Will Blockchain Be the Next Big Thing in Video Games?
Does blockchain in games solve a real user need, or is it just a cash grab?
Blockchain, crypto, and NFTs have quickly become buzzwords in the world of gaming start ups, with high-profile investors throwing millions at seemingly anything that manages to fit those words into its pitch.
So, I was curious. Does blockchain in games actually solve some kind of real user need well enough to become a core part of the industry? Or are we just seeing another wave of poorly justified speculative investment in an attempt to cash in on the new trend?
What is blockchain gaming?
Blockchain gaming has become an umbrella term for a variety of different games underpinned by some type of blockchain technology. This enables, in varying ways depending on the game, the buying and selling of in-game items via cryptocurrencies.
The majority of these games revolve around a simple idea called play-to-earn. This basically means that the players can earn some cryptocurrency (usually Ethereum) by grinding out in-game items and then selling these to other players on a marketplace. This marketplace can be one that’s specifically tied to the game or a general crypto-asset exchange like OpenSea.
These items can be artificially scarce collectible characters, pieces of productive in-game land, or anything else that an in-game economy might have like experience boosters or crafting materials. Either way, players can then either convert this earned cryptocurrency into their local currency or choose to invest it back into in-game assets to hopefully make more money in the future.
You can find out more about how they function on a technical level from this report by Block Research or by Googling it yourself. That’s largely irrelevant, however, when we’re just trying to figure out whether the general idea behind them will actually bring value to players.
Is play-to-earn a good value proposition?
The hundred-million-dollar question is whether the idea of playing a game to earn money is something that will resonate with players. The answer to that question is a yes, kind of.
This has already existed for decades in games like Runescape and World of Warcraft, where a small portion of top players and a more sizeable portion of players from low-income countries would farm in-game currency to make real money.
This worked because (mostly) Western players would go against game rules to buy gold from other players to get ahead (or keep up) without having to expend all the effort it’d otherwise require. The amount they’d be willing to pay in dollars or euros for each hour of grind skipped was much lower than the minimum wage of Western countries but often higher than the average wage level of countries outside the West. In other words, even if you could only make, say, 10% of the U.S. minimum wage farming gold, that’d still be a genuine way to make money for some people in low-income countries.
This became especially popular in Venezuela during its economic crisis, since the bolivar was rapidly losing its value in 2016 (to the point of being worth almost nothing) and it was nearly impossible to convert those bolivars into a more stable currency like dollars without knowing someone inside the ruling government. Being able to hop onto Runescape, earn some in-game gold, and sell that gold to get dollars from Westerners was genuinely a huge opportunity for many Venezuelans.
Now behind all this, there’s of course the problem that game developers don’t really want players to buy and sell in-game currency for real money. There are three reasons for this:
- It ruins the integrity of the in-game economy, as players would no longer feel like their hard work meant something when someone else could just spend a couple of bucks and coast past them without any effort. That means less reason to play the game to accomplish whatever you want to accomplish.
- It also massively increases the incentive to use all kinds of tactics that severely hurt the player experience or even get the game developer into regulatory trouble. Examples include rampant botting, win-trading/match throwing, cheating, and hacking the game or other players’ accounts.
- And, lastly, there’s also just the fact that game companies don’t earn any money from it and that money just disappears into the abyss to be collected by some sketchy company somewhere in China or Eastern Europe.
In response to this, these games had historically spent a lot of resources trying to stop people from buying in-game currency with real money. They’d ban offending players, add restrictions to trading, use automated systems to monitor transactions (just like banks), come up with ways to counter whatever new method players would use to get around the restrictions and monitoring, or generally just reduce the importance of the in-game economy.
Runescape went as far as to nearly kill its game by taking out core features (player versus player where the loser would drop their items for the winner to pick up) because they were being used for real-world trading — one of the most notorious decisions in the history of the industry.
Runescape players rioted for nearly a week as the developer removed a core feature in an attempt to stop real-world trading. It was so unpopular that the re-release of the pre-2007 game has outcompeted the modern game in player numbers since its inception.
This all did work to a certain extent. Buying in-game currency with real money was a pain in the ass because you’d be forced to buy from or sell to sketchy middlemen through often complicated and risky processes in a completely unregulated black market.
This meant that the market for trading real-world currency for the in-game currency has remained relatively small until about 5 years ago. That’s when developers started adding ways to do it officially but in a way that makes it easy to put real money into the game but not take it out. For example, players might be able to use real money to buy in-game cosmetics or game subscription tokens to then trade to other players for their hard-earned in-game currency.
That way, developers would theoretically get to maximize profits, avoid regulatory hurdles, and still at least go some way in preventing the previously mentioned integrity and cheating problems (though they’re still very much facing these issues and haven’t yet come up with good solutions).
That’s the current state. There are people earning real money from these games, but the conversion process between in-game currency and real-world currency is still difficult and costly.
