Are NFTs in games dead?

Or are we missing a billion-dollar opportunity by focusing on the wrong problems?

2021 was the year of the NFT collectible. Axie Infinity, NBA Top Shot, Bored Ape Yacht Club, and others skyrocketed in popularity. There was a real, palpable buzz with everyone wondering what would come next.

But if 2022 taught us anything, it was that this hype was, in fact, based on speculation. You only have to compare the numbers for NBA Top Shot today versus its peak back in the spring of 2021 to see it clearly.

It’s fair to say the sector wasn’t helped by the steep fall in crypto in 2022, either. The FTX fiasco is still running the news cycle, and the other potentially illegal activities are having a deleterious effect. But we’d be remiss not to point out that these types of illegalities also occur in the ‘traditional’ banking industry all the time.

The challenge is that web3 gaming is still in its infancy. Most of the current web3 games revolve around collectible card games (CCG) because of the role that NFTs play in them. This has caused a backlash against NFTs because, in many cases, the value of the ‘collectible’ is based on speculation only. And honestly, that backlash is justified. Gamers just want to have fun, and worrying about the value of your ‘portfolio’ is not fun.

There are many ways web3 can transform the gaming economy, but web3 is still not popular among gamers, and we still have a long way to go. Issues continue to unfold with the Play-to-Earn model, and thus we will likely see Pay-up-Front and Free-to-Play remaining as the two dominant business models in web3 gaming. At least for now.

But for gaming-orientated business models to work in conjunction with web3, we need games that are both appealing and, more importantly, FUN. Where is the web3 Super Monkey Ball or Mario Party? Does web3 have its Witcher series, or even Limbo? Again, where’s the fun?

The billion-dollar opportunity to improve and monetize digital ownership in games

When we take a step back from all that’s previously been said, true digital ownership in games (i.e., the potential to trade items freely for more than ‘in-game’ currency) is clearly something that resonates with gamers.

One only has to look at the numbers to understand why:

• The skin-trading market is estimated to be over $40 billion a year (Newzoo).
• Gameflip.com, a single example of a game-asset marketplace, has sold $140 million worth of virtual in-game items on its platform (Benzinga).
• 81% of players would also like to be able to trade skins for real-world money, and 75% of those interested in skin trading said they would spend more on them if they had a monetary value outside of the game. (Newzoo).

So, what’s the problem then? Gaming companies would certainly love to tap into this revenue. However, gaming companies cannot legally permit in-game item trading for real money. If they admit that they are storing items with real-money value on their servers, then they are legally obliged to declare themselves as banks — and that requires going through all the rigmarole associated with getting a banking license.

Gaming companies, from indie to behemoth (such as Epic), are first and foremost a business, sure. But many were started because the founders wanted to create joy, build something fun, and share it. Are these the right companies to build boring, secure, trusted…financial institutions? Perhaps not.

It’s certainly an industry pickle to ponder. But hypothetically, if we could legalize this trading, we would be:

a) Giving gamers what they want

b) Permitting gaming companies to monetize this $40 billion+ market (by charging commissions)

There are big rewards for those who can figure out how to make secure, real money trading possible while validating ownership of items.

Tokenized assets are the solution, but not in their current form

Blockchain can solve many of the problems involved with in-game trading and verifying digital ownership by decentralizing the responsibility of ownership. In other words, games can permit the trading of items between players, as long as the ownership of the item is recorded on the blockchain, maintaining a record of every sale over time and ensuring that items are safe from tampering.

The primary way of doing this is to use tokenized assets, such as NFTs. However, because NFTs are traditionally ‘static,’ it’s impossible to change their appearance or characteristics. That’s a problem for games because gamers are accustomed to having items evolve with corresponding gameplay.

For instance, when you level up a character, upgrade a race car, or even feed a Tamagotchi. Your actions as the player and the events in the game changed the item, how it looks, and even its “value” in the game. But if the item is minted as a static NFT, it becomes impossible to evolve the item further. This is why static NFTs can really only be used for collectibles, as they have no utility in the games themselves.

But that’s not all.

Another problem for NFTs is volume. Despite blockchain speed improvements, minting tens of thousands of NFTs per hour is quite a technical challenge. Not to mention, expensive and environmentally absurd in terms of gas fees. While this can be partially solved by using Layer-2 technologies, the static nature of the NFT remains.

The final challenge facing NFTs is the UX. The web3 world really needs to sort this out. The problem with current web3 wallets is that they require extra security steps which the average game player might not have the patience for. And who would? Especially when all they are trying to do is enjoy a little escapism from the doldrums of daily life.

Dynamic NFTs & more opportunities for monetization and player retention

Dynamic NFTs could help solve many of the challenges both game developers and players face with digital ownership and trading in-game items and open many exciting opportunities for monetization and player retention.

All NFTs contain unique metadata, or ‘properties,’ that are recorded on the blockchain. However, unlike static NFTs, the properties of dynamic NFTs (dNFTs) can change and evolve according to different actions, such as the item’s usage in-game. As an item evolves, its new characteristics are recorded on the blockchain, providing validation of its current ‘value’ and making it difficult to replicate or counterfeit.

For example, think of a car in a racing game. When you work hard in the game to customize or upgrade the car’s parts, the car increases in its perceived value to other users, based on your effort. If this car is an asset tokenized on the blockchain (for example, a dNFT), the car can be traded between players for real money, without the game developer assuming the legal responsibility of a banking entity — in effect, “the blockchain is the bank.” This means that the game developer can, via the transaction smart contracts, collect a commission on that sale, monetizing the same asset multiple times.

dNFTs can also also provide a boost in player retention because of what we call the “Tamagotchi effect.” Unless the player comes back to the game regularly, the abilities of their asset (and thus, its value) will decrease over time. This adds an incentive for the player to return to the game on a regular basis, and opens up even more opportunities for monetization via traditional channels, such as in-app-purchase, adverts, and subscriptions.

The future of digital ownership in gaming

We may see the term ‘NFT’ disappear from the gaming community as quickly as it emerged. But the underlying technology and its use cases, specifically for in-game trading, are only just starting to appear.

Rather than powering the gaming economy on speculation, we have a real opportunity to secure and authenticate in-game assets, creating enormous value for both developers and players.

At Freeverse, we are creating the future of digital ownership. Our dynamic Living Assets™ technology permits trading assets in-game and allows the properties of in-game items to change and evolve based on the player’s interactions.

Living Assets™ can be set up for purchase within any game and traded between players or users for both fiat currencies (dollars, euros, pounds etc.) and cryptocurrencies. All of this is achieved through our next-generation, Layer-2 platform built on Polygon.

We are committed to helping our clients create more value for their players. We are always happy to discuss potential use cases and ways that we can help you grow. Get in touch today!