Some games need closed ecosystems

Maybe most?

Yesterday, Blizzard announced "phase 3" for Classic WoW. Most notably, phase 3 includes Blackwing Lair, a forty-person dungeon more difficult than anything in the game currently. After seeing this announcement and the ensuing hype from the community, a diagram popped into my head that I could use to explain why open game economies are sometimes bad for games. But first, a little background on how games like WoW work.

WoW is about progression.

You start out as a weak little thing without any armor, weapons, or skills and meet somebody who gives you a quest to kill some wolves or boars or something. This gives you XP, items, and access to more quests. You keep doing this until you reach the maximum level of sixty.

This is called the leveling phase. Getting to the end of leveling is easy and anybody who wants to commit the time can do it.

Once you reach maximum level, you enter the raiding phase. Here, groups of up to forty people work together to complete more difficult content that rewards more powerful gear. Classic WoW released with two "raids"—Molten Core and Onyxia's Lair—and while some hardcore groups were able to clear them with relative ease, some groups of players are still struggling.

To clear raids, groups need to learn the fights and assemble a sufficiently powerful group of players. Mostly, this is a function of gear. This little loop basically summarizes the whole game:

By clearing more difficult content, players are rewarded with better gear, which allows them to clear even more difficult content, rewarding them with even better gear, and so on.

This means that each new raid that gets released will have higher requirements for gear. It will be impossible for players to defeat certain bosses without the right equipment that can only be earned by clearing prior content. These fights are called "gear checks," because unless you have the right gear, the boss will kill your players 100% of the time.

So you have a series of raids with increasingly higher gear requirements. You can visualize it like this.

Over time, players need to achieve higher gear quality to complete new, more difficult content. They do this primarily by "farming" the rewards from the preceding content. So to do Blackwing Lair, players will want to have done a lot of Molten Core + Onyxia to get as much gear from that raid as they can. (There's more nuance to it than this but I'm making illustrative points).

But in WoW, players can only clear a given raid one time a week. And because items are distributed across forty players, it's unrealistic to expect all members of a raid to be fully geared out in the best possible gear when new content gets released. So to bridge that gap, players increase their power with consumeable items that temporarily increase their power.

These consumeables can be very expensive and end up being one of the biggest cost centers for end-game players.

Okay. So that sets the stage:

  1. WoW is about progression

  2. To progress, you need to get better gear to clear more difficult content

  3. Sometimes you need consumeables to help you clear that content

In order for this game to survive, progression needs to feel rewarding. In order for it to feel rewarding, the progression needs to feel valuable. For progression to feel valuable, the investments in progression need to feel costly. Some examples:

  1. Leveling to sixty takes time. A lot. The fastest player ever got to sixty in something like 72 hours. Most players take double, triple or more.

  2. The best gear is difficult to get and cannot be bought with gold. For example, Onyxia—one of the phase 1 raids—drops two powerful weapons. But each time she dies, she only has a 5% chance of dropping each. And players only have one chance each week to kill her.

  3. Consumeables are expensive and gold is not easy to come by. A good rate for "farming gold" is ~50 gold per hour. Flask of Titans, a potion that will be required for most players going into Blackwing Lair costs around 100 gold.

Classic WoW works because (1) progression takes a lot of time, (2) the best gear is difficult to obtain, and (3) in-game gold feels worth something. There's no way to use IRL money to buy your way to sixty or into a set of gear that's powerful enough to clear the hardest content. And while the in-game economy is not perfect, it's relatively balanced (and works a whole lot better than future expansions).

For WoW and other progression games, a closed ecosystem is critical to its survival. Allowing in-game gold to be traded for fiat and vice versa or free trading of items between players not to mention in between games would literally ruin the game. Imagine if the cost of something was one hundred hours for Player A and one hundred dollars for Player B. The fact that this is possible would make the rewards from Player A’s investments feel less valuable. (I wrote about this wrt Diablo 3 previously).

I don't make this point to damn the entire concept, just to make the observation that one of the most beautiful things about these virtual game worlds is that they can be isolated from all other worlds.

Acquisition vs defense mindset

Last weekend, a few friends and I got to talking politics over dinner (as one does) and the topic of wealth taxes and corporate taxes came up.

