Blockchain, Cryptocurrency and Gaming: A Collision Course
Do you remember when games used to be simple? Pong, Frogger, even Pole Position. Do you remember when money was simple? Earn a dollar, spend a dollar.
The world doesn’t seem as simple as those picturesque days of a dollar being something you can hold and a game consisting of a squarish ball bouncing from side-to-side.
We’re entering a semi-uncharted area where legal tender, cryptocurrencies, virtual economies, marketplaces, in-app purchases, gambling and investing are blurring at breakneck speed. Let’s explore the various sides of this diorama.
Exploding Industries
The video game industry raked in $108 Billion last year, while the cryptocurrency market skyrocketed to over $800 Billion just after the year closed. While we saw a market cap correction for crypto, it’s regaining ground and 2018 is poised to be another epic year for gaming.
Surprisingly (maybe) $82 Billion of the gaming revenues were generated by ‘free-to-play’ games. This is important when we begin to consider the impact that crypto will have on in-game economies. Free-to-play is a winning model for many games, and we only need to look as far as Fortnite and their $8.5 Billion in profit to see how well it works.
Market levels aside, we are seeing the vines of gaming and crypto organically grow together in a twisted fate. This really shouldn’t be a surprise though. Looking back, gaming has been creating virtual economies for as long as many can remember. In some sense you could think of game economies as being a social proving ground for the viability of cryptocurrencies overall.
CryptoKitties: The Beginning of Crypto Games
Developed by Axiom Zen, CryptoKitties is one of the more well known games developed on top of the blockchain. The game allows ‘players’ to collect, breed, buy and sell virtual cats, and at times has taxed the Ethereum network resources so much the network slowed to a crawl.
It should be noted that CryptoKitties is not a cryptocurrency, however the virtual cats do have value and can be traded for currency, resulting in an interesting blend of game player and potential investor.
CryptoKitties is by far not the only game in the market. Other blockchain-based games such as Crypto-All Stars and Etherbots are gaining ground, and we’re sure to see many other pure-play games developed on Ethereum or other blockchain platforms.
In-Game Economies
Virtual economies have been around in games for a while, popularized by the likes of SecondLife, World of Warcraft and Ultima Online. Interestingly the inequality of members within some of these ecosystems is drastically larger than we see in real economies, though the actual impact of this is largely unexplored.
In-game economies are not all created equal, and there’s various tracks which game designers have gone down including purely closed markets, one-way markets and derivative markets.
Closed Markets
Closed markets are designed to be entirely encompassed within the game, meaning there’s no way to transfer value into or out of the economy. This usually comes as a mechanism that lets a player earn some kind of in-game credit or currency, and spend it in-game, with no mechanism to artificially increase the amount of credit you have (outside of hacking the system of course).
While fairly limited, most of the early in-game economies used this approach simply because there were no easy mechanisms to provide value exchange or liquidity.
One-Way Markets
One-way markets step up the game (pun intended) and provide a simple and effective way for players to purchase additional in-game credits or assets with their favorite out-of-game currency (such as US dollars). While this has existed for some time, the trifecta of smartphones, mobile apps and in-app-purchases has catapulted one-way markets into a dreamy space for game makers, who, as was mentioned earlier, are raking in extreme revenues even while the games themselves are free-to-play.
Derivative Markets
Derivative markets, sometimes called secondary markets, introduce a player-to-player element where in-game assets are trading for real currency outside of the game environment, and are typically uncontrolled by the game designer. While these out-of-game asset markets may or may not be wanted by the game designers themselves, they clearly prove that virtual assets can and will be traded in a liquid marketplace, and there is an ever growing appetite to create, collect, buy, sell and maybe even invest in virtual assets.
…you can buy Candy Crush Gold with USD, but you can’t buy USD with Candy Crush Gold — Dave Thier, Forbes
Advancements of in-game economies not-withstanding, the above quote from Dave Thier at Forbes describes the problem that still exists. We’re almost there, but the question now is how can earnest gamers trade their hard earned assets into hard earned dollars.
Crypto for In-Game Economies
Looking through the lens of cryptocurrency it would appear that these evolving in-game economy dynamics have paved the way for the adoption of cryptocurrency as a (de-facto?) mechanism to provide game economies of the future. On top of facilitating the basic elements of in-game economies, cryptocurrency’s inherent properties could potentially solve for aspects including including ownership, secure trading and fiat liquidity.
