3233: Inside Xsolla ZK and the Future of Blockchain Gaming

[00:00:04] Gaming has always been about pushing boundaries and today we're talking about one of the biggest shifts yet. The fusion of Web3, Blockchain and gaming economies. Traditionally, the games industry has operated on closed ecosystems. But what if players could own, trade and move their in-game assets seamlessly across multiple platforms?

[00:00:30] That's exactly what Xsolla is doing. And today I've invited Chris Hewish, Chief Strategy Officer and Lee Jacobson, Senior Vice President of Business Development of Web3 at Xsolla, to join me on the podcast and share their decades of experience in gaming, commerce, blockchain and everything in between.

[00:00:53] Because today I want to hear more about how they're leading the charge in making Web3 gaming more accessible, increasing adoption, while also keeping it secure and making it more rewarding for both developers and players. So I want to learn more about their digital backpack concept, the power of zero knowledge proofs for security, the shift towards direct to consumer gaming models and what the future of in-game economies might look like.

[00:01:23] So is blockchain really the future of gaming? And what do game studios need to know before they make the leap into this world too? Let's find out by getting my guest onto the show now. So we have not one, but two great guests joining me today. So to begin with, Chris, would you mind telling everyone listening a little about who you are and what you do? Thank you, Neil. Yes, my name is Chris Hewish and I am the Chief Strategy and Communications Officer at Xsolla.

[00:01:53] And I've been working in the video game industry for quite a while, driving new products and business models. And my role these days really focuses on helping the company drive its vision forward, be innovative, which includes Web3 blockchain technologies, really with the point of empowering game developers and player experiences worldwide. And there's so much I want to talk with you both about today, Web3 blockchain video games.

[00:02:21] We're going to geek out a little bit. So Lee, could you tell everyone listening a little about who you are too and what you do? Sure. Yeah. Like Chris, I've been in the game business about 35 years. I started writing video games on my Atari computer when I was about 15 and disappointed my parents because there was no industry back then. And long story short, I wanted to go work for this company called Atari just to sweep the floors and work with the likes of Steve Jobs and Steve Wozniak, who did Breakout, which is a game that Atari published way back when.

[00:02:51] And I started a couple of game studios, published a number of games, sold the studios and went to join Richard Branson's Virgin Entertainment back in the 90s in Orange County. I moved from Dallas to there and we sold that to Electronic Arts in 1998. And then I basically went south to San Diego and never left to join a company called Midway, also known as the House of Mortal Kombat and a bunch of others sort of arcade classics, if you will, on the coin up and home console side.

[00:03:20] I was there for 13 years. And then through weird happenstance, I got a call from the CEO of Atari and I got to run 30 years to the day, the entire publishing, business development, licensing and consumer products unit for the company. So for me, it's sort of like a full circle in the video game world, getting to work for a company that was my icon when I was 15 years old.

[00:03:47] So I started a couple of companies after that. And then I met Chris and a few other guys and really about 2017 and 18 early days in blockchain, got involved in the Ethereum side and investing in various things. And I really liked what these guys were doing. So I took some time off playing golf, got tired of that every day and joined Chris and the team and really helping just to focus and give developers

[00:04:16] a great way to scale cost effectively games that they may want to deliver on the blockchain. So it's been really fun. Wow. What an incredibly cool origin story. I love that. And we are going to be looking forward to talking about Web3 and blockchain. But for a moment, we've got to mention that Atari 2600, that beautiful wooden veneer finish. It was a piece of art, wasn't it really?

[00:04:41] It was. Yeah. And in fact, we basically took that unit and we shrunk it down. And the games are so small, Neil, that you could put 100 different games on one chip. Right. And so we basically every year we would do a smaller version of the 2600 with two joystick controllers. You could just HDMI plug into your TV. And we sold an enormous amount of those, I think just for the nostalgia factor.

[00:05:08] It was really cool. Yeah. And it was only the Atari joysticks that could handle the 1500 meters in the decathlon games. Right. I remember those just back and forth, back and forth. Yeah, I remember those. I have many a booster on my thumb from that joystick. Fast forward to present day. Exola has been a leader in video game commerce for two decades now.

