The irrational exuberance of cryptocurrencies knows no bounds, and the gaming industry is just the latest field to get sucked into this sphere of influence. As a result, this has brought upon a deep divide between crypto-natives and game-natives: most crypto-natives are out of touch with regards to what makes a game work, while most game-natives tend to overlook the value-add potential of blockchain technology for the gaming industry.
At times, this misalignment has boiled over into ugly exchanges amongst the two ‘factions’ — culminating in crypto-natives being labelled as “greedy tech bros”, or game-natives being labelled as “dense gamers”.
Considering that the prevailing trend in the gaming industry has increasingly leaned towards excessive monetization of in-game content, gamers in recent times have understandably become dismissive of changes to their industry. The nature of crypto (and NFTs) makes them prone to be hated by gamers, seeing them as a tool for companies to extract more pennies out of their pockets: the bastardized version of microtransactions.
On the other hand, the manner on how current blockchain games are being marketed does not help the cause either. Instead of focusing on playability and game enjoyment, most blockchain games are in fact Ponzi schemes under the guise of a game — those so-called “play-to-earn” games. As such, their user base mainly consist of players primarily motivated by financial gains — which quite frankly doesn’t help either in terms of bridging this deep divide.
It doesn’t have to be this way.
Play-to-Earn: An Unscrupulous Pyramid Scheme Built Upon a House of Cards
“A game is a structured form of play, usually undertaken for entertainment or fun, and sometimes used as an educational tool. Games are different from work, which is usually carried out for remuneration, and from art, which is more often an expression of aesthetic or ideological elements.”— Wikipedia
Games are exactly that, a form of entertainment. Gamers play games to relieve the stress of their day-to-day life, just like watching movies or hanging out with friends. This is the fundamental first-principles of what makes a game, a game.
Play-to-earn “games” (or just about anything with the “earn” tag; e.g: play-and-earn, etc.) introduce the wrong kinds of incentives towards its potential players — one where entertainment or fun becomes secondary to financial motivations. When NFTs or tokens are sold as a precondition in order to play a game, players won’t be buying it for its in-game utility, but as a speculative investment in expectation of future profits.
Sadly, this is the state of the current blockchain gaming landscape: filled with unsustainable “games” where demand is primarily fueled by financial motivations, not the fun or enjoyment derived from playing the game itself.
Axie Infinity is a case on point: early adopters shell out money to buy Axies and play the “game”, then they “make” money and cash out (fueled by external money coming in, specifically from the late adopters), and the cycle goes on until there is no new money left to come in and offset the old money coming out. Eventually the music stops, and late adopters will be the ones footing the bill — basically a pump-and-dump scheme masquerading as a “game”.
Don’t get me wrong, paying money for a game is perfectly fine — what matters is that the motivation behind the purchase must strictly be for in-game utility, not speculative intent. At this point, it is clear that spending $100 on an entry Axie implies a different meaning compared to spending $100 on cosmetic items, like champion skins in League of Legends, or utility items, like builder huts in Clash of Clans.
Make no mistake, an FPS blockchain game with its players’ best interests at heart could in fact opt for a gameplay loop in which all weapon NFTs are degradable and of unlimited supply: 1) people mint the brand-new weapon straight from the game for a fixed price (which prevents speculative intent); 2) the weapon will degrade and become less powerful the more it is used in battle (the utility of the in-game item). This mechanism ensures that each purchase of the game’s weapon NFT is not due to financial motivations — assuming other things equal, programmed wear-and-tear means that prices on secondaries will almost always be cheaper than in-game mint prices.
All in all, games are first and foremost played for entertainment or fun — financial incentives, if any, must only be an afterthought, not the main value proposition. As long as play-to-earn remains the dominant narrative, the true value-add potential of blockchain gaming will never become apparent to the mainstream, and the deep divide between crypto-natives and game-natives will continue to exist — for obvious reasons.
Value-Add #1: In-Game Items as NFTs, Explained
Simply put, NFTs can represent anything deemed to be of value on-chain. What it actually represents, and how this representation is enforced will be down to very human factors: the social utility of BAYC NFTs will depend on its community, likewise the functional utility of blockchain domain NFTs will depend on the number of integrations and partnerships that its associated domain name protocol can attract.
