2.5 games at the most conservative estimation of $10 per player, we get the following yearly revenue estimates:

While these are not mind-blowing numbers, onboarding web2.5 games with established player bases is a win for everyone involved. Avalanche onboards a substantial number of people onto their platform, game developers see healthy growth in per player revenue, and players own their digital assets that help them in-game or sell them on the open market. If the adoption of web2.5 games continues, it is only a matter of time before larger AAA game titles follow.

In order to estimate player revenue in AAA games, we need to create an equivalent proxy for revenue per player from on-chain data for GameFi games. We will assume a standard protocol fee of 2.5% and draw on incoming volume (USD) to dApp smart contracts, divided by the number of unique interacting wallets. AxieWorld reports Axie Infinity’s revenue data, so we will not apply the proxy to Axie Infinity. Below is a chart of the three biggest GameFi games by volume according to DappRadar. 

Due to token price changes, the revenue per player should be dramatically lower in the last 30 days than in the lifetime of any particular game. Surprisingly, this is not true in the case of The Sandbox, which has seen large volumes transacted among a relatively small player base. The expected trend holds true for DeFi Kingdoms. Below is a breakdown of revenue per game.

Most of Axie Infinity's total revenue comes from the fees generated by breeding - an in-game mechanism to generate new NFTs. The revenue generated from marketplace fees are about 15% of total revenue.

The major spike on February 22, 2022 aligns with Snoop Dogg's avatar NFT collection drop. One thing worth noting is that revenue numbers across GameFi tend to be highly correlated to token price. Marketplaces and transactions in-game generally occur entirely in the game's native token. That means when markets are good, and token prices are high, revenues fly through the roof. However, when markets are bad (and token prices fall 90+% across the board for GameFi), dollar revenue numbers look terrible.

If we annualize the revenue per player over the lifetime of each game, we get a range of $12.84-149.40. This is compared to the annualized range of traditional AAA player revenue at $10-70. 

We can apply the average of the GameFi revenue per player per month, $8.58, to the active monthly user base of successful AAA traditional games, and annualize that for our final estimation. 

Assuming that the GameFi industry gains the player base of the traditional gaming industry, we can estimate that the GameFi total addressable market is somewhere between 1.47-7.7x that of traditional gaming, placing the total addressable market between $296bn-1.54tn. To be clear, this estimation is based on hypothetical assumptions and is not a reflection of the current market. 

This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.