[00:05:32] So I'm curious, how have you seen the landscape evolve and what key trends are shaping the industry today? Sure. So as you mentioned, Exola has been around for quite a while, and we've really been on a mission to democratize the whole business of games and empower game developers so that they can really connect directly with their players.

[00:05:54] And the way we see the landscape evolving is there is a accelerating trend of game developers and publishers looking to connect directly with their players and at the same time empower their players to make them much more part of the whole ecosystem beyond just a consumer. And I think this really lines up a lot of the opportunity and value that could come from blockchain.

[00:06:18] So for us, we work with thousands of games globally all around the world from the biggest companies out there, all names you would recognize, all the way down to individual developers. And we really want to give them every tool that they can use to take advantage of this direct-to-consumer sort of direction that the industry is heading in. There's regulations that are helping with that. There's value propositions that have come down on the platforms, so it makes more sense really to connect with your players.

[00:06:48] But when you think about the industry, the game industry itself is, it's surprising to say this or odd to say this, really entering kind of that later stage, mature stage of an industry where people are starting to focus much more on margins versus hyper growth. And that is leading people more and more into the direction of, okay, let's get off or evolve beyond platforms. We take 30% of the revenue and connect directly with players.

[00:07:17] Let's put the economy into players' hands even, right, and allow players to earn from playing games. All of these things that will help improve the margins and leverage new technology to continue growth. I think that really brings us to where we are today in the conversation. Yeah, I would totally agree with Chris. I mean, I've only been with Atola September, but I've learned that I've obviously known the company for many, many years. And I think Chris is absolutely right. The company's been providing a bunch of different solutions.

[00:07:47] I'm still learning all the different solutions they have. There's so many. And I think this is a natural evolution of just the company's offerings. And obviously being a layer two blockchain developers, I don't think Chris and I even know all of the things that developers may or may not do. I mean, we're the blockchain. So I think we're going to both learn, the whole company's going to learn like, oh, they're doing this. They're doing that.

[00:08:17] They're doing that. How can we improve on this? So I think it's going to be an evolving process for the company. But given the number of years the company's been in business, I think that I've had a ton of meetings with people that are wanting to experiment in the space now that we're evolving what I call from early experimentation and problems to a more mature, hopefully knock on wood, stable ecosystem and environment.

[00:08:43] And I think that they really want us to be part of the conversation because of the company's stability for so many years. And what we're talking about here today is a next generation of gaming. So just to ensure we've got everybody on board here, can you just explain the vision behind Exola ZK and how it will drive Web3 adoption in gaming? Because we hear about Web3 a lot.

[00:09:38] And we're going to happen to see how much of a great way to make it. And I think that's what we're going to do today. And I think the reason we use the word digital backpack or digital item, I don't even I just call digital asset because it's just a digital asset. is I think we're finally getting to a point, as I said before, I think we're in the third inning

[00:10:07] of a nine-inning ballgame. And that is, suffice to say, that we've moved to a more mature technology level after a bunch of experimentation, right? Speed, the cost effectiveness now of deploying things on the blockchain, on the Ethereum blockchain without costing a ton of money and the ability to make it a seamless experience. Like you probably have logged in

[00:10:35] or some of your friends have logged into Coinbase and set up an account. How easy was that versus setting up a wallet and a MetaMask here and keys and all these kinds of crazy things. You just simply created a password and you got an authentication thing and you logged in and boom, it was a frictionless experience. And all of a sudden you could earn an own Bitcoin and Ethereum and a bunch of other assets. And I think that's kind of where the company really wants to evolve to is make it a simple process

[00:11:05] where you have the option as a game developer and a publisher to have a longer life cycle for your game from web two to web three to make it extend its life. Or you give the game players the option to do it on their own very simply and very easily that makes them have the ability to monetize something that you couldn't do. For example, if you bought a Celestial Tiger on World of Warcraft,

[00:11:32] it was $5,000 for that item, right? $5,000. And Blizzard has to flip a key and you're gone. It's gone. Now I'm saying they would, I'm saying they could. And I always tell people not to overthink it and overcomplicate it. But imagine that being on the blockchain where you simply own it and it may or may not have higher or lower value at some point in time, just like any stock or anything else you'd own. But at least you would have the rights

[00:12:03] to the digital asset. So I think we're moving into a more mature, not fully there yet, but a more mature, thoughtful process of blockchain gaming. And you mentioned an interesting concept there that caught my attention before you came on the podcast. And that is the introduction of this digital backpack. So tell me more about that. How's that going to transform the way that players and developers manage in-game items?

