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Intro

The gaming industry stands at the cusp of a revolution fueled by the principles of Web3 technology. The ability to program and compose virtual gaming goods is reshaping the very foundation of online gaming, hinting at a future where these elements become central to the gamer's experience. The consensus may currently favor trading and stablecoins as the paramount applications of Web3, but there's growing belief in the potential of programmable virtual gaming assets to take this mantle.

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Metaverse

As an integral part of the burgeoning metaverse economy, GameFi represents one of the innovative avenues through which the digital age is evolving. The metaverse, a concept that has permeated popular culture, science fiction, and technological ventures, is essentially an expansive network of interconnected virtual spaces. These spaces provide a fully immersive, three-dimensional experience that serves as the next evolution of the internet, known as web3. Here, the metaverse and GameFi come together to create an environment where virtual experiences not only entertain but also hold the potential for economic gain.

Historically, the gaming industry has undergone a seismic transformation, evolving from simple formats like the original Atari system to the complex ecosystems supported by today’s cutting-edge consoles and PCs. This evolution has been propelled by significant technological leaps in computer processing power, graphic capabilities, and internet speeds. As a result, gaming has become more lifelike and immersive, with both linear and open-world games offering increasingly complex simulations.

However, blockchain gaming diverges somewhat in its technical capabilities, particularly in graphic intensity, due to the foundational limitations of blockchain technology, which wasn't initially designed to handle high-demand graphical processing. Despite these current graphical limitations, blockchain games introduce several transformative advantages.

Key among these are on-chain assets that facilitate player-driven economies, composability across different games, and extensive opportunities for user-generated content. Ownership of in-game assets on the blockchain provides tangible value to players, intertwining their efforts and time with genuine digital ownership. This model not only enhances player engagement but also fosters a collaborative value-creation process among players, creators, and platforms.

These assets, unlike their predecessors, can be freely traded and modified across the globe, independent of centralized servers, thanks to the security models afforded by blockchain technology. This represents not just a shift in how games are played but in how gamers interact with the digital world. Imagine a system where a player's in-game assets and reputation are directly tied to their digital wallet, allowing games to dynamically reward players with items matching the rarity or value of assets they already possess. This capability could fundamentally alter player engagement, offering a tailored gaming experience based on an individual's portfolio of digital assets.

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P2E

GameFi stands at the intersection of gaming and finance, encapsulating a new frontier in blockchain gaming that incentivizes players through a play-to-earn model. This model rewards players with real-world financial value for engaging with and advancing in games. This sector includes popular titles like Axie Infinity and Illuvium, empowering players with ownership of in-game assets and virtual real estate.

Ownership in these games typically falls into two categories: land ownership within the virtual world and asset collection through gameplay. For instance, in the virtual world platform The Sandbox (SAND), players can purchase land parcels that vary in price depending on their location; particularly desirable are those towards the center of the map. The Sandbox exemplifies how interactive gameplay can facilitate economic opportunities. During its Alpha seasons, players not only engaged with the game but competed in events to win SAND, the platform's cryptocurrency, which could then be used in the game’s marketplace. Notably, one of the most sought-after assets within this marketplace is a collection of avatars verified for celebrity collaborations, such as Snoop Dogg, which vary in price based on their rarity.

Moreover, beyond individual platforms like The Sandbox, the blockchain gaming industry is supported by accelerators such as Merit Circle and Yield Guild Games. These organizations function like treasuries, aiming to attract skilled players and enhance their gaming experience with strategic asset allocation. Merit Circle, for instance, operates as a decentralized autonomous organization (DAO) focusing on the adoption of P2E games through educational initiatives and strategic investments to expand its treasury. This organization also utilizes a novel approach of offering 'scholarships'—in-game asset loans—to encourage players to engage with blockchain-based gaming, highlighting the symbiotic relationship between technological advancement and community-driven economic models in the GameFi sector.

Through these innovations, GameFi not only redefines who can earn from gaming but also how value and ownership are perceived in the digital realm, making it a significant and transformative element of the metaverse economy.

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A New World of Options

Moreover, Web3 gaming opens new avenues for discovery and user acquisition beyond traditional app stores. By analyzing wallet data, developers can directly target potential users with relevant assets, introducing a more personalized approach to game promotion. This method also lays the groundwork for a more interconnected and fluid gaming economy, where assets are not just transferable between games but can be integrated into the broader DeFi ecosystem, offering unprecedented liquidity and financial utility for gamers.

To satisfy their users’ demands, developers are increasingly migrating from the leading L1 blockchain, Ethereum, to more scalable blockchain networks such as Solana, Polygon, Immutable X, and Avalanche. This shift is driven by the need for enhanced technical capabilities, including faster transaction speeds and lower costs, to accommodate the growing demands of blockchain-based games. This technological migration is a response to the critical need for infrastructure that can support more complex and user-intensive gaming experiences.

