5 reasons to have NFTs in games (Part I)

Crypto gaming is a controversial topic. Hardcore gamers hate it. Game developers hate it even more. According to 2022 State of the Game Industry (GDC), 70%+ of game developers (of 2,700) are not interested in cryptocurrency or NFT as part of their game. Whereas artists, celebrities and athletes have embraced NFTs, gamers and game developers have voiced vehemently how much they despise NFTs. Ubisoft pulled back their NFT marketplace after receiving huge backlash. Dan Olson’s famous video on “ The Problem with NFTs” was watched more than 6 million times in 2 months (as of March 2022). On the other hand, crypto enthusiasts love crypto gaming, because they believe gaming will make crypto even more mainstream. In fact, according to a lot of news outlets, video games (and art) is the most obvious use case and will drive mass adoption for crypto. Reddit cofounder Alexis Ohanian predicted that play-to-earn games will be the only type of games people play in 5 years (Forbes).

The crypto gaming market is relatively small compared to the traditional gaming market. In 2021, the global video games market generated $180 billion USD in revenue ( Newzoo). According to Blockchain Game Association, crypto NFT generated $2.3 USD billion revenue in Q3 2021 or $9 billion USD in revenue if we annualize Q3 (BGA). While the crypto gaming market is only <5% of the traditional gaming market, it is catching up to some traditional entertainment industries. It is

• 50% of the global music industry ($22 billion)
• 50% of the global box office revenue ($21 billion) (Note, box office averaged ~$40 billion in annual revenue 2017–2019)

As a gamer and someone planning to spend her career making games, I am particularly vested in trying to figure out what the heck crypto means to gaming. Is it going to be the biggest shift the gaming industry will experience, or is it just a ponzi scheme that will be buried in the abyss when the market crashes? In a 2 part series, I will lay out the most salient arguments for and against employing blockchain technology in the gaming industry. I will also offer my thoughts on these issues in an attempt to lay out one viable path for blockchain games.

• Part I. Main arguments supporting crypto: ownership, easier transactability, player-owned economy, player governance and interoperability
• Part II. Main arguments against crypto: unsustainability of business model, bad environmental impact, “scam”, lack of game impact and a “solution looking for a problem.” Read it here.

PART I. Main arguments supporting crypto

1. Ownership

Argument: Players can own game assets such as non-fungible tokens, or NFTs. Even if the game shuts down, players still own and can access their tokens. In the current state, if a game studio decides to shut down their game, players have no recourse or access to their inventory.

Counterargument: NFTs are just a bunch of links. True ownership doesn’t really exist because generally only the smart contract is stored on chain; the metadata (i.e., the content) of the NFT is stored off-chain. Furthermore, if the metadata is stored in an off-chain centralized location, it could be vulnerable to hacking or disruption. If a disruption occurs, the smart contract will point to a broken link. Due to the immutable nature of the smart contracts, rerouting the link to the metadata is not possible ( One37PM).

SW’s Take: Ownership is the legal right to use, possess, and give away a thing ( Cornell Law School). If a disruption in the storage leads to a broken link and the owner can no longer get utility from or sell the asset, ownership is still intact. No one will deny that you still own the NFT, as it is written in the smart contract. The NFT is just not as useful as it was before because the utility might be tied to the underlying metadata or the ability to sell the NFT, which could be undermined if the metadata is not available. In this case, there is theoretic ownership but less practical ownership. Owning some physical assets has the same risk as owning digital blockchain assets. For example, owning a car. If a car gets stolen, the title owner still owns the car, but the utility and ability to sell is impaired.

The more important question is, do players care about truly owning a digital asset. I think so, especially when the assets took a lot of time and investments and owning those assets is an important part of the gameplay (e.g., Legendary cards in Hearthstone) or a status symbol (e.g., Gladiator mount in World of Warcraft). The beauty of physical card games such as Magic the Gathering or Yu-Gi-Oh is that true ownership (and open economy — more on this later) enabled players to monetize their sweat equity and investment into the game. Those who don’t own their accounts or assets have to resort to selling them on the black market.

2. Open vs. Closed Economy

Argument: Blockchain provides for easier transactability of assets outside of the game because it is an open economy. Traditionally, players sink so much cash and energy in playing only to have their rewards trapped inside the game. To unlock the trapped value, players prop up gray markets to provide liquidity for these assets. Blockchain provides a permissionless infrastructure to unlock this value. Using a decentralized exchange, players can trade assets, fungible (in game currency like gold) or non-fungible (rare skin like The Reaper).

Counterargument: Gaming platforms and games have already created a form of real-money exchange without blockchain technology. Steam Marketplace allows users to spend the proceeds made from one in-game item for a different in-game item, or even brand new Steam games. However, users are not allowed to cash out so all proceeds remain locked inside the Steam ecosystem. Roblox has a similar economy where players can buy and sell in-game items with its Robux currency. Players can cash out if they meet certain requirements. Games have been less successful with their real-money exchanges. Diablo 3 shut down its Real Money Auction House in 3 years ( Wired). World of Warcraft’s WoW token curbed illegal gold farming but led to an inflation in the economy ( Polygon).

SW’s Take: Transactability can occur in open (decentralized exchange), semi-open (Roblox) and closed economies (most games), as demonstrated by the above examples. They all can work, given the right designs and incentive alignment. The difference is who controls the exchange and who “owns” the value. When the exchange is decentralized, activities are driven by market forces (e.g., general crypto market), game design and token supply and demand. When the exchange is semi-open or closed, the gatekeepers (e.g., Roblox and game developers) can greatly influence the health of the economies, sometimes for the better. They also often charge a fee for the service, anywhere from 5% ( Steam Transaction Fee) to 75% ( Roblox). I believe that all these economies can work alongside each other, but certain systems are more suitable for certain genres and games.