[00:12:30] It's an incredibly fascinating concept and intriguing too. Yeah, well, I think the idea, and again, not to overcomplicate it, I think the idea is really just having a place where they can hold their digital assets and I'm afraid, hopefully they have, as I tell people, anybody can do a screen grab of a picture and call it their own and copyright infringe on a picture. So I encourage the game developers when I talk to them to not just have something

[00:13:00] that has cosmetic value, make it have utilitarian value. And I think having a digital backpack of, let's say it's a gun that I leveled up from level one to level 50, for example, just to use it as an example, has more value than it's a level one. And being able to own that in my digital backpack and maybe even list it for sale and someone wants that because they don't have the time,

[00:13:30] but they have the means to join their buddy who's also got a level 50 gun, if you will, can buy that. And players can benefit from that. I think it's just the, coming from my previous company, it's a logical extension of what we did. And it just makes sense that you get to potentially monetize. And I say potentially because I don't think it's a quick, a get rich quick scheme, Neil.

[00:13:59] I don't want this to be perceived and I don't think we're telling the message that, oh, you can just grind through 50 different items and now you have $10,000 in your bank. I don't think, you know, certainly we're not thinking of it that way, but the digital backpack itself is where everything is stored and it's secure and it's a single sign-on with your mobile phone number and your email address and you're done and you don't overthink it. Yeah. And it really is that term backpack, right?

[00:14:29] Digital backpack. It's a place where you can basically store all your toys and you can take them out to play with them when you want and then you can pack them up and take them with you, right? So it's not that all your toys have to stay at one friend's house. You can take them with you, trade them with other friends, portable, secure, they're yours and that really opens up a lot of possibilities and you asked earlier about sort of where the industry is heading. Part of this is there's a big convergence between creator and consumer

[00:14:58] and in the past it had really been one directional. Somebody created and somebody consumed. Well, we really are at a point in time now where those walls have come down and it's bidirectional and people who are creating are also consuming and vice versa. Consumers are creating and all of this really empowers that and I think there's a lot just happening beyond games when you look at just where the world is with governments now getting into the into the fold and endorsing crypto and I think that brings legitimacy

[00:15:28] to blockchain gaming and unlocks all of these new revenue models for developers and players expands the business makes it real borderless which is great and hopefully attracts new major investments and people build even greater things. And as you mentioned a few moments ago we're not talking about a get-rich-quick scheme here it's so good to hear that we're seeing the back of that so on behalf of any game developer that might be listening and intrigued how does it integrate

[00:15:56] in ZK sync technology how does that enhance Exola's blockchain solution and also what advantage does it bring to that game developer that's listening to us today? Chris, don't want to feel that? Yeah, I mean look for developers really embracing this opens up new monetization opportunities new business models by allowing items to be retained their utility across different games gets deeper engagement and retention with players helps them

[00:16:26] I think engage with creators even more and gives players that sense of ownership in the game that they have or even if you go more to an ecosystem play into a relationship with the developer or the publisher which is great we know that engagement always leads to benefits for everybody at the end of the day whether it's monetary or just for fun and as Lee said it's a real benefit to players where they get to really take control of what they own and what they have

[00:16:55] so this is just good all around and there is an increased demand for this and when you talk about ZK which by the way stands for zero knowledge so we probably shouldn't have said that up front and Lee can talk a little bit more about that but ZK syncs on an Ethereum layer and it helps developers by reducing transaction fees it's very scalable and very accessible and secure which is great and secure because it uses zero knowledge proof so it basically

[00:17:25] because of the way the blockchain was formed I think again I'm coming on board after a lot of research had been done on various different companies to partner with is the fact that because it uses advanced cryptography it doesn't go into your privacy information it just knows it's true and it because of the way it's written it can batch up thousands of transactions and write them to the blockchain and cost you pennies versus dollars

