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What’s Behind the Nearly $1 Billion Surge in Blockchain Gaming Investment
The following is a guest post by Yaniv Baruch, COO of Playnance.
The first quarter of 2024 has reinvigorated investor sentiment in the cryptocurrency market. With the conclusion of the historic SEC litigation, US investors finally had access to spot Bitcoin ETFs. This opened Web3’s door for large institutional investors: weekly net cash inflows into U.S.-based ETFs repeatedly outperformed initial projections, triggering a bullish rally toward an all-time high of Bitcoin.
Despite the overall market’s optimism, investment in Web3 games remained cautious, with $288 million injected in the first quarter. However, April brought the sector an unexpected windfall: a staggering $988 million, the highest monthly investment since January 2021.
Surge in investments: the data
The root causes of this year’s investment surge appear to be similar to those at the start of 2021. More than three years ago, GameFi the industry anticipated a cycle of explosive growth, facilitated by the emergence of new technologies such as NFTs. From 2020 to 2021, the total market capitalization of NFTs skyrocketed 29 times, while at the same time the total value locked in DeFi protocols reached historic peak levels.
Likewise, the sharp increase in committed investments in April 2024 is driven by Ethereum implementing its recent new Account Abstraction technology and the rise of Layer 3 blockchain solutions in general. The company’s activity is anomalous: a16z is raising a $600 million gaming fund, Bitcraft Ventures is moving forward with its third $275 million GameFi fund, and Ubisoft Studios is increasingly interested in blockchain collaboration and joint ventures. From the looks of it, Web3 Games is gearing up for a powerful lead.
Unusually strong fundamental user engagement metrics reinforce this. The average of unique active wallets for gaming dApps has almost reached 3 million per day: a record number. According to data from DappRadar, one in three people who accessed dApps in April did so primarily for gaming purposes, suggesting strong interest in the fair play, play for money and play for airdrop business models. Meanwhile, the number of active blockchain players grew by 83% in 2024, reaching 90.3 million users.
Growth Drivers Explained: Account Abstraction and Level 3
Why are market participants and venture investors equating the importance of Account Abstraction and Layer 3 with the revolutionary impact of NFTs and DeFi? In 2021, blockchain gaming has tried to find a unique way to distinguish itself from its Web2 predecessors. This search for a value proposition manifests itself in NFTs, offering users true data sovereignty and ownership claims for digital assets and DeFi to monetize the plethora of native GameFi tokens.
In 2024, it is not the newness of the technology or the lack of sustainable monetary rewards that is hindering the future development of Web3 games. Users have become accustomed to the game to earn GameFi and the world of Web3. Ironically, the taste for new technology has become the opposite: irritation at its flashiness. It’s not the technology or the in-app economics that VCs are betting on. Rather, they see Account Abstraction and Layer-3 solutions as technological catalysts for superior GameFi UX.
On paper, Account Abstraction replaces unattended wallets with programmable smart contracts. In practice, this gives dApp developers unprecedented flexibility. For example, by eliminating the dependency on the seed phrase and introducing arbitrary verification, AA allows players to create trusted decentralized accounts with familiar options like email or Google accounts.
Second, it maintains the integrity of the gaming experience without compromising security, eliminating the need to approve each game purchase individually and from external wallets. Finally, Account Abstraction introduces sponsored transactions, removing the most notorious choke point in dApp UX: gas fees.
Even when network activity is low and gas rates are negligible, cognitive bias against unpredictable and unexpected additional costs prevents users from engaging more with dApps. Linking fiat cards to seamlessly pay gas fees or even using developer funds to directly cover associated fees is an important step towards better UX and better user retention.
Likewise, vertical scaling of Ethereum in Layer-3 solutions (also known as application-specific blockchains) allows it to reduce transaction execution times and radically decrease gas fees to achieve zero-gas functionality. Combined with account abstraction, Layer-3 solutions open the door to a completely new experience in GameFi: truly free-to-play, seamless and indistinguishable from the Web2 gaming process in terms of UX.
Chekhov’s Investment Gun: The Future of GameFi
With new technologies readily available and substantial financial support breathing new life into the industry, it’s only a matter of time before these fundamentals become the next big wave of GameFi products.
If this becomes reality, blockchain games will become the vanguard of a new development paradigm that puts user experience first. Technical advancements such as Layer-3 and Account Abstraction solutions are entering the initial technology stack for most GameFi products, and Web3 is heading into a new phase of widespread adoption. Tomorrow’s blockchain will present itself as an alternative to Web2 and a much better option.