At it’s very core blockchain provides a platform that ensures there can be only one digital copy of something, meaning every in-game virtual item could truly be unique, with it’s own unique associated value.
Ownership
If virtual assets are based off of cryptocurrency tokens, players actually own the assets they create or hold. Similar to exchanges, we may see in-game wallets that temporarily hold assets, however if those assets are created on platforms such as Ethereum and ERC20 tokens, those assets could be easily transferred out-of-game and stored in personal crypto wallets.
While this may have some implications for game designers and franchises, the prospect for gamers to have 100% ownership of the fruits of their (game) labor is highly intriguing in-and-of-itself.
Secure Trading
Once in-game assets have transitioned to token based cryptocurrencies they can easily participate in many of the large and supported marketplaces for crypto exchange. There isn’t a need for secondary markets that grow up around a specific game or a specific type of asset, since at the end of the day we’re dealing with a standards-based token that can be traded in hundreds of places.
Additionally, because of the widespread tradability across numerous markets it stands to reason that the overall market price will be based on a broader and more dynamic ecosystem. Whether this means value will go up or down is anyone’s guess, but open markets are a good thing.
Fiat Liquidity
Perhaps one of the more fascinating aspects of adopting cryptocurrencies for in-game ecosystems is that they naturally provide an onramp and offramp to traditional fiat currencies. Not only does cryptocurrency ensure that I can securely trade virtual assets that I own, but I can also exchange them for whatever my favored fiat currency is (at least until crypto is legal tender and this is no longer necessary).
That’ll be 1.4 CryptoKitties for your Latte sir…
The idea that playing a game can produce virtual assets that are owned by players and have a simple path to liquidity in the dollars that gamers spend on their lunch, or a new game, opens up a whole new aspect to the good ‘ol side-hustle and gig economy. And to support such liquidity at scale we’re now seeing platforms like KIN pop up to enable rapid cryptocurrency integration for gaming and the app economy.
Bonus: Investing
Humans will gamble on anything. In-game virtual assets are no different. What shape or form this will take in the future is up for some serious debate, but there’s little doubt that some will see game-based virtual assets as an investment mechanism.
Perhaps one day we’ll be looking at our CryptoKitty holdings alongside our shares of Apple and Amazon, though quarterly earnings calls will likely be missing for the former.
Legal Concerns
This article would be remiss if it didn’t at least briefly touch on the legal sensitivity around cryptocurrency, gaming, investing and gambling.
To put it bluntly there are rising legal questions and some serious concerns over gambling laws, which tend to vary country by country and state by state. Some of the simplest precautionary advice for game designers is to ensure that they don’t use elements of chance to reward virtual assets of value, thus avoiding being classified under traditional gambling laws.
However from a gamers perspective that isn’t the only worry. Since cryptocurrencies and tokens are more often than not considered securities, they are in effect investments and must be declared during tax time. For the most part governments can’t even agree on how to properly tax cryptocurrencies in their raw form yet, so cryptocurrency-based in-game economies may be a hot mess for the near future.
Play Leads to Reality
We’re on the cusp of gaming economies being disrupted by blockchain and cryptocurrency.
In the book Wonderland: How Play Made the Modern World, Steven Johnson talks about our inherent need to play, and how the pursuit of games has been a powerful driver in technological changes that have shaped the world. We see this play out in realtime with technologies such as Virtual Reality, beginning largely in the gaming realm but rapidly moving into mainstream verticals like medicine and real estate.
Given the trajectories discussed above it would appear, at least on the surface, that gaming is both a natural place for cryptocurrency based economies to play, as well as a leading testing ground for a paradigm shift that could make its way into mainstream industries in a big way. Above and beyond this, ownership is now in control of the gamers. If fully implemented any generated or owned in-game items could, in fact, literally be owned by the gamer and stored in a digital wallet outside of the gaming environment, facilitate all measure of activities from collecting to trading, or selling for top dollar.
It’s doubtful we’ll all be trading CryptoKitties in the future, however it’s highly likely some of the games you (or your offspring) play will have a seamlessly integrated cryptocurrency-based economy and marketplace that provides liquidity to those regular hard earned dollars in your pocket.
Food for Thought…
- What is the true value of in-game assets?
- Will we see a virtual asset wallet dedicated to gaming assets?
- What, if any, are the repercussions of kids participating in cryptocurrency-based virtual game markets?
Want to start poking around?
Check out DMarket to see what people are trading, and check out BitGuild for a curated blockchain games list.
