IPG Media Lab
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IPG Media Lab

Why Brands Should Still Care About NFTs

NFTs are making a comeback in gaming and could become the economic foundation for future metaverses

Image source: Axie Infinity

At the beginning of the year, we witnessed the mainstream breakthrough of non-fungible tokens (NFTs) after digital artist Beeple grabbed headlines in March as one of his works sold at Christie’s for $69 million. Before long, household brands from Taco Bell to Charmin were jumping on the bandwagon and releasing their own NFT collections to ride the hype. Yet, one month later, cryptocurrency prices tanked (in one of their many routine fluctuations as a speculative investment vehicle), and the hype around NFTs cooled off with them. By June, some crypto blogs had started running headlines proclaiming that “the NFT bubble” had burst, and most brands had all but abandoned their experiments with NFTs.

Yet, over the course of the last six weeks, NFTs have seen a resurgence in both value and reputation. Over the past thirty days, according to DappRadar, the top five NFT marketplaces saw $2.42 billion in transaction volume in total. Some teenagers are reportedly making bank creating and selling NFT art as a cool summer job. Instead of being beholden to the volatile fluctuations of cryptocurrencies, NFTs are now growing in spite of them, particularly as increasing regulatory scrutiny from both the SEC and the Senate indicates some rough waters ahead for crypto-traders.

Source: DappRadar

One key reason behind NFTs’ quick comeback is the rise of NFT-based games, which applies the social network effect of NFTs to gaming environments, turning the “proof of work” concept embedded in blockchain-based projects, NFTs included, into a game mechanism that incentivizes and rewards the players. The marriage of NFTs and video games proves to be a natural match that is opening new doors for brands to rethink their strategy regarding gaming, NFTs, and digital assets. Furthermore, it also offers a glimpse into the metaverse future where NFTs and other decentralized financial tools may serve as its economic infrastructure.

The Intersection of NFTs and Gaming

When we initially wrote about the applications of NFTs in February as they first popped into mainstream discussion, we discussed the new monetization models they could unlock for digital media, but mainly focused on creator-driven content platforms. One thing we didn’t account for, and one that in hindsight seems glaringly obvious, is how perfect NFTs are for video games as a reward mechanism. Most games today already employ a freemium model that relies on selling in-game items and currencies as a main revenue stream, and NFTs provide game developers with a new way to structure the in-game economy.

The meteoric rise of Axie Infinity is a prime example of the potential that NFTs have in gaming. As a play-to-earn crypto game built on the Ethereum (ETH) blockchain, Axie Infinity lets players buy Pokémon-like digital pets, called Axies, as NFTs. Players can breed, battle, and trade their Axies with each other to earn in-game tokens, such as the Axie Infinity Shard token (AXS) and the Smooth Love Potion (SLP). More importantly, these tokens are denominated in ETH and are available for sale on various crypto exchange platforms for investors who want to own these tokens but do not want to play the game.

Developed by Sky Mavis, a Vietnamese gaming studio, the game generates revenue by taking a 4.25% fee when players buy and sell Axies in its marketplace, as well as by charging fees for breeding new Axies. Since April, this cleverly positioned NFT game has been on a skyrocketing trajectory. In the span of four months, Axie Infinity went from a meager $670,000 in revenue to surpassing $200 million in July, earning more revenue than Bitcoin. Last week, the game hit a major milestone as its all-time trading volume totaled over $1 billion, the first NFT game to do so. For comparison, NBA Top Shot, a popular NFT platform where users trade digital basketball cards, has racked up $675 million in all-time sales as of last week. Furthermore, The AXS token has gained 934% against the U.S. dollar and 840% against bitcoin during the last 90 days, attracting more crypto investors to join the hype.

Of course, Axie Infinity is not the only NFT game in town — other notable examples include CryptoBlades, Evolution Land, and Gods Unchained — but its massive success is emblematic of how video games can unlock the true potential of NFTs. The first round of NFT hype died down fairly quickly because it was primarily focused on NFTs as digital art, which, while more accessible than traditional fine art, still has a limited audience who have both the foresight to recognize their value as an investment vehicle and the financial capital to invest. In contrast, video games can serve as a more accessible vessel to onboard a wider audience into the NFT economy, not just as investors, but also as creators.

Indeed, among the 1 million daily active players of Axie Infinity, a large portion of them come from developing countries like Vietnam and the Philippines, where some players are quitting their day jobs because they can earn more playing Axie Infinity. Playing video games to earn real money is nothing new, but NFTs have made it possible to turn in-game currency into an investment vehicle that may grow in value. In a fashion true to blockchain’s decentralized structure, NFT games like Axie Infinity have redistributed control of the in-game economy from game developers to every player and crypto investor, activated a segment of the global population that hasn’t traditionally been a top priority for the crypto platforms, and unlocked a new corner of the burgeoning creator economy. That’s what makes the intersection of NFTs and gaming such an exciting domain to explore.

NFTs as an Economic Foundation for the Metaverse

Looking ahead, the long-term prospect of NFTs will likely be significantly tied to the development of the metaverse, which itself is starting to emerge out of massively multiplayer online (MMO) games like Fornite and Roblox. Although at this point none of the popular MMO games has incorporated NFTs into their games (likely due to legitimate concerns over ceding control of the in-game economy and disrupting their monetization efforts), the rise of NFT games has made it abundantly clear that NFTs have an important role to play in the development of the metaverse.