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Challenges on the Horizon

Despite the promising growth and innovation within crypto gaming, several challenges loom large, potentially hindering its progress. The industry has grappled with issues of poor tokenomics and volatility, where the value of gaming tokens can plummet as initial hype wanes, as seen with Axie Infinity. The speculative nature and price fluctuations of these digital assets, coupled with their relative novelty and lack of regulatory oversight, heighten the perceived risk. Furthermore, liquidity issues, especially in lesser-known games or platforms, can deter investment due to fears of being unable to exit positions promptly. This underscores the difficulty in designing non-inflationary token models that balance incentivization with sustainable economic viability.

Security risks pose another significant challenge. The decentralized and digital nature of GameFi introduces vulnerabilities ranging from on-chain risks like ERC-20 token flaws, NFT metadata manipulation, and DAO governance issues to off-chain threats, including centralized server attacks and front-end vulnerabilities. High-profile incidents, such as the $600 million hack of Axie Infinity, highlight the vulnerabilities associated with storing in-game assets on-chain. Developers are tasked with continually adapting to new threats, a race that necessitates robust and evolving security protocols. 

User experience (UX) remains a hurdle for wider adoption. Comparatively, blockchain games often fall short in terms of graphics, immersion, and gameplay mechanics when measured against mainstream gaming offerings. The lack of engaging and diverse gameplay can hinder player retention and broader adoption, which are critical factors for the success of GameFi projects. Many players, including seasoned gamers, find navigating blockchain technology cumbersome, which can impede new user onboarding and overall engagement. The complexity of blockchain interfaces and transactions can detract from the gaming experience, underscoring the need for more intuitive and accessible designs.

Regulatory uncertainties further complicate the landscape. As GameFi introduces new economic models that blur the lines between gaming and finance, aligning these innovations with existing legal frameworks becomes a formidable challenge. The regulatory environment has yet to fully catch up with the fast-paced developments in blockchain and crypto gaming, creating a landscape filled with both opportunities and obstacles.

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Gaming Current Day and TAM

The traditional gaming industry has experienced phenomenal growth on the backs of the mobile wave, with a global gamer count of approximately 3.8 billion and an impressive ~$200 billion in revenue for 2023. A significant ~75% of this revenue is generated from the sale of virtual items within games. On the user-generated gaming platform Roblox, creators have designed more than 62 million virtual fashion and accessory items, leading to a bustling economy of 3.2 billion virtual transactions and 1.8 billion avatar items traded on its marketplace. This virtual economy is not just limited to older gamers; 75% of children aged 9-12 in the US, UK, Canada, New Zealand, and Australia are participants, engaging through Roblox, which boasts 70.2 million daily active users. Fortnite, another giant in the industry, accumulated approximately $20 billion in revenues from 2018 to 2022, primarily through the sale of cosmetics, underlining the game's success with its 200 million monthly active users.

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When it comes to gaming habits, the average weekly playtime for Gen Z in the United States is about 12 hours, which spikes to 15 hours for the most enthusiastic gamers within the cohort. Video games have become an integral part of life, with 84% of US consumers engaging with them and earning the title of the number one form of entertainment for Generation Alpha and the third for Gen Z. The immersive nature of games is evidenced by the fact that 90% of Gen Z players are involved with both gaming and virtual worlds, and 50% of both Gen Z and Gen Alpha gamers spend money within these games. The financial impact of Gen Z is substantial, with an estimated $360 billion in spending power, underscoring the economic influence of this digitally savvy generation.

As for Web3 gaming, the landscape has seen a significant influx of projects and initiatives over the last couple of years, albeit with varying success. Despite this, there's a contrasting tightening in the financial backing, which paints a multifaceted story of the industry's current state. Amidst these fiscal fluctuations, the sector continues to exhibit a tenacious spirit and promise, hinting at an impending era where its integration into the mainstream could become a concrete reality.

By the latter half of 2023, the industry was home to roughly 2,500 blockchain-based games. However, a closer examination sheds light on a noteworthy point: only about 226 of these games, which is just 9%, were able to attract more than a thousand active users monthly. This stark figure highlights a prevalent issue in emerging markets: while there is an abundance of new ventures, a limited number manage to establish a significant and enduring presence.

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Why Avalanche Subnets for Gaming

The advent of blockchain technology in gaming has heralded a new era of innovation, yet it's not without its share of technical hurdles. Network reliability, transaction delays, and scalability issues have emerged as significant challenges, occasionally hindering the seamless integration of blockchain into gaming experiences. High transaction costs and the complexity of developing a blockchain solution tailored to a game's specific needs can further complicate the adoption of this technology.