The social or functional utility of in-game NFTs are no different: they will depend on the going-concern of the game itself. Otherwise, it will simply be a useless token on the blockchain, devoid of any utility whatsoever. Ask the question: What remains of your NFT if its underlying game is discontinued for various reasons? What if developers decide to stop updating the game, or remove the in-game item that your NFT is supposed to represent?
Stripped to its bare bones, in-game NFTs are more like “access passes” to an in-game item. Contrary to popular belief, they certainly do not allow for “immutable ownership” of in-game items — if the game is no longer a going-concern, then your NFT won’t actually represent anything anymore.
So, what are NFTs even good for the gaming industry anyway?
For one, representing in-game items as NFTs will enable the item to be freely tradable to anyone with an internet-connected device, irrespective of their background and geographical location. While we do have centralized platforms like Steam that allows for trade between in-game items, it is heavily subjected to the T&Cs of each platform, as well as being highly inefficient: trading amongst in-game items within the same ecosystem is one thing, but trading in-game items across ecosystems is another thing.
To illustrate, to trade your CS:GO skin (Steam) for Fortnite skin (Epic), you will need to rely on a P2P matching service: 1) you send the CS:GO skin to your counterparty’s Steam account; 2) the counterparty sends you the Fortnite skin to your Epic account; 3) if the trade involves cash, then money is wired separately by the sender to the receiver’s bank account. This is notwithstanding the cross-border transfer fees in case of international wires, which is likely to cost you more than the in-game item itself!
If both of the said skins are represented in form of NFTs, challenges arising due to differences in a counterparty’s jurisdiction or an in-game item’s gaming ecosystem will be made irrelevant, since the trade will be executed under a common “financial layer” — the blockchain.
Transaction fees will be negligibly low (except on Ethereum, at least before ETH2.0 kicks in) no matter where your counterparty resides, or on which gaming ecosystem is the in-game item part of. On top of that, the atomic nature of smart contracts on NFT marketplaces will ensure that counterparty risk is significantly minimized, all without requiring a centralized intermediary to mediate the process.
In addition, the composable nature of blockchains will enable in-game NFTs to harness the full power of DeFi — for instance, pledging your in-game NFTs to be used as a collateral for borrowing money, or even “wrapping” it with a renting functionality such that when rented out to a third-party, the NFT can automatically return back to you upon duration expiry or in case of default.
Once NFT standards evolve to become sufficiently advanced, in-game items could even be made interoperable with one another — for instance, via a strategic partnership between game A and game B, a gun NFT in game A could be imbued with the power to redeem a sword NFT in game B, assuming the gun NFT reaches level 50 in game A.
With that said, a game choosing to represent its in-game items as NFTs will have to subject its virtual economy to external market conditions — often times, it could directly bring upon unintended consequences towards the playability of the game itself:
Due to this fragility, most games would in fact be better off not concerning themselves with NFTs (and cryptocurrencies) — the game itself needs to be of a certain magnitude for the endeavour to be worth it: although a blockbuster MMO might find blockchain integration to be a worthwhile pursuit, the same can’t be said for a casual mobile game.
Value-Add #2: In-Game Currency as Tokens, Explained
Like in-game items represented as NFTs, the main benefit of representing in-game currencies as tokens lies in its ability to be freely tradable irrespective of each party’s background and location, at a negligible cost compared to using centralized infrastructure tied to traditional banking rails.
Again, to illustrate, trading WoW’s gold for, say, Roblox’s Robux, is quite a hassle: it involves two completely different ecosystems, let alone if counterparties turn out to be in different jurisdictions. If both of the said in-game currencies are represented as tokens, trading them would be as easy as submitting an order at a decentralized AMM like UniSwap!
Like in-game NFTs, the value of in-game tokens is heavily dependent on the game’s successful going-concern, in which it will be based on the utility that each unit of token can have within the game itself (ex: payment for weapon crafting, etc.). Moreover, the composable nature of the blockchain will enable in-game tokens to also harness the full power of DeFi: swapping it to stablecoins, lending/borrowing, liquidity pooling, and so on.