The term “metaverse” has been having a moment in recent weeks, following Mark Zuckerberg’s announcement that Facebook is rebranding itself as a metaverse company. Besides Facebook, the m-word has been similarly name-checked by other big companies. Tilak Mandadi, head of digital and technology for Disney’s Parks, Experiences and Products division, talked about creating a ‘theme park metaverse’ at an industry event last November, and Microsoft CEO Satya Nadella, one of the first big tech leaders to touch on the concept, reiterated the idea of building an “enterprise metaverse” on an investor call in late July 2021. It is worth noting that these three companies are talking about different applications of the metaverse (Facebook’s metaverse ambition is closely related to its VR investments, as its latest app Horizon Workrooms demonstrates), and none of them have considered the potential role of NFTs in the metaverse.

Make no mistake, we are nowhere near the actualization of the metaverse, nor are the aforementioned companies claiming that they have built one. Rather, the metaverse has been popularized as a guiding principle for building the next iteration of the internet — a collectively shared virtual universe that is persistent, participatory, and immersive.

As venture capitalist and thought leader Matthew Ball puts it in his widely read treatise on the concept, the metaverse should possess seven defining characteristics: a persistent experience; that is both synchronous and live; with no cap to concurrent users; functioning as an economy; spanning both digital and physical worlds; with unprecedented interoperability; and driven by decentralized work from a range of contributors. As the success of Axie Infinity has demonstrated, NFTs could serve as a functioning economical foundation for games that extrapolates value from the decentralized work of global creators.

Ball recently evolved his analysis in a follow-up piece, laying out a framework consisting of eight core “stacks” central to the development of the metaverse. Among them, a payment system, a system for trading and managing digital assets, and corresponding changes in consumer and business behaviors are all the fundamental building blocks of the metaverse. In a further analysis focused on the payment stack of the metaverse, he laid out the potential role that NFTs and cryptocurrencies will play in the metaverse:

“Regardless of whether cryptocurrencies become a common form of payment in the “real world”, they’re increasingly being used in gaming via NFTs and blockchain-based studios… As a result, the “crypto Metaverse” suffers from substantially less currency fragmentation than today’s gaming ecosystem, supports two-way exchanges, [and] is widely interoperable.”

In the same piece, Ball counters this potential implementation with some existing hurdles such as regulatory overhang and constraints posed by the hardware platforms, citing the latter as the main reason why most crypto games and NFT platforms today are purely browser-based and not as an iOS app. This conflict is also reflected in Epic Games’ ongoing lawsuit with Apple regarding its App Store policies. As the promising MMO games continue to evolve in the direction of the metaverse while Facebook attempts to conjure up a metaverse out of its Oculus platform, it will be interesting to see which camp can find a solution to these hurdles and incorporate NFTs into their respective virtual economies.

What This Means for Brand Marketers

All this talk of NFTs and metaverses may understandably sound like buzzword overload for some marketers, but it’s important to look past the hype and recognize the real potential of brand opportunities at the intersection of NFTs and gaming, into which some brands are already diving. Recently, two luxury fashion brands jumped into digital collectibles via in-game NFTs, but with different approaches. To commemorate its 200th anniversary, Louis Vuitton developed a mobile game, Louis: The Game, in which players can collect 30 free NFTs, along with 200 candles, as they follow the brand’s mascot Vivienne to Paris. Plus, ten NFTs created by Beeple are embedded into the game. In contrast, Burberry is partnering with Mythical Games, an NFT game startup, to integrate NFTs as in-game clothing items featured in an upcoming game called ​​Blankos Block Party.

Granted, the Louis Vuitton example is an outlier in how brands typically approach games as a marketing channel. Building a branded game from the ground up requires a lot more upfront investment as well as promotional budgets to bring in players. While Louis Vuitton does have the brand recognition to attract fans to the game, the main draw of Louis would be the free NFTs that players get to collect, which could increase in value in the after markets. (It is unclear whether players will get a chance to collect or bid on the NFT art-pieces created by Beeple.) The approach of the partnership that Burberry has established is more conventional and cost-effective for issuing branded items as in-game digital goods, although that also means Burberry would have less control over the gaming experience and that its audience reach largely relies on the popularity of the partnered game.

Regardless of the differing approaches, both brands are leveraging NFTs to create scarcity of branded collectibles and distributing them via video games as a way to provide an engaging and rewarding experience for their fans. In our 2021 Outlook trend report, we highlighted the ways that technologies born out of video games are starting to impact non-gaming vectors, and urged brands to form a gaming strategy that treats video games as a holistic media channel in its own right to engage with younger audiences. Adding NFT-based collectibles into the mix would serve as a great tool for marketers to enhance their brand presence in the gaming environments of today and the metaverse of the future.

Of course, not every brand has the cultural cachet to pull off issuing NFTs as in-game items. NFTs are better suited for the so-called “passion brands” that inspire loyal followings. The popularity of any given NFT collection is closely tied to its perceived social value, which, in turn, is often determined by the niche “in-the-know” communities that rally around it. Understanding where your brand sits in the cultural conversation is the first step to understanding where NFTs would be a right fit for your brand. And for brands that want to increase their cultural cachet so as to earn an organic presence in the metaverse future, it is time to start making the efforts to cultivate an engaged, vocal community of brand ambassadors who would gladly wear your brand assets as part of their digital identities.

If you’re interested in learning more about how to leverage in-game NFTs as a marketing tool, or would like to have a deeper understanding of how NFTs will play into the metaverse development, the Lab is here to help! You can start a conversation by reaching out to Josh Mallalieu (josh@ipglab.com).

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Richard Yao

Richard Yao

Manager of Strategy & Content, IPG Media Lab