Avalanche has positioned itself as a blockchain gaming solution with its subnets scaling solution. These independent, self-governing networks provide a customizable blockchain infrastructure, allowing game developers to craft a chain that aligns precisely with their project's requirements. By choosing between Avalanche's Primary Network, more specifically the C-chain and a Subnet, developers gain unparalleled flexibility in deploying smart contracts tailored to the desired gaming scenarios and features.

Subnets stand out by offering game-specific logic and an autonomous operational environment, making them the go-to choice for projects prioritizing flexibility, stability, and security. These independent chains allow for bespoke adaptations like tailored gas payment systems, compatibility with the Ethereum Virtual Machines (EVMs), and/or the ability to create a custom VM, thereby directly addressing the game's unique demands. This level of adaptability not only streamlines integration but also significantly reduces costs and resource expenditure.

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Furthermore, by operating independently of the main chain, Subnets ensure that game services are insulated from the broader network's traffic, promising a stable and consistent user experience. Enhanced scalability and the ability to configure access control and privacy settings bolster the security and integrity of user data, reinforcing the appeal of Subnets for blockchain gaming ventures.

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For developers wary of immediate commitment to a Subnet, starting on Avalanche's C-Chain offers a pragmatic approach. This allows for an initial development phase on the main network, with the flexibility to migrate assets to a Subnet as the project's needs evolve, ensuring an efficient allocation of resources.

Avalanche further eases the transition to blockchain gaming with an ecosystem rich in support tools and programs:

• Avalanche CLI and AvaCloud: These tools simplify the creation and management of Subnets, making blockchain technology accessible to developers with limited blockchain expertise.
• Stardust Game Toolkit and Moralis Unity SDK: These tools enhance the gaming experience with minimal coding required by facilitating the integration of NFTs and real-time blockchain data into games.
• Thirdweb: Thirdweb facilitates the development of user-friendly wallets and enables the deployment of a variety of smart contracts within a subnet with just one click. These can range from NFTs, tokens, and staking systems. Furthermore, developers can personalize their smart contracts using Thirdweb's software development kits (SDKs). 

• Arcad3 Program: This initiative extends technical and business guidance to traditional game developers exploring blockchain, with participation from industry giants like GREE and Neowiz.
• Avalanche Multiverse and Blizzard Funding: With substantial financial incentives, these programs aim to nurture the growth and innovation of the Avalanche ecosystem across gaming, DeFi, NFTs, and more.
• Codebase: Codebase is an Avalanche accelerator program that funds and supports web3 founders. While the current round is full and the application process is closed, future rounds will be opened to builders.

Games On Avalanche

DFK Subnet: DeFi Kingdom 

DeFi Kingdom, one of crypto’s most successful games, was one of Avalanche’s first gaming subnets back in 2023. The strategic move positions the game, renowned for blending NFTs with decentralized finance (DeFi), at the forefront of blockchain gaming and Avalanche growth. The creation of the DFK Subnet created a scalable, secure, and uncluttered environment specifically tailored to the DeFi Kingdom’s community and builders.  Synapse's analytics point to a substantial uptick in activity, with the DFK Subnet experiencing a tenfold increase in transactions and a doubling in monthly activity since moving to a subnet. As can be seen below, it remains Avalanche’s most widely adopted game by a wide margin, boasting over 500,000 wallets.

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SHRAPNEL: A New Era of FPS Gaming

While DeFi Kingdoms illustrates what’s possible currently in mainstream blockchain gaming, SHRAPNEL, an upcoming AAA first-person shooter game, epitomizes the potential of blockchain in gaming. Developed by veterans of industry stalwarts like HALO, Call of Duty, and Westworld, and backed by heavyweight venture capitalists Polychain Capital and Dragonfly Capital, SHRAPNEL is poised to make a significant impact in the blockchain gaming world.

Set in the year 2044, it offers players a unique blend of resource extraction and combat within a narrative-rich environment. The game’s use of NFTs for content creation and economic transactions underscores a shift towards giving players more control and ownership over their in-game assets. 

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Beam Subnet

Operating as an Avalanche subnet, Beam was created for Merit Circle DAO and is operated independently to meet the needs of gamers and game developers. Beam operates as a specialized gaming blockchain that leverages the robust capabilities of the Avalanche subnet architecture. In its current developer preview mode, Beam employs a Proof of Authority (PoA) consensus mechanism augmented by the Snowman protocol. This setup entrusts transaction validation to a select group of reputable entities, ensuring the network's integrity and reliability. While a PoA model does sacrifice some decentralization and permissionless-ness, it is beneficial for a gaming-focused blockchain as it prioritizes scalability and swift transaction verification. Validators are chosen for their proven trustworthiness, guaranteeing a secure and efficient network operation.