For the sake of a game’s virtual economy’s sustainability, it is imperative that token faucets (events that add tokens to circulation) and sinks (events that remove tokens from circulation) are strictly contained in-game: introducing external elements that could affect this dynamic will just cause the already fragile virtual economy of a game to be uncontrollable — worst case, rendering the game to be unplayable.
One such example is the pre-mining of in-game tokens (or in-game NFTs), an “external faucet” in which it is not tied to the overall gameplay of the game in any shape or form. As such, you can expect tangible consequences to befall on the virtual economy of that game down the road.
On the flip side, WoW, the longstanding MMO, is a great case study on how to manage a game’s fragile virtual economy. While not flawless by any means, WoW’s virtual economy is still well-oiled up to this day, mainly due to the fact that the faucets and sinks of WoW’s in-game currency, gold, are all triggered by events within the game itself.
Value-Add #3: Value Accrual via Governance Tokens, Explained
Unlike in-game NFTs and in-game tokens, governance tokens do not affect the core gameplay loop of a game. Instead, they resemble more like a vehicle for value accrual, akin to equities in traditional companies (but better).
Goes without saying, the value of governance tokens will depend on its value accrual model. While the value accrual of equities will largely be based on the present value of cash flows plus net cash on the balance sheet, the programmability of governance tokens means that its value accrual model is up to the discretion of its issuer!
For example, a game could design the value accrual of its governance tokens such that holders who staked their tokens will be entitled pro-rata to proceeds generated from taxing sales of its in-game NFTs, as well as from reflections on its in-game tokens. Treasury funds in excess of the game’s operating expenses and future development costs could also be used to conduct token burns, in effect returning value to existing holders of the governance tokens (akin to share buybacks in the case of equities).
Automation of these functions via smart contracts will greatly reduce the probability of human error — at the same time significantly speeds up processes. The blockchain’s transparent nature will eliminate the need to engage independent entities for attestations — everything is out in the open, which means anyone will be able to go to a blockchain explorer and verify for themselves: whether the proceeds are actually distributed pro-rata, whether tokens are actually burned by virtue of excess treasury funds, and so forth.
Furthermore, governance tokens provide games with an alternative method to fundraising: no longer are they restricted to private VC-controlled markets, they can now fundraise directly from the public through an ICO.
ICOs democratize early-stage investment access to the masses such that anyone, including an 18-year-old avid gamer who probably knows more about games than any accredited investor or venture capitalist could ever hope to be, can be given the chance to get in early on his favourite game’s early fundraising round.
As a bonus, governance tokens could also be imbued with voting rights, just like voting shares in equities. But in practice, the extent to which decisions are made available to be voted on by token-holders remains in the control of the issuer itself — a decentralization theater.
In equity-based corporations, shareholders could seek legal recourse if their votes are not being honored by the management (on the grounds of fiduciary duty breach). Needless to say, we are still years (even decades) away in order for voting rights on governance tokens to reach the level of equities. Until then, expect voting proposals to resemble more like a community engagement tool — revolving around mundane stuff outside of the game’s core mechanics such as the gameplay loop or the virtual economy.
Bridging the Deep Divide
Ultimately, blockchain gaming spurs existing incumbents as well as budding challengers to rethink the best practices of game design and creation.
Crypto-natives should be enlightened that a game is a delicate system of closely intertwined components grounded by the first principles of what makes a game, a game: a structured form of play undertaken for entertainment or fun. An unplayable game won’t miraculously become playable just by virtue of blockchain integration — if anything, it simply evolves to become the worst manifestation of itself.
On the other hand, game-natives should realize that blockchain gaming is more than just play-to-earn pyramid schemes. Cryptocurrencies and NFTs are not the bastardized version of microtransactions — they are merely an on-chain representation of in-game assets (currencies and items), in which its value will still be fully dependent on the underlying game’s going-concern.
Disclaimer: The author @0x_delken is a Reitio core team member. The views and opinions expressed throughout are those of the author as an individual, and do not necessarily reflect the official policy or position of Reitio as a project.