Blockchain
Video Games and the Rise of NFTs as a Digital Asset Class
By: David Bracken | October 26, 2021
Blockchain-based video games promise to accelerate the adoption of NFTs (non-fungible tokens) and greatly expand the digital asset ecosystem. By making in-game items NFTs that are embedded in the blockchain, players can take ownership of the digital assets they accumulate while gaming and then sell or trade them for real-world value. Such functionality could restructure the economics of the $175 billion gaming industry and turn legions of gamers into digital asset investors.
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When the graphic designer Beeple sold a collage of digital art for $69 million in March, it marked the peak of last spring’s nonfungible token (NFT) craze. NFTs—unique digital assets whose authenticity is recorded and tracked via the blockchain—have exploded in popularity this year, with $2.5 billion in NFT sales of art, music, NBA highlights, and other digital assets recorded in just the first six months.1

While digital art and collectables are driving this frenzy, NFTs entering the cultural zeitgeist has heightened interest in the technology disrupting another industry: video games. More than $1 billion has been invested this year in blockchain gaming companies, up from just $71 million last year.2 Many of these companies are designing games with a play-to-earn model where in-game items are NFTs that players can sell or exchange on marketplaces for cryptocurrencies (which can then be converted to fiat money). Such games are a small slice of the gaming industry today, but they have the potential to transform the way we play and invest because:

NFTs and gaming were made for each other. There’s a reason blockchain advocates have long cited video games as the ideal use case for the technology. The hurdles to adoption are lower than in other industries given that in-game assets are natively digital and have existed for decades: gamers are comfortable owning them and understand their value. Players are also familiar with digital currencies, as many of the most popular games have built their in-game economies around proprietary digital currencies. And the popularity of free-to-play games like Fortnite means players are spending increasing amounts of money on costumes, weapons, and other digital items that NFTs could help unlock from closed gaming economies. Gamers spent $54 billion on such content last year, a number that is forecast to reach $74 billion by 2025.3

Gaming infuses NFTs with a purpose. For all the hype surrounding NFTs right now, the number of people actively buying and selling them is relatively small—one recent report put the number at about 100,000.4 Introducing NFTs into video games expands the user base beyond collectors and speculators. And unlike NFTs of pudgy penguins or pet rocks, gaming NFTs have utility in that they accrue value when used in the context of the game. Axie Infinity, the most popular blockchain game with more than one million active daily users, has experienced explosive growth in recent months as it’s become a viable way for players in developing countries such as the Philippines to earn extra income. Axie Infinity players battle, breed, and raise monsters (Axies), each of which is its own NFT. The game has seen a direct correlation between time spent playing and NFT sales. More than $1 billion in Axie NFTs have traded since the game launched in 2018, including $600 million in July, making it the most valuable NFT collection ever, according to DappRadar.5 Major game studios such as Sega, Atari, and Ubisoft are experimenting with NFTs as well.

In Sum

Like the crypto space overall, the use of NFTs in gaming is evolving rapidly. Much remains to be figured out and we in FCAT will be keeping a close eye on developments. For instance, the process to buy, sell, and trade NFTs in blockchain games today is not user friendly. The games can be slow, and creation of these assets can be complex and expensive due to congestion and rising transaction fees on the Ethereum blockchain. Improving the user experience is a prerequisite for wider adoption of NFTs. There’s also the question of whether blockchain games will ever be as fun as traditional games? Are users playing for fun or to make money? Both? If NFT-based gaming is to reach its full potential, player-owned assets will need to enhance gameplay as well as make playing the game profitable.

Given how rapidly the gaming industry is growing—the number of players globally is forecast to approach 3 billion this year6—the potential for video games to become a gateway to owning and investing in NFTs and other tokenized assets makes this a space worthy of close attention.

 
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