A standout feature of Beam is its compatibility with the Ethereum Virtual Machine (EVM). This compatibility not only fosters innovation by supporting Solidity-based smart contract coding but also ensures ease of transition for developers familiar with Ethereum's development environment. The ability to port Ethereum-based applications onto Beam opens up expansive opportunities for creating sophisticated, engaging games that captivate players.

Within the Beam ecosystem, the $BEAM token serves as the vital currency for facilitating all network transactions. From executing smart contracts to transferring value, the $BEAM token is integral to engaging with Beam's offerings and games. As of 2024, three new games are coming to Beam through Merit Circle, including Moontropica, Monsters Rocket, and Nekoverse.

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Off The Grid and MetaDOS: Broadening the Blockchain Gaming Landscape

Similarly, Off The Grid, a cyberpunk battle royale game by Gunzilla Games, and MetaDOS, a survival battle royale from DOS Labs, are setting new standards for what games can achieve on the Avalanche Subnet. Off The Grid's integration into the GUNZ platform and MetaDOS's commitment to a seamless, no-gas-fee gaming experience for its substantial daily active users demonstrate the subnet’s capability to cater to diverse gaming needs while maintaining high scalability and security. Additionally, in March 2024, Gunzilla Games announced it had raised $30 million in a round co-led by CoinFund and Avalanche's Blizzard Fund.

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DOS Subnet: DOS Labs

Similarly, DOS Labs has made significant strides with the rollout of its DOS Chain within the Avalanche Subnets framework. The studio, which draws an impressive 400,000 players daily, has leveraged its subnet to mitigate the common issues of network congestion and latency, thus granting developers the latitude to focus on game innovation. The DOS Chain, powered by a cutting-edge consensus mechanism conceived by Cornell scholars, boasts remarkable transaction speeds of under one second and a high throughput of 4,500 transactions per second. In addition to its robust security features and customized governance protocols, the chain maintains compatibility with familiar Ethereum tools like MetaMask, Remix, and Truffle, positioning DOS Labs at the cutting edge of game development infrastructure.

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MapleStory’s Own Subnet

Nexon Group's cherished game, MapleStory, has captivated players for nearly two decades and is experiencing a renaissance thanks to its move to the Avalanche blockchain. Nexon, Korea's preeminent game studio, gained international acclaim in the early 2000s when MapleStory emerged as a standout in the golden era of massively multiplayer online role-playing games (MMORPGs). The game, which continues to enjoy a dedicated following, is set to embrace the Web3 wave with a new iteration launching on Avalanche.

This upcoming venture, dubbed MapleStory Universe, is poised to push the boundaries of traditional gaming by incorporating user-generated content, a feature that has become a hallmark of top-tier Web2 games. The Web3 transformation of MapleStory goes beyond mere play; it empowers players to craft and monetize their own worlds within the game.

By integrating with Avalanche, MapleStory is set to vastly extend its virtual universe. This evolution, fueled by the principles of Web3 — ownership and incentive models — promises to enhance the already rich expanse of MapleWorld. It grants users the unprecedented ability to create compelling new worlds, enrich gameplay, and leave their unique mark within the MapleStory Universe.

This innovative move is expected to usher a wave of Web2 gamers into the expansive realms of Web3 gaming, all through the familiar portal of Avalanche. With the support of Avalanche's customizable features, MapleStory Universe will operate on a dedicated Avalanche Subnet, meticulously crafted to fit the game's unique needs, unlocking a future of endless possibilities within the gaming cosmos.

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Conclusion

The gaming industry is poised to undergo a transformative shift with the integration of Web3 technologies, particularly through the innovative deployment of blockchain and its profound impact on digital asset ownership and economic models. The emergence of GameFi and the expansive metaverse economy highlight a burgeoning realm where gaming intersects with real economic value, reshaping player engagement and opening new avenues for developers and players alike. Despite facing significant challenges, including technical limitations, security vulnerabilities, and regulatory uncertainties, the potential for blockchain to revolutionize the gaming landscape is undeniable. 

The shift towards scalable blockchain networks like Avalanche, with its specialized subnets, demonstrates a proactive approach to overcoming these obstacles, ensuring a more stable, secure, and user-centric gaming experience. As developers continue to innovate and adapt, the gaming industry stands on the brink of a new era where its integration with blockchain technologies could redefine the very essence of how games are played and valued. This evolving landscape promises not only enhanced gameplay but also a robust economic system within the digital realm, marking a significant milestone in the history of gaming.

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Disclaimer: This report was commissioned by Ava Labs. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.