Leveling up esports

In this piece, Nami’s Nexus explores how web3 can help address some of the issues prevalent in the esports industry by facilitating more transparent and effective financial management systems

Esports is often misunderstood as a business, especially since it works differently from traditional sports. Unlike traditional sports, where revenue is generated from in-person ticket sales, paid remote viewing, and merchandise, esports generates little income from these channels. Instead, esports is a combination of tournament systems and marketing strategies aimed at increasing in-game spending, building influence and attracting advertising sponsors. In this model, game developers allocate a portion of their marketing budget to esports, which is used to promote the esport and finance the leagues and events, including prize pools.

How money flows in esports

The funds for esports organizations mostly come from sponsors, though there may be some revenue from merchandise sales and sometimes even from the game developer to ensure stability. This money is then spent on league spots franchises and payment and housing of players. These organizations may also receive a portion of the prize pool money, or sometimes all of it, to help cover the player overheads. Sponsors pay for exposure, similar to Nascar, and ultimately esports relies on marketing spend from all three groups: developers, orgs, and sponsors. Additionally, tournaments themselves often have sponsors that pay game developers for league/event exposure. To further complicate things, many game developers outsource the actual running of leagues/events to organizations such as ESL, FaceIt, and Blast, who pay for production staff that usually includes talent like commentators and hosts.

Bad actors

The fact that the esports industry is relatively new and involves different players with different interests leads to several challenges. Game developers face problems such as inexperienced middle managers, bureaucratic red tape, and difficulties with managing marketing budgets for contractor payments and prize pool payouts. In esports organizations on the other hand there is a general lack of transparency concerning finances, and players frequently don’t receive their salaries on time or at all. Unless game developers exercise proper oversight, contractors may also engage in similarly dishonest behaviour. Moreover, sponsors often lack essential information, such as metrics and financial data, which impedes their ability to make sound business decisions.

Transparency of money flows

We believe that web3 can help with some of these issues, especially around financial management and transparency. The most apparent way that blockchain technology can be valuable is by ensuring the transparent flow of funds. This could be achieved through smart contract escrows for player and prize payments, as is already the case for Axie Infinity, where leaderboard-based payment systems are used to pay out AXS rewards at the end of each season. Additionally, Splinterlands demonstrates how automated payouts for player or org/guild-run tournaments can be achieved by automating the tournament and paying out from an escrow account. Smart contract technology could also be utilized to fund prize pools using player contributions/purchases, as seen in games like DOTA and Rainbow 6: Siege. These contributions could be distributed to treasuries in a manner similar to royalties, providing complete transparency and enabling everyone to monitor the progress of the prize pool in real time, thus facilitating ethical prize pool funding.

Funding tournament prize pools

Web3 can also help by offering alternative forms of prizes in the form of digital assets, including tokens and NFTs, as opposed to solely cash payments. In fact, the value these unlock is more around funding prize pools by providing prizes that are low cost to a developer but high value to players. Tokens, if highly desired by the player base at large, can be designed in a way that it makes sense for tournament winners to sell their winnings to general players. NFTs, on the other hand, offer even more possibilities as they can provide exclusive cosmetic variations or even virtual autographs for winners. For example, the Pokemon TCG sells special editions of tournament-winning decks, but imagine if the winners could sell their copies of those special decks or cards to other players. By lowering the cost of providing prizes for game developers the number of tournaments and esports events can potentially increase and make them more accessible to a wider global audience.

Smarter affiliate systems

Another area web3 technology can offer support is the way organizations work together with influencers. Influencers play a vital role in building the brand image of organizations and attracting a loyal audience. With the use of smart contract-based royalty systems, there is an opportunity to create more efficient and automated affiliate programs for influencers. In a traditional affiliate system, the influencer uses a unique link or coupon code to track their sales. However, this method lacks transparency and can lead to complications in paying influencers, which can lead to a lack of motivation and trust in the organization or brand they represent. Smart contract systems can provide proper attribution to the source of the sale, improve transparency, and automate payment processes. For example, Faze may have some NFT skins in a web3 game and want to incentivize influencers of the game to promote sales of these digital items. In a typical web2 game, each influencer would need to have a unique coupon code, and every given period, the game developer would pay out a percentage of sales to Faze, along with a report of coupon code usage. Faze would then need to divide the revenue among its influencers. With a smart contract-driven system, an influencer could register their coupon codes and wallet address in the smart contract, and whenever someone purchases the Faze NFTs, the smart contract would automatically distribute payments to Faze and the influencer.

Driving new esports business models

These are just a few examples of how blockchain technology can facilitate improved business models in esports through financial automation and transparency, but there are many more possibilities. Unfortunately, crypto has a bad reputation in the industry due to examples like the FTX TSM deal. However, as web3 games establish new esports, there is an opportunity to change this perception. We anticipate seeing more innovative profit-sharing models between game developers and players that organically improve discoverability and provide sustainable earning opportunities for players. While competitive gaming may not be for everyone, as long as there is significant interest from players in watching high-skill players compete, there is an opportunity for those skilled players to earn a living from their passion.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.