How unfair, one of my friends said, is it that wealth inequality continues to grow while so many Americans live below the poverty line? We need to redistribute the wealth accumulated by the very rich and very powerful to offer a basic standard of living to everybody we can.

In Los Angeles, It’s hard to disagree with that position without seeming like a horrible miser. But disagree I did, suggesting that if we make the country less friendly to the rich and powerful, they will leave. And there will be nothing left to tax.

How do we know they will leave? They already do it where they can. Here’s a chart of “who evades taxes” which clearly shows the rich evade a much higher percentage of the taxes they owe.

With a goal of improving the overall wellbeing of people in America, what do you do when faced with these data?

  • You can try and plug the holes—increase surveillance, enforce harsher punishments, enact more restrictive laws

  • You can accept that the holes will never fill and search for solutions in an environment where governments lose their ability to tax their constituents

Gabriel Zucman, a professor of economics at Cal wants to plug the holes. He believes that wealth inequality threatens our political process and advocates for more “just” taxation—which in practice means better data on who owns what and using that to minimize tax avoidance:

There is this view that you can’t tax rich people, high earners, or very wealthy individuals, or they would hide assets or, again, move to low-tax places. What I want to do in my research is to try to explain how important these phenomena are, to quantify these things, to understand why we’ve let these phenomena of tax avoidance and tax evasion prosper, what are the policies and the policy failures that are responsible for this.

He’s seeing tax avoidance driving further wealth inequality which has political consequences:

It’s [wealth] the power to control the state for your own benefit. You see this very clearly in the United States, where inequality has increased enormously. And at the very same time as inequality arose, tax progressivity declined. Basically, the rich cut their tax rate.

Zucman thinks it’s unjust that wealthy individuals and corporations can hide their wealth or simply move to other geographies to avoid tax. Among his proposals are:

  • Making Swiss banks disclose the holdings of their customers to relevant authorities (this already is happening)

  • Taxing corporations based on where they are making sales rather than where they are artificially locating their businesses (e.g. Bermuda, Ireland)

His asks are reasonable enough—just close the egregious loopholes. To close those loopholes, he needs two things:

  1. Complete disclosure of property ownership by citizens

  2. Political capital to enact laws that minimize tax avoidance

I think he and other “plug the hole” supporters will find that (1) complete disclosure of property ownership by citizens is difficult and continues to get more difficult every day (and of course they know this which is perhaps the cause of their sense of urgency). As evidenced by the chart above, there are clearly already resources available to the rich and powerful to obfuscate their property. Adoption of non-sovereign digital moneys like bitcoin offer more ways to obfuscate—and potentially offer ways available to more people (not just the rich). In the end, I expect these efforts to plug the hole will be futile. Perhaps it will work over a short time frame but that success will catalyze a shift in mindset from acquire to defend.

Phil Bonello’s recent post on the Sovereign Individual contextualizes this shift well. In short, globalization, digital moneys, and encryption reduce the returns on violence because more people have powerful tools to defend themselves. For example:

  • Globalization: if you are looking to start a company, information availability helps you find the jurisdictions that will be most favorable

  • Digital money: if your nation’s financial system doesn’t suit you or your government wants to censor or seize your assets, you can opt into a non-sovereign digital money

  • Encryption: to avoid surveillance, you can encrypt your personal information to protect yourself from groups that would otherwise exploit your data for their gain

My hypothesis is that acquisition mindset is the default for most people and it takes a catalyst or some sort of environmental change to jolt people into a defense mindset. The obvious one given the topic of this post is tax. The status quo is to continue to acquire but once your jurisdiction suddenly enacts policies that threaten to seize your assets, you’ll allocate at least some of your time to defense. If a global shift towards surveillance, property seizure, and unsound governance of state moneys swells, maybe a mass shift from acquire to defend occurs.

I’m reminded of what I hear from my contacts in China. The everyday people are happy as long as things are stable and growing. They know they are surveilled, they know they do not enjoy the freedoms of a democratic country, but they are okay with it as long as they can stay in acquisition mindset. Today, only the very rich facing capital controls and potential capital seizure are in defense mindset.