[00:17:54] because if you've seen the price of Ethereum it's certainly not cheap and rolling those up if you will to Chris's point is just a really effective way that developers can do it cost effectively and make more money and I think that's what the company is always focused on is trying to put the power back into the creator's hands whether it's through publishing of games or user generated content etc etc and this makes it

[00:18:24] finally scalable effective and cost effective with security in place to let them do that and they'll do it like I said before in ways that we probably haven't even thought of honestly yet you know and with the recent updates to the Exola web shop too again can you expand on how you're helping those developers listening increase player lifetime value and engagement all that magical stuff yeah I mean the web shop has been a real

[00:18:53] success story over the past few years for the industry and there's a whole variety of them out there but the concept is you have all of these mobile games that had really been locked into platforms sort of gatekeeper ecosystems and they were unable to truly connect with their players players didn't have all of the data or the analytics or information about the players they weren't allowed to sort of message those players with better offers or things

[00:19:23] that maybe were customized for their behavior or what they enjoyed so with web shops we have provided the opportunity and not just us there's others but we are the leader in the space we have nearly 600 of them now working with all of the leading companies out there and it allows those companies to actually create an online presence and engage with their players outside of the app store's ecosystem and this opens up the ability to leverage everything that we know about

[00:19:52] e-commerce allows people to do more live events customized offerings all kinds of engagement opportunities for the players that make their lives better that provide better value for the players for the developers and the game makers this all happens at a much lower cost instead of having to pay 30% of every dollar that you earn to a platform it's in the 5-10% range and that creates a huge amount of additional

[00:20:21] profit for developers much of which gets turned over directly to the players in the form of higher value propositions for them and it also provides more profit to the game developers which allows them to make better games keep more people employed it's just a win-win all around and that's the importance of this connecting directly with your players and we see a much similar benefit over on the blockchain side as well maybe even greater benefit because it truly is borderless

[00:20:52] I'm curious what role do you see direct-to-consumer activations playing in the future of game monetization as that continuously evolves and how do you support that model moving forward too yeah I mean direct to consumer is the future of the industry and platforms are always going to have a value proposition just due to the number of users that are on those platforms but those value propositions change over time

[00:21:22] as all do and now that these platforms have become over saturated with content discovery is incredibly difficult fees are incredibly high and we feel that going direct to consumer allows people to take that take sort of their business into their own hands and develop we really tell people it's not just about throwing a store up online you have to really engage with your community you have an opportunity to build a rapport get to know your players

[00:21:51] understand what they want create better content for them to increase the value proposition but it's sort of like you know somebody has a hobby like Lee who used to play golf but still plays golf but is an avid golfer or player of golf being able to go and talk with a local pro and have his own club that he goes to and he knows everybody it's going to have a much better experience than if it's just all generic and it's controlled and he can't really determine where he goes or when he plays or anything like that

[00:22:21] so similar analogy and we feel that there's just a lot of power in direct to consumer and it's not just with games I mean we're seeing this decoupling and getting off of the intermediaries and connecting directly in all media right whether it's streaming entertainment which is bypassing movie theaters and all of that to connect directly with the audience music same thing so we're seeing at the end of the day better content better engagement and everybody wins

[00:22:49] well except the middlemen but you know that is what it is yeah and to follow up on that Chris I think you're right I'm way more about it than I do but I like the idea of individualized offerings that you don't get from the app stores right if I do a certain thing a certain way for a certain time I could get a reward or a benefit or some certain offer that may not be somebody else's offer because I'm a loyal engaged fan of your

[00:23:19] game and I think that's really powerful because it doesn't treat everyone the same way I mean I get rewarded for engaging and I think that's terrific it feels like there's so many exciting opportunities and possibilities around everything that you're doing here but just to rein ourselves in for a moment as the XIT guy I've got to talk about security and fraud prevention because these are major concerns in blockchain gaming right now so how are you at Exola ensuring

[00:23:49] a safe and seamless experience for both the players and indeed the developers so I mean with Exola because we had our I could do a little bit Lee and then if you want to dive any more technical we've got our beginnings working with a variety of different payment providers and we are a merchant of record is our business model which allows us to work with we have a thousand different payment providers that we work with now that we aggregate because of that we are