• For games with very light economies and where players care less about owning and transferring value, a closed economy makes more sense
• For games with deep economies and where players care a lot about owning and transferring value, an open economy could make sense
• For games that have varying economies but are tied together in an ecosystem via a central currency or token, a semi-open or open economy could make sense

The more important question is, do players want an open economy? I think so. If there is value to truly owning an asset, that is, there is utility derived from the ability to use, possess and trade the asset, there could be a need for an open economy. “Illegal gold farms” and “gray markets” exist outside closed economies due to player demand and inefficiencies in the existing system.

3. Player-Owned vs. Dev-Owned Economy

Argument: Players get to participate in the economic upside of a game. Currently players don’t have a way to benefit from the success of games. The value of the game (i.e., revenue) accrues to the game developer (~70% of revenue) and platform providers (~30% of the revenue). With crypto games, players can play and earn from the game by owning a cryptocurrency or NFT. If the game becomes popular and the cryptocurrency or NFT increases in value, both the developer and the players who helped to make it a success could get financial rewards. In that respect, players are invested in the success of the game.

Counterargument: Game developers are giving away a huge portion of the economics. Instead of purchasing game items from game devs, players can purchase directly from other players and pay a small platform fee to the game devs. This is the most brutal form of cannibalization. Why would game devs give up a lot of money for less moneyand move from a product/service based model to a platform model?

SW’s Take: If players contribute to the success of a game, should they be entitled to its economic upside? I think so. But a shared economy isn’t going to work for all games because not all games are large enough to support this new model of economic distribution. A shared economy will only work if the game developers can still make a living and players are taking out less than they put in collectively. Scale could be built with either a very deep economy (e.g., lots of ways to trade and/or large transaction values) or tons of users (e.g., lots of transactions). Most games do not get to that size. Only games that can appeal to a large user base (e.g., Roblox, Pokemon Go) or have very deep economies (strategy or RPG games) can “afford” to run on a shared economy.

4. Governance

Argument: In traditional games, gamers have little say regarding economy changes, new game metas, and etc. Typically, gamers have to adjust their play style to keep up with new game updates. With blockchain gaming and DAO governance structure, gamers can influence the direction of the game.

Counterargument: Most of the governance tokens are owned by developers and VCs and whales who can afford the high upfront cost. On average, VCs and the game dev team own ~40% of the governance token of the top 9 games (by market cap). On one hand, it makes sense to reward people who are investing heavily in the project upfront. On the other hand, that means it will likely take 3+ years (or however long for all the tokens to be distributed) for the public to get a meaningful majority vote on the governance.

The game devs also have no obligation (no legal repercussion) to do as the community or majority vote says. For example, even though 55% of the community voted to not wind Wonderland down, the founder of the project decided to close it ( Coinmarketcap, Tweet thread). When a whale decided to veto a PancakeSwap proposal with 65% vote, the dev team kept proposing it again and again until the whale just gave up trying ( PancakeSwap Twitter).

SW’s take: Player governance sounds good in theory but is hard to implement. Token issuers also don’t have any legal duties to do as they promise because there are few regulations holding them accountable (yet). Secondly, total democratic governance also makes little sense in practice. Majoritarian governance will be detrimental long term because most individuals lack the skills, expertise, and long-term incentives to maximize game growth. Gamers might not know what’s best for the game, hence why game and economy designers exist. Gaming DAOs will need to adopt a representative democracy, where certain members vote for the community, so decision makers take action at scale.

In my opinion, governance tokens are a loophole — they enable companies to issue equity-like securities without the regulatory burdens. When regulation catches up, governance tokens and voting might resemble either 1) stocks with proxy voting or 2) participation in investment funds. Governments and consumer protection bureaus will want to protect investors by requiring token issuers to put in more protective clauses and disclosure, pushing these companies to become more like public companies. Or they will institute criteria for investors, including net worth and/or earnings requirement (e.g., need to be accredited), pushing these companies to become more like investment funds.

5. NFT Interoperability

Argument: Players can bring their assets from one experience to another. We can see NFTs from different projects in the same metaverse.

Counterargument: Interoperability is difficult due to technical challenges and misaligned incentives. There are no standards across the industry on the specs (e.g., height and width of the pixel) and attributes (e.g., strength, defense) of each game asset. Furthermore, some assets just don’t have counterparts in other games (e.g., a gun from Call of Duty has no counterpart in Animal Crossing). Read more about interoperability from @tha_rami’s tweet thread on why it doesn’t work. Publishers and game developers have no incentive to bring in outside assets into their games. Why would they sign up for something that 1) they have no control over and 2) could potentially cannibalize their ecosystems?

SW’s Take: NFTs interoperability is not an either-or decision. Interoperability has a spectrum and already exists within semi-open ecosystems. Many UGC platforms such as VRChat and Roblox allow persistence of avatar and cosmetics across different games within their ecosystems. In a crypto context, interoperability is also evolving. The most extreme form of interoperability (where utility and persistence all remain) across all games would be difficult because publishers and game developers (currently) have little incentive to open up the games. However, interoperability could work when there is coordination. From a top-down approach, the game developer would permit interoperability within its walled ecosystem. For example, Sky Mavis, the team behind hit crypto game Axie Infinity, is sponsoring outside teams to build games and experiences using its NFT Axies, therefore giving Axies utility outside of Axie Infinity. For a bottom-up approach, the game team develops a common NFT system that connects multiple games. The Loot Project is an example in which all NFTs originate from a common lore and come with pre-existing metadata. Game teams would then build experiences around these NFTs and the NFT owners can use their loot assets for multiple games.

In Part II, I will explore 5 reasons why NFT and blockchain should not be used for games. Read it here.