In Guild Wars 2, players can buy a premium in-game currency with real money and then sell it for normal in-game currency. Other players will buy this premium currency since it will let them buy premium cosmetic items.
Even though 3rd party marketplaces have evolved to be significantly more trustworthy and convenient, many risk-averse players will either avoid buying/selling gold even if they wanted to or use less cost-effective workarounds like buying in-game tokens to exchange for gift Blizzard game keys and then selling those via third party game key marketplaces like G2A.
What blockchain gaming promises is a way to fulfill this unmet need. They solve the ‘pain in the ass’ problem (transaction costs in economic terms) in the way of earning money from grinding video games. It’s a problem that some people around the world do have, but there are some big issues that stand in the way of it ever becoming the main value proposition for a video game.
The need to create sustained value
The first and biggest issue that stands in the way of mass-scale adoption for blockchain gaming is that, like any other currency, the value of an in-game currency is socially constructed. It has no real, intrinsic value beyond what the players of the game collectively decide it’s worth by buying and selling it with each other. That means that the potential to earn anything from the game depends on whether players decide the stuff in the game is valuable.
The reason why players can earn money from grinding currency in Runescape or World of Warcraft is that these games are fantastically designed, entertaining, widely popular games. In-game progress and items are deemed valuable by players — they give players social status because of how popular the game is and provide a genuine sense of accomplishment because players are invested in the game world.
The problem with many blockchain games is that they suck as games. Nobody would ever play them were it not for the prospect of making money by ‘getting in early’ and then ‘getting out’ by selling whatever in-game assets to the next person trying to get in early. It’s what economists call a speculative bubble — when people buy things not because they think it’s actually valuable but because they think the price will go up and they’ll be able to sell it to some sucker who thinks it’s going to go even higher.
Pictured here, Coin Hunt World is a blockchain game that’s just like Pokemon Go. The only difference is that instead of being a Pokemon trainer, you can experience exactly what it’s like to work as a starving bottle collector in China by collecting nondescript keys to indirectly exchange into infinitesimal amounts of bitcoin.
This all means that whether the success of these early blockchain games will depend on whether they’ll be able to make the game interesting enough to attract players that aren’t just there to capitalize on the trend to earn some quick bucks. Or, alternatively, they’ll have to figure out some way to maintain the mere perception of value over long periods of time.
Only a few markets have managed to do the latter. The ones that have are usually niche and have very, very strong brands to the point of bending culture around them. This includes the likes of luxury fashion houses, sports collectibles that live on big-name sports stars and the well-known leagues that represent them, or art that relies on the names of a few popular artists. Art gains its value from its cultural importance but also from the marketing dollars spent by big auctioneers, price manipulation by a small number of collectors, the ability to donate overvalued paintings to museums for tax write-offs, and an anonymous transaction process that makes art perfect for money laundering.
Players fundamentally can’t earn much over time
The second broad issue is that, with a few very rare exceptions, farming an hour’s worth of in-game currency will always yield much, much less money than the average hourly wage of the player base when converted into real money.
In all the popular online games like League of Legends or World of Warcraft, only the top 1–5% of players in terms of commitment, gameplay skills, or the ability to play the in-game market can earn a meaningful amount from playing the game. So, for the vast majority of players, it’ll never be worth playing games for money.
This is because real currency (and the real work that its value is determined by) is a whole lot more useful than some random game’s currency (and the average player’s work in that game), so people will inevitably value it a lot more highly.
Again, the only reason why farming Runescape gold was lucrative for a decent chunk beyond that top few % was that there’s a huge difference between wages in the West and low-income countries. Western players are willing to pay way, way too much for skipping a grind or earning a rare item by Filipino or Venezuelan standards.
Once the blockchain gaming market eventually calms down and it isn’t this exciting new thing that everyone’s rushing towards in hopes of getting rich quick, the average wage from playing the game will drop down to far below the average wage level of the player base, whatever that ends up being.
That means that it’ll only be worthwhile as a money-making method for the average low-income player (or a kid in the West with only a little pocket money) if a majority of players have a substantially higher income level and willingness to pay. If this isn’t the case, then the price of the in-game currency will just drop lower and lower, falls far below the wage levels of the low-income player base, and eventually isn’t worth it for nearly everyone.
At that point, the only reason to play would be if you were a kid that got baited in by the promise of ‘getting rich quick by getting to play a game, wow!’, which comes with a whole set of ethical and regulatory issues that this niche will end up facing sooner or later. Or you might be part of the small in-game capitalist elite — which is the next big problem I’ll talk about. This situation is where a lot of the early blockchain games are stuck now.
The question then is: how do we get players from high-income countries to play if they’d be better off just mowing a lawn for 30 minutes than playing for the entire day? You’d again have to get them to play for some other reason — it has to stay cool somehow, like through solid gameplay or a really strong brand.