[00:24:19] incredibly compliant when it comes to security so you know all of the top security compliances that you could think of SOC 1, 2, etc. PCII all of that and we keep things very secure obviously not going to share all of the details of how we do that publicly which you can appreciate but we do have redundancies and high securities and we take it very very seriously and that also applies to blockchain and in fact

[00:24:49] it's one of the reasons that we have been incredibly diligent about how we approach it we haven't rushed in we've seen a number of companies out there that kind of rush in and they don't quite understand the compliance or security side of it and then they get out over their skis and they get in trouble for us that is not how we're approaching it yeah and a follow up with what Chris said Neil I think since a lot of this moves like a freight train at 100 miles an hour and it's continually evolving you always have the idea I'm a computer

[00:25:19] programmer by trade and so programmers will tell you theoretically there's nothing that can be protected that can't be hacked that's just sort of a fundamental thing we always say in the engineering world but I think that Xola has gone 2% like literally it's like way above industry norms in terms of fraud prevention just as a general the services that we

[00:25:49] offer and I think going into the blockchain space having a heavy duty back end but a simple login on the front end like Coinbase does for example along with cryptography and everything else that the reason they took the 20 years in normal game development it's taken security really seriously

[00:26:18] and when you look at zero knowledge proofs which is true identity and while keeping back PII information is really a remarkable thing that is new and will continue to evolve because security is a big deal you've probably seen as much as Chris and I have where people hack in they walk by their phone they get a wallet thing they scan their SIM card and boom I had it happened to a friend of mine he lost

[00:26:48] $10,000 out of his account that afternoon so I think those are going to always be at the forefront of the company's focus I don't think it'll ever end because the hackers will never end but I think that the company is taking a very thoughtful to do so on making sure that state of the art tech is implemented for gamers to

[00:27:18] have a secure play space I I'm going to ask you both to look into your virtual crystal ball now if we were to look ahead what would you say are the biggest opportunities and challenges in gaming commerce on the horizon what makes you excited and want to jump out of bed in the morning and how are equally positioning yourself for this future too I think looking ahead with a crystal ball I think the opportunity as we have said is that there is just a

[00:27:47] real convergence point that we're approaching not a singularity but we are approaching a point in time where the consumer and creator really are one in the same and the old ways of thinking about how you do business if you've created something how you will evolve and change and there's an expectation from consumers these days especially if you look at younger

[00:28:17] generations how they engage with games now they're very social engaged they're creating content for those games they're sharing and they really jump around quite a bit to different experiences and the idea that they can shape what it is that they're engaging with I think is really going to be critical so looking at technologies like blockchain and CK and Web3 and all of that that allow that afford that opportunity to help

[00:28:46] developers make things and engage with their audience and let that audience live on and continue creating with what they've made is really innovative and where we're heading obviously this creates a lot of challenges and there's questions around what do in-game economies look like at this point how are the ecosystems living and evolving what how does revenue move around in this where how do different marketplaces interact

[00:29:15] beyond what has been created by the original developer or content creator I think it's exciting new revenue streams cross game promotions will emerge I think interoperability is a key interoperability at the moment more in terms of tech stacks working together and hardware being interoperable but really in the future I think you need to think about it from a business perspective like how do different business models become

[00:29:45] interoperable how do different audiences and communities become interoperable and again this is what blockchain opens up potential for and then of course personalization and the ability to have hyper personalized experiences but at the same time hyper social experiences and being able to really show off what you're doing and gain value from it whether it's just social value or economic value so I think these are all threads that we'll see continue to emerge and

[00:30:22] anything that you're thinking about when you're going around or makes you want to jump out of bed in the morning yeah no no I think Chris certainly put it together pretty distinctly but I think if I could just add to that I think it's really the evolution of experiences where it can bring value back to the video gamer as you guys remember back in the early days you couldn't create content there was no internet to speak of so I couldn't do a twitch stream until justin tv got bought

[00:30:52] and then amazon owns it and everybody is a streamer who's 12 years old right and they start making money by simply playing games and filming it like wow how do and I think that if I look forward into the future certainly it's hard but having

