Fortnite Skins on the Blockchain?

Understanding the value of secondary markets

Unfortunately, Fortnite will almost definitely not put their skins on the blockchain. Nor will you ever be able to (legitimately) sell your skins for BTC, ETH or USD. But Fortnite won’t be around forever — and the games of tomorrow should learn to capture the value of secondary markets.

Image from this website.

Secondary Markets

Whereas a primary market refers to players purchasing game items directly from the developer, a secondary market refers to the exchange of used game items or currency for real money. These markets are usually maintained on grey market websites because most games prohibit this in their end-user license agreement.

Game developers stay away from secondary markets for several reasons. Here’s a few big ones with rebuttals:

1. They think it lowers overall sales. There is sound justification that properly managed secondary markets strictly increase profits. Players have different preferences. Some just want a good deal on a used item and will not pay top dollar for a new item. A secondary market also incentivizes more players to buy new as their purchase is now also an investment. The key is that a used good should be sufficiently different than the new good. This can be achieved in many ways. Some methods might be: new cosmetics that put old ones out of style, durability points or items losing potency/capacity over time.
2. Legal hassle. The demise of Diablo 3’s real money auction house partly had to do with new regulation from FinCEN in 2013. Blizzard had effective custody of players’ fiat currency. But there are examples of making it work ala Linden Dollars, Steam Dollars, and now cryptocurrency. This, of course, depends on your jurisdiction.
3. More systems to manage. If you enable secondary markets, you need a trading platform. One solution is to plug in to an already existing platform like Steam Community Market or OpenSea.
4. Added complexity in game economics. The hardest but most exciting part. In the case of skins, Dota 2 has a reasonable model where the newest skins are untradable for a period of time after purchase. This prevents players from undercutting the developer until the popularity for new skins dies down. On the other hand, RuneScape and World of Warcraft sell tokens redeemable for game subscription time. Players can sell these to other players for in-game gold. This is a pass-through primary market for gold and an attempt at taking a slice of secondary market gold sales. However, these tokens are significantly more expensive than just buying gold from a secondary market. It is unlikely they had any impact on the volume of gold sales in secondary markets.

Where Does Blockchain Come In?

Projects like Loom and Enjin give new meaning to secondary markets by enabling developers to program their game assets onto the blockchain. For starters, this allows secondary markets to thrive with near-zero fraudulent activity. It circumvents a lot of legal hassle as developers can avoid all custody over player funds. More importantly, it shifts the fundamental gaming business model to capturing value in an open ecosystem. Secondary markets are only one value-hub in a decentralized, open ecosystem.

Value

A 2011 report estimated global gaming secondary market value at $4.9 billion annually ¹. Recent onlookers claim it to be as high as $50 billion. Much of the data hides in grey market exchanges like PlayerAuctions and G2G, but a conservative estimate of the entire market might be $15–20 billion. That number is total sales. The average transaction fee to use these sites is >10%. That’s a lot of economic activity left out in the wild.

During its heyday, Second Life had ~1 million monthly active users and an in-game GDP of $500 million, i.e. $500 million changing hands each year in a purely secondary market. Fortnite, League of Legends and Pokemon GO each have monthly active users on the order of a hundred million. That’s a lot of players with no legitimate secondary market (Pokemon GO has a bit of in-game trading but it is very restrictive).

Is it worth it for incumbents to capture and grow these secondary markets? It depends on the game genre, but mostly I think yes. Will they? Probably not as it is risky and not the norm. Games come and go.

How much bigger might secondary markets be if fostered in a legitimate environment? The immense value of secondary markets and the open gaming ecosystem just might be captured by the innovate startups who plan well from the beginning.

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Credit to Tony Sheng for getting me thinking about this topic.

¹ Original 2011 report had a calculation error in Table 7 on page 15 and was corrected in “Virtual Economies: Design and Analysis” by Lehdonvirta and Castronova on page 138.