The path towards plugging the holes will catalyze a mainstream shift from acquisition to defense mindset. From the perspective of governments and maybe the every day people, this could lead to short term pleasure (in that indeed wealth could be redistributed in a way that benefits more people). But this path accelerates the adoption of defense mindset, which will cause long term pain for states.

Still unsolved is the issue of how do we help the impoverished. If redistribution of wealth isn’t the way, what is? If some redistribution is required, how would we achieve that? I’m not sure here and would love suggestions from readers on what they think will help the most.

The virtual worlds future is already here, it's just not evenly distributed

I've noticed a lot of talk over the last year or so about virtual worlds. It's impossible to ignore. Internet access and speeds and growing, gaming is now mainstream, more of our work is going remote, and online communities have achieved unprecedented cultural significance. But virtual worlds are not new, people have been living in them for decades, it just hasn't been evenly distributed.

And what people expect:

Isn't what virtual worlds will look like in reality:

First, on definitions. Wikipedia says: "A virtual world is a computer-based simulated environment which may be populated by many users who can create a personal avatar, and simultaneously and independently explore the virtual world, participate in its activities and communicate with others."

The ingredients for a virtual world are

  1. Environment

  2. Identity

  3. Activities

  4. Communication.

Science fiction describes these are parallel universes created by computers. But all of the above logos, some of them mundane tools we use at work, also satisfy the criteria. For example, Slack offers environment (channels), identity (who you bring to work), activities (posting, calling), and communication.

To me, the question of will we spend most of our time in virtual worlds isn't a question of if, but how. Which intentions in our lives will we satisfy through virtual worlds? How will we navigate our time across these many virtual worlds. Will they ever unify to just one?

On intention, I find this graphic from a WSJ article on how we spend our time helpful.

We spend most of our time (in order) on:

  1. Personal care (mostly sleep)

  2. Working

  3. TV, leisure, sports

  4. Household activities

  5. Eating and drinking

  6. Shopping

  7. Caring for family

  8. Education

And when we're unemployed, we spend more time on leisure.

So the exercise is to look at these categories and see where we might see adoption. Gaming is clearly eating into leisure time, but where are the next big buckets?

The obvious ones are working, shopping, and education. And we're already seeing some traction here with remote work, social shopping, and virtual schools (e.g. Lambda). I think all of these markets are underserved and there's probably a lot of opportunity to take lessons from gaming and apply them to these time buckets.

On how will we navigate our time, I think the answer is continued fragmentation. For most people, our everyday lives involve many different types of physical environments—our home, school, workplace, grocery store, social gatherings. While they are unified by the physical realm, they are separate environments that we visit for separate purposes. And we may bring different versions of ourselves to each of those environments (while work Tony shares the same name as out with friends Tony, these two Tonys behave and are perceived by others quite differently).

I expect the same from virtual worlds. We will bounce around from many virtual worlds each serving different purposes. And while unified by the digital realm, they are better understood as separate places rather than rooms in one house.

This is how virtual worlds work today. Just yesterday, while I was waiting for my flight at the airport, I:

  • Chatted with my family in iMessage

  • Checked messages in Slack

  • Scrolled through some tweets

  • Visited a few subreddits

  • And played a quick multiplayer game on my computer

This all happened within an hour of time. I brought a slightly different version of myself to each of these virtual environments, and my intentions spanned personal, professional, and entertainment. And I expect these behaviors to accelerate as more of our everyday lives happen in virtual spaces.

Is this good? I'm not sure but it sure feels inevitable.

What I will say is this: my favorite thing about virtual worlds—both enjoying and building them—has been seeing people find their tribes online. From the bulletin board services of the nascent internet to massive multiplayer online role-playing games like World of Warcraft, likeminded people have been getting together irrespective of physical location for decades (the 70s for bulletins and the 90s for modern MMOs).

These worlds offer an alternative place for people to build relationships, feel a sense of accomplishment, find entertainment and more. Unlike the physical world—the school you're forced to go to, the job that's the best that you can get, the family you're born into, the town you're stuck in—virtual worlds are opt-in. And those that opted in tended to have more in common with each other than the random selection of people at one's local mall.