[00:31:22] another revenue stream for gamers and I don't mean the churn and burn kind where you have people that are disadvantaged in certain countries trying to do something that isn't fair or isn't right or isn't proper in terms of what you should be doing I'm talking about the average person or maybe younger person who wants to play a game and grind out and now there's the ability to perhaps monetize that in a way that it's been

[00:31:52] saturated on there's a billion YouTubers or there's a billion Twitch streamers or there's a billion whatever going on right so I look at it down the road I could see this and I hope it doesn't get abused because that's not the intent but having gamers actually be rewarded for engaging with a particular brand I think is kind of cool and it brings the ability not that you want to do it but you could do it a potential revenue

[00:32:22] stream that is a completely new animal that never existed before and it's not a get rich quick scheme but you could never benefit on any of those MMO games anyway or other games that you could never do that before and I think it's going to evolve in a pretty significant way that Chris and I probably can't forecast all that but it's something new and it's something that

[00:32:51] people have really been excited about as making money potentially making money if you will well and I think that is the perfect mic drop moment to end on but before I let you go one quick question for you both I'm going to send you in first here Chris I always ask my guests to leave either a song that means something to them to our Spotify playlist for listeners to check out or a book to an Amazon

[00:33:21] wishlist so all I'm going to ask is what would you like to leave everyone listening and why so yes I would be remiss if I did not share that our company's founder Shurik Agapatov has actually written a book about this very idea called Once Upon Tomorrow he discusses things like harnessing the power of blockchain and the opportunities that it unlocks and the idea that we are entering a future that allows people to sort of

[00:33:50] break free from the constraints of gatekeepers and platforms which are great and they've served a purpose but we're just evolving beyond that and it really leans into a lot of the opportunities and benefits and ideas around this direct to consumer sort of evolution via the blockchain and web free Lee over to you a song or a book what are you going to go for well well I read everything on the internet so books are out of the question

[00:34:19] I mean if I don't have my Apple news I don't do it and on the music side gosh that's a rough one Neil I grew up in the 80s and I was in a rock band cover band if you will I played piano and I was a lead vocalist in a couple of bands and I would say that there's so many great songs that I grew up with in the 80s but my favorite would be the songs I sang pick any song from Journey in the 1980s

[00:34:49] and I'm fine with that I'll go with that because I sang all of them and it's hard to pick the perfect one out of so many different Duran Duran's and Journey's and REO Speedwagons and Foreigners that I did back in the day but Journey would be at the top of the list if you want to drop one of those in that'd be great okay but there's a rule here now you said you sing it I'll hit you up just a small town girl oh gosh

[00:35:22] yeah those were the days love it absolutely we didn't make any money but we had a lot of fun that's what it's all about and for everybody listening just wanting to find out more information about anything that we talked about today where would you like to point them so really you could go to our website xola.com and that is spelled x s o l l a dot com we have a great site with a lot of blog posts articles helpful information

[00:35:51] anything that you would want to learn about what we've talked about today or even just going beyond and what does direct consumer in the games industry mean excellent i'll have links to everything to make sure people can find you nice and easy but had so much fun with you today we covered everything from golf rock and roll web 3 blockchain i don't think we could have squeezed anything more here but more than anything just big thank you to you both it was fun neil thank you very much for you know having me on i appreciate that likewise thank you neil

[00:36:21] been great i think it's clear isn't it that the gaming industry is on the verge of yet another transformation ownership interoperability direct player engagement these are just a few of the things that are redefining what's possible in gaming economies so it's great to hear at exxon at the heart of this evolution but what do you think will players embrace true asset ownership or will traditional gaming models continue to dominate

[00:36:51] and if you're a developer does web 3 present a real business opportunity for you or does it add more complexity we can only cover so much in a short episode today and i know that many of you listening are far more knowledgeable than i am on this so please i'd love to hear your thoughts x linkedin instagram just at neil c hugh send over anything that sparked your interest during our conversation today and anything you would like to add to that

[00:37:20] conversation and if you enjoyed today's episode please hit subscribe for more conversations about technologies not just shaping video gaming but our digital future our personal lives our work and even world and as always please stay curious keep innovating and i will speak with you all again tomorrow bye for now