NIFTY Blockchain Gaming Thoughts

I had a great time at the NIFTY conference put on in Hong Kong a couple of weeks ago by Kenetic and Decentraland. The conference was focused on non-fungible tokens (NFTs, hence “NIFTY”) and blockchain gaming. This certainly isn’t a “hot take”, given that a couple of weeks have gone by, but I wanted to share some thoughts that I took away from the conference.

NFT Basics

A lot of people, even within the blockchain space, are unfamiliar with NFTs. Basically they are unique tokens. Think collectibles, in-game items, badges, art, or even representations of debt. The canonical example so far has been CryptoKitties. The leading standard for NFTs on Ethereum is ERC-721, whereas most of the tokens issued on Ethereum follow the ERC-20 standard, which produces tokens that are fungible, or interchangeable with each other. (Well, ERC-20 tokens are not necessarily fully fungible, since the transaction history of each token makes them distinct, and, for instance, tokens that were previously used for criminal activity might have additional risk associated with them, but the other properties of the tokens are essentially the same.)

An ERC-721 NFT has a name, a description, and a URI, which usually points to an image (it’s more complicated than this, but that’s basically the idea). As the metadata standard evolves, there are likely to be more standard options for metadata. A clear and robust standard is important for extensibility and interoperability. For instance, wallets need a clear standard in order to support display and transfer of NFTs.

Discovery of NFTs is also an issue for wallets. There’s no easy way to find out which NFTs are held by a particular address without scanning the whole blockchain, so wallets have to add support for NFTs on a per-contract basis (this is also true for ERC-20s, but several factors make it a bit more complicated for ERC-721s). There was some talk about how to deal with this, including the possibility of having one contract to encompass all NFTs, but my guess is that pretty soon wallets will have an interface to support manual addition of display for specific NFTs, and NFT creators will provide a link that you add to your wallet.

Compromises on “decentralization”

While most of the discussion in the blockchain space seems to have been about how and when blockchains can be scaled to support more on-chain gaming, many groups, notably a few in China, are rushing ahead with “blockchain games” that are really only blockchain games because they have a token. Some claim to have 10s or 100s of thousands of users. The token is actually a real ERC-20 token, but none of the in-game interactions are actually on-chain. You can procure tokens in the game, use tokens in the game, and win tokens in the game, but everything in-game is either done on a private chain or (and I suspect this is more often the case) just on the company’s database of tokens. Despite so much being done “off-chain”, you can withdraw tokens from the game to an Ethereum wallet, you can buy and trade them on exchanges, and you can deposit them back into the game.

There are certainly issues created by this model, and there are use cases for which more decentralization makes sense or is necessary right now, but it seems to me that for most games this is the appropriate compromise to make at this time. Most cryptocurrency holders hold tokens on exchanges, and holding and using them in an in-game custodial wallet seems like an acceptable risk for most gamers.

I suspect that this will emerge as the dominant model for “blockchain games” over the next 6–12 months.

Baby steps, baby steps…

Are in-game item NFTs a Trojan horse for blockchain to enter the gaming industry?

There was a lot of talk about using NFTs to represent in-game items. For blockchain games, it seems like a no-brainer, but there is a lot of debate about to what extent traditional gaming companies will embrace NFTs.

One big argument against established companies using NFTs is that they don’t want to support interoperability of items because then they lose control of their economies. For instance, if you can use an item from Game A in Game B, then Game B loses the revenue from selling that item. Interoperability also brings up lots of questions about IP management.

I agree that interoperability is the most challenging use case, and I think that a more likely first step is to support ownership and withdrawal of in-game assets. A game could begin to represent in-game items as NFTs, and have an optional withdrawal feature. This would allow users to own their items within and outside of the game, but would not require companies to give up control over their in-game economies.

From a user perspective, I think this feature is quite compelling. To give just one example, even after a game shuts down, I could keep representations of my in-game items or achievements (I wish I could proudly display my Triforce of Wisdom from The Legend of Zelda on NIFTY.gallery). It seems to me that, all other things being equal, many users would be more likely to play a game that promised “true ownership” of in-game items. Once one or two popular games adopted this model, it could quickly become the expected norm.

After users become more accustomed to the concept of ownership through NFTs, they might become more interested in interoperability. There would still be IP issues to work out, but Game B could charge a fee to activate an item from Game A in Game B, and Game B could charge a royalty fee, or even take a cut of all transactions of the item. In that way interoperability would be possible with less disruption to game owners’ ability to manage their in-game economies.

Decentraland is my favorite blockchain case study

First, full disclosure: INBlockchain invested in Decentraland, and I personally own some MANA and LAND.

That said, I think Decentraland is one of the most interesting experiments going on in the blockchain space today. It encompasses so many different facets of issues that other projects are exploring, including:

• Multiple layers of intersecting communities. 1) MANA holders; 2) LAND holders; 3) Users organized into Districts, which are LAND pooled together to create a large plot of land that is governed by the LAND holders; 4) Other communities that may arise within and outside of the virtual world (designers, artists, interest groups, etc.). Will these communities grow strong and govern themselves effectively?
• NFTs! NFTs represent LAND in the virtual world, and objects that you can use within the virtual world. How significant will this be to users?
• Games! It’s sort of cliche to say that gaming may be a catalyst for blockchain usage, but it makes sense, as gamers are early adopters and are used to using in-game currencies. Will Decentraland gain adoption as a game? What about games-within-games?
• Interactions with other blockchain projects. Whether it be cooperation with other blockchain games, land mortgages using Ripio, or exchanges setting up branches within Decentraland, there are so many possible integrations with other projects. Decentraland is a playground for how projects can work together. To what extent can different communities leverage each other?
• An economy token that just might work. MANA is in some ways a classic example of an ecosystem token that is not really necessary. “You use the token to make payments within our ecosystem.” “Why not just use BTC or ETH?” “Why would I hold a volatile token just to buy in-game goods?” But because Decentraland is a virtual world that people may spend time in and become emotionally invested in, and given the context of the factors mentioned above, maybe users will come to see MANA as a currency that they want to hold to be part of the Decentraland economy. Will they?

And there are so many more interesting questions… How will the community deal with censorship of objectionable content? Will it optimize for LAND value? MANA value? Or user experience? What does it mean for a game to be “in” Decentraland? How will the supply of MANA and LAND be eventually governed?

What a fascinating and exciting experiment!

Those are a few of the thoughts I left NIFTY with. Thanks to Matt Condon and Todd Goldberg for taking a look at a draft of my notes. I’d love to hear your thoughts and feedback. If you’re interested in learning more about NFTs and blockchain gaming, check out some of the videos from the conference, many of which are now online Decentraland and Kenetic’s YouTube pages.

A few that I watched and enjoyed were:
Tony Sheng’s Opening Talk (The Opportunity for NFTs): https://www.youtube.com/watch?v=CJ8KKCcbNXQ
Panel on NFT standards: https://www.youtube.com/watch?v=zeaBVJH4-yw
Blockchain Scalability and Second Layer: https://www.youtube.com/watch?v=PA4w0QsoJoI&t=440s
The hackathon presentations: https://www.youtube.com/watch?v=7WMA8hGLFO8

Also: thanks to Matt Condon and Todd Goldberg for taking a look and providing feedback on a draft of these notes!

I’m a partner at INBlockchain, an investment group out of China (our principles). I try to share short, semi-formed thoughts here fairly often, because I find that writing stuff down helps me understand things better. Please point out the holes in my thinking, and feel free to share. Follow me on Twitter here.