So to the extent our increasingly virtual lives lead to a greater percentage of our time spent in environments that we opt into, with communities of people we fill energized and welcomed by, I'm for it. And I’m hopeful that is what is happening.

How to get into VC

The Top Quartile VC Loop

Here’s a highly informative and irreverent post on how venture capitalists make money. If you are at all interested in the industry, I recommend it. I had to piece it together from many books and blogs over the years. This is maybe the best individual post on the topic I’ve seen.

In the post, the author shares this graphic that they call “The Top Quartile VC Loop.”

Four steps:

  1. Get allocations in good startups

  2. Generate top quartile returns for your LPs

  3. Gain notoriety for your golden touch

  4. Your track record attracts the best startups

And repeat.

The famous funds in VC are famous because they did this. They outperformed and that outperformance led to more outperformance. Once you’re in the loop, it seems almost hard not to keep winning—unless you blow yourself up.

This loop is what every general partner is trying to either kickstart of maintain for their fund. It’s useful framing for everybody in the VC ecosystem:

  1. Aspiring and junior VCs can ask themselves how they can aid the general partners in each stage of this loop

  2. Founders seeking capital must position their company as a way for the fund to achieve top quartile returns for their LPs

  3. GPs are trying to get their loops going and LPs want to invest in funds with this loop

Several friends have recently asked for advice on breaking into VC and my response has been “get as close to doing the job as you can.” Good is domain expertise (e.g. prior experience in the field or thought leadership) and clear articulation of why you would have good judgement. Better is proven access (by e.g. introducing funds to companies) and approximation of judgement (by e.g. managing a “fantasy portfolio.”). Best is actually having invested and built up a track record.

This loop offers some context on why. To break into VC, you need to convince partners or LPs that you can help start or accelerate this loop.

Do what you can

SPOILER ALERT: JO JO RABBIT (no plot spoilers beyond what is already revealed in the synopses, but if you’re super sensitive to these things, turn away)

Anna and I went and saw Jo Jo Rabbit over the weekend. It’s a great film about a little boy whose worldview (Nazi party fanatic; his imaginary friend is Hitler) gets challenged when he finds and befriends a Jewish girl that his mother is hiding in their house.

Without revealing more about the plot, there’s a clear theme of “do what you can.” While it’s obvious that the Holocaust was a very bad thing that we should do everything in our power to stop from ever happening again, you can empathize with the characters in the film who aren’t risking it all to stop what’s happening. Some of them, like the boy at the beginning of the film, don’t know any better. Others can’t afford to take the risks. And the film makes it clear that the risks are high.

The uncharitable way to interpret an unwillingness to “do the right thing” is to say that person was “unwilling” to take the risk. A more charitable way is to say they are “unable” to take the risk. And what the film reminds viewers to do is “what you can.” It’s okay to be unable to do some things… find your limit and do what you can.

I think about this a lot when I look at what’s happening in the world and indeed within our own borders. Camps of migrants held in poor conditions at the Mexican border, violence in Hong Kong, abhorrent prison camps in China. There are human rights violations all around us. We’re (by we I mean people of similar circumstances to me) not yet faced with whether we would take on risk of death by housing a persecuted individual, but we are faced with whether we should speak out.

It reminds me of this piece from Tyler Cowen on the NBA x Hong Kong thing. In it, he asks why zero NBA players (at the time of writing) have spoken out in support of Hong Kong:

One hypothesis is that all three hundred of these individuals are craven cowards, worthy of our scorn.  Maybe.

Another hypothesis, closer to my view, is that it has turned out sports leagues (and players) are neither the most efficient nor the most just way to combat social and political problems related to China.

It’s probably true that a sports league isn’t the most efficient way to combat social and political problems related to China, but it’s hard not to view their decision here as a risk/ reward one. They’ve decided that they cannot risk their livelihoods to do what many of them probably think is the right thing.

Shaq, on the other hand, was able to speak out. But he’s well established and on a relative basis probably takes on less risk than the average NBA player in doing so.

Curious how you readers think about “doing what you can.” I’m not sure where that is for me yet, but I do know I’m probably not there yet.

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