Inequality and bad behaviour
Now because of what I talked about above, the idea of blockchain gaming being a way to let a whole bunch of players earn any real money for playing games is an impossibility. What will actually happen — and has happened in every digital and non-digital economy in history — is that you end up with substantial earnings inequality.
As long as there is (a) some set of scarce assets that yield greater returns than other assets, like pieces of land that only one player can own or your skills as a top 0.5% player, and/or (b) a way to make more money the bigger you are (called economies of scale in economics), almost all of the money in the game will be earned by a very small percentage of players.
This is because some players will just outcompete and buy up all those scarce, valuable pieces of land or rare productive items before anyone else and use their massive wealth to then dominate the market and create more wealth.
In fact, what will inevitably happen is that players will form groups to purchase these productive assets, scale up, and exert as much control over the economy as they possibly can because that’s the way to maximize earnings. Just owning a portion of these assets will let them completely eclipse whatever paltry amounts the average player will earn from grinding, which will eventually cause new or average players to become demotivated unless you use deceptive marketing to hide that fact.
This is what has happened in every single functioning economy from Runescape to EVE Online and, in fact, in every real-world country. It’s quite literally how nation states and corporations came about in the first place. It just doesn’t matter in most games because they’re not trying to tell the average player that they can make real money from playing.
More insidiously, the capacity to make money from playing creates an incentive for bad behaviour in existing players and invites a whole bunch of bad actors once they figure out they’ll be able to make money from it. Think botting, hacking accounts, using cheats, DDoSing, you name it.
Once it’s no longer a game played mostly for entertainment, there’s very little reason to not just do whatever will make you the most money even if that isn’t fun by any sense of the word. Playing the game in the proper, fun way will never be the best way to make money in the long run and that’ll make gameplay far less engaging for those that aren’t just looking to make a quick buck.
This all means that, in the long-term, a huge amount of effort will have to be spent balancing the in-game economy, making policy changes that mirror a real government. This will be an effort to try and prevent bad behaviour and make it at least seemingly possible for the average player to keep up so that there’s still a reason for new players to pick up the game. Real economists and policymakers have historically had a very hard time doing that, and I don’t think game designers are any more capable.
Conclusion
There are some fundamental economic realities at play here. A ‘play-to-earn’ blockchain game cannot survive unless its in-game assets will seem valuable to other players over the long term.
That value can come from the fact that it’s a well-designed, entertaining game in which players want to progress or play the economy. Alternatively, it can come from some rare external factors like the social significance of luxury brands or the cultural importance of baseball stars and the collectable items that represent them. But, regardless of where that value comes from, it’ll have to come from somewhere once NFTs are no longer the ultra-cool hot thing that everyone is trying to make money from.
Then there’s the problem of all the bad things that happen in any real-money economy. Games are uniquely easy to break in a way that ruins the experience for everyone — be it through botting, forming conglomerates, cheating, or hacking — and people will have no reason not to if they’re just there for the money. Creating an actually functional economy that involves real money transactions (not just a marketplace) and provides opportunities for everyone is an incredibly difficult problem in the long term that I don’t think anyone is capable of solving yet.
For this reason, the selling point for blockchain games can’t just be “earn money by playing games”. I don’t see another option other than them being fun games first and foremost — be it the collectionist aspect or the fact that it provides an extensive progression system that’s fun to work in. The blockchain part only works as a secondary value proposition for the subsection of players that either lives in low-income countries or otherwise just like the idea of earning a bit of real-world money from gameplay.
Yes, there’s lots of money to be made from blockchain games for the next few years because of all the hype and wishful thinking by players and investors looking to get in early enough and avoid their fear of missing out. The same was the case for Theranos, Juicero, Enron, Star Citizen, or any other product or company that investors have gladly poured millions into over the years without any rational basis.
But, after the hype dies down, a game that only boasts a play-to-earn model is just not sustainable and I fear that some blockchain games will resort to questionable practices. Elements of gambling, exploiting sunk-cost, or other tricks rivaling multi-level marketing scams will attempt to keep (particularly young and impressionable) players playing in the absence of any rational incentive. Steam, the largest PC games marketplace, and the Korean government have already banned all blockchain games because of multiple high-profile scams and, more generally, their inherently speculative nature.
There is a value that can come from leveraging advances in the crypto space within video games. Let’s just try to keep blockchain games in the realm of video games rather than something that looks a lot more like a ‘get rich quick’ scam. Both for the sake of our conscience and the regulatory hammer that’ll come down the moment there’s a moral panic about some kid being tricked into wasting thousands of dollars on useless crypto assets.
If we do that, the underlying tech can very much become a solid option in the monetization of massively multiplayer online games. It could truly be a way to create hassle-free marketplaces for in-game collectibles, or an opportunity for a bunch of games that feature cool and actually interactive collectibles, something similar to Neopets, Pokemon, Tamagotchi, or trading cards.
