Blockchain gaming may be in its infancy but the video game industry has come a long way since the 1970’s. In 2021, the reported number of gamers in the world reached a staggering 2.7 billion, essentially 1 in 3 people worldwide play video games. The reach of video games is only overshadowed by the money involved in gaming with Naavik analyzing the industry to be worth approximately $336 billion. This puts video games as the single largest form of entertainment as the industry is double the size of the music and sports industries combined.
Apart from the sheer number of gamers and money involved, the development of games has changed substantially over the past decade as well. Free to play models have been the emphasis and backbone of the industry as widely accessible multiplayer games with consistent content updates are able to retain players attention more so than almost any other genre. This is but one trend among many in the gaming world, but at Spectacle Investing the most important trend we believe is that of Blockchain Gaming.
Blockchain gaming, also known as NFT gaming or crypto gaming are games built on a blockchain which allows the assets created for that game to exist on cet blockchain. Early adopters of blockchain gaming understand the inherent value created in their games being built on a blockchain. For traditional gamers who have had microtransactions thrown at them constantly for the past decade, NFTs coming to video games has left a sour taste in their mouth.
Just this month, Ubisoft made an announcement of how it was planning to build NFTs into their games. The announcement was met with harsh criticism from their fans to the point that Ubisoft took down their video and declared that they are canceling their plans. Current iterations of NFTs simply feel like another scheme for developers to make more money off their user base. This isn’t always the case though so we’ll breakdown the value that blockchain adds to gaming, both for developers and for gamers alike.
Blockchain Gaming: Potential Value Added
First, what is a blockchain? A blockchain is a digital, decentralized ledger which is distributed across a network of nodes. Why does this add value to video games? Blockchain gaming gives gamers control for the first time. It is now possible for a user to own a digital asset that can’t be tampered, removed or shut down from a central party.
For example, a game that would benefit greatly from this would be World of Warcraft. In WoW, players run around a fantasy world completing quests, obtaining loot and sometimes fighting one another. Specific loot in the game can be very hard to obtain leading to players needing to “grind” for tens if not hundreds of hours. These items that they gain are simply being rented. Activision Blizzard has full control over these in-game assets. They can suspend or ban a player without any refunds, disable the items or completely remove them from the game, or simply stop supporting the game entirely leading to all assets earned in that game to be useless.
Blockchain gaming looks to solve this. The in-game assets earned by players exist on a blockchain outside of the developers controls where the individual player has ownership of their digital goods as well as the ability to sell these goods on open market places. This has spawned a new genre of video games called P2E or Play to Earn, where players can devote time and effort to obtain the difficult loot in a game and then sell that to another player on the market place who has money but doesn’t want to devote the time or effort to obtaining that item.
Virtual Goods: Current Issues
Virtual goods have several issues which blockchain gaming looks to solve.
1.Virtual goods exist in siloed databases in a variety of different formats.
2. Assets are replicated and abundant.
Video game assets are abundant in the sense that everyone using the same asset is simply using a copy of the original created by the developers. This means there’s no true ownership or scarcity in these ecosystems. Assets on a blockchain are provably scare, secure and their ownership is verifiable. Wearing an NFT skin in Fortnite which only 30 other players have tends to be cooler than wearing a skin that everybody has.
3. Fragmented Markets
Gamers around the world don’t have equal access to virtual assets. Blockchain promises a future of global liquidity, equal access and security for users all across the world for digital assets of all nature.
4. No Real Ownership
As previously stated, current game economies have no mechanisms which identify and allow players to truly own their assets. NFTs are unique, verifiable assets on a blockchain where the owner has complete control over the asset.
Currently, games exist in a “walled garden” state where items and assets earned in that game are not capable of being transferred over to a different game. The implications of this are initially confusing, how would a skin in Fortnite transfer over to league of legends? How this will be accomplished is not yet clear but over time, blockchains will become interoperable and with that will come universal items.
6. Limiting Assets
The assets in the game are specifically designed to meet the requirements that the developers have set for themselves. Blockchain assets have composability. A prime example is Decentraland where users can own a section of the Decentraland world and build their own experiences, properties and events on top. With composable assets, imagination becomes the limitation of what can be done.
Benefits for Gamers and Developers
With the understanding of how blockchain can positively impact virtual goods, what are the benefits for gamers and developers?
1. Game Economies will Flourish
Currently, 2% of gamers spend money on in game items. This means developers heavily rely on “whales” to be their main source of income to sustain a game. Digital ownership will create a much stronger incentive for players to spend money thereby allowing developers to capture money from a larger portion of their audience.
2. Developer and player alignment
In blockchain games, users retain more of the value that they accrue through their effort and time and therefore their economic incentives align with that of the developer. In games with thriving marketplaces, on-chain royalties from the reselling of virtual assets will benefit both parties.
3. Transparent Ecosystem
Games built on the Ethereum network have their transactions facilitated in a transparent and trustless manner. Other Layer 1 blockchains will have the same characteristics and this will allow for a more inclusive experience.
4. Capture lost value from Gray Markets
Gray markets tend to exist from a gap in the market due to games being designed in a closed off manner. More open ecosystems will allow these gray markets to become a functionality of the game itself and developers can take a cut of each transaction.
It is still very early into blockchain gaming but innovation will happen rapidly due to the composable nature of decentralized networks.
Barriers to Adoption
Although blockchain gaming has made big headlines the past year and many game companies are looking into it and gamers have their interest piqued, there are still issues that need to be addressed in order for the space to come to fruition.
Speed: Blockchains like Ethereum lack scalability in their infrastructure and so the network is easily congested with transactions and it can take significant time for a transaction to go through.
Cost: With congestion on the network, the cost of transactions can skyrocket on Ethereum. No gamer wants to pay a $50+ transaction fee to obtain a $20 in game item. Other blockchain networks can look to solve speed and cost such as Solana, Polygon, Cardano etc.
High Switching Costs: Current: Large current generation developers have ecosystems where they have complete control and retain 100% of the revenue(apart from third party marketplaces). These companies are significantly less incentivized to switch to blockchain gaming and so the innovation in the space will come from new developers.
Game Design: Blockchain technology presents many challenges and when combined with game design it presents many more. As time goes on and issues are resolved, game design will become less constrained.
User Experience: Accessing certain blockchain games can be a headache, even moving an NFT from the game’s main chain to a side chain like in Axie Infinity’s Ronin takes several steps and can be confusing for those not familiar with crypto. This aspect plagues all sectors of crypto but will be more fleshed out in the years to come.
Sectors of Blockchain Gaming
Blockchain gaming being in its infancy means now is a prime time to invest in the future blue chip projects. Spectacle is investing and evaluating 3 different sectors:
1) Games and gaming platforms: This includes games like Meta God(MGOD) and paltforms like Sandbox and Decentraland.
2) Tools: Game development in the blockchain world is far from easy with many barriers as discussed above. Projects like ImmutableX are deploying tools to help game developers scale their games and make the games more accessible.
3) Marketplaces: NFT marketplaces are the gateway to NFTs and blockchain gaming’s ecosystem. OpenSea is currently the most dominant player but L1 blockchains are developing and each day new NFt marketplaces are launching.