Mythbusting NFTs and blockchain games
A gaming-first analysis of how web3 can enable better games
Perhaps one of the most controversial topics in gaming today, non-fungible tokens (“NFTs”) took the world by storm in 2021 with the high profile sales of collections like CryptoPunks and Bored Apes, which have each eclipsed $2bn in total volume to date.
While artists and media properties have seen some early success experimenting with the technology (e.g. NBA Top Shot, Sorare), the broader gaming community remains mostly skeptical. Enter any gaming Discord server or watch any of the popular game streamers today and you’ll likely come across harsh rebukes of NFTs — “enough of this NFT crap” or “just another cash grab by greedy corporations” are sentiments undoubtedly shared by many gamers today.
And to be honest, I don’t blame them. NFT projects are rife with rug pulls and blatantly fraudulent schemes that give them a bad reputation. Just the other day, I came across a play-to-earn “game” called Soul Reborn that was shamelessly ripping off the IP of Lion Games’ Soul Worker. The team behind Soul Reborn even bought a fake Twitter page that had ~70k followers to deceptively show traction behind the project so they can sell more NFTs. Oof. Lion Games eventually put out this announcement to prevent more players from being scammed:
"Soul Reborn" is the game that currently steals the Intellectual Property of Soul Worker without permission. The developer of this unlicensed game has been identified as a company that takes illegal NFT business, unfair profits, and committing fraud. We, Lion Games, are informing you to prevent further damage.
This is about as ugly as it gets. Unfortunately, history tells us that we’ll likely see more of these scams in the future. With the advent of any new technology, bad actors will inevitably emerge — NFT marketplace OpenSea reported earlier this year that 80% of NFTs minted for free on its platform were either plagiarized works, fake collections, or spam. It’s clear that these challenges aren’t going away anytime soon.
The good news is that history also shows that the thoughtful builders and innovators can prevail through all the noise in the long term. There are already companies working to address the trust & safety issues within the NFT ecosystem — Doppel, a startup founded by ex-Uber engineers to track down counterfeit digital assets, recently raised $5 million in seed funding led by FTX.
So how should game developers capitalize on blockchain and NFTs? To understand how these technologies can fit into gaming, we must answer 3 fundamental questions:
Why do people play games?
What makes any gaming digital asset valuable?
What do tokenized digital assets offer over traditional digital assets?
Welcome to the world of infinite possibilities
At its core, games construct new interactive experiences for its players. Whether you’re Lebron James or just an average Joe, life generally follows some variation of the following routine: wake up, go to work / study, eat, sleep, and hobbies sprinkled in between free time. Are some jobs / hobbies more interesting than others? Sure — being a superstar in the NBA is probably more eventful than a standard 9-5 office job. But is it more exciting than defeating a lava-spewing 3-headed dragon as a superhero to save the world? Probably not!
Researchers who study gaming call this “experiential enhancement.” Simply stated, one of the main reasons people play games is to experience something new. Not tall enough to dunk like Lebron James? You can play NBA 2k to simulate that experience. Want to rain down meteors at hordes of enemies? You can build a fire mage in New World. Feel like completing covert missions via stealth and parkour? Try Assassin’s Creed.
Raph Koster also reinforces this concept in his book Theory of Fun (if you haven’t read it, I’d highly recommend it). He likens playing games to solving puzzles, where the fun comes from the process of learning the different patterns within the puzzle. In other words, he argues that all games are basically edutainment — once you’ve analyzed and mastered all the patterns, the gameplay becomes predictable and ceases to be fun.
The challenge is that the human brain is wired to always optimize (e.g. think of meta characters or builds), which ultimately leads to predictability in gameplay and consequently reduces the fun factor of the game.
“As gamemakers, we are fighting a losing battle against the human brain, which always fights to optimize, assemblyline, simplify, maximize ROI.”
As such, the best games tend to be more like puzzles with more than one right answer. Games achieve long term sustainability by creating self-refreshing experiences that directly contrast with the predictable routines governing our daily lives. For example, games like League of Legends and World of Warcraft have lasted for 10+ years because they help players jump off the metaphorical treadmill and immerse themselves in consistently novel and highly engaging experiences (“endless supply of similar yet subtly varied puzzles”). Every League game is like a different puzzle depending on the lane you play, champion matchups, and objective statuses. Similarly, WoW raids can be tackled in a multitude of ways depending on team composition, strategy, gear, etc.
To boil it down, fun games are essentially worlds with infinite possibilities — as effective mediums for the consistent delivery of new and immersive experiences. And in these worlds, digital assets are the tools that help unlock these possibilities.
How can jpegs and pixels be worth anything?
Today, it is not uncommon for top games to have in-game digital assets that cost thousands on average to attain (or in the case of Diablo Immortal, tens of thousands). How do games justify charging these seemingly exorbitant sums of money for their digital assets?
Many postulate that digital assets should follow the same economic principles as any physical asset — value is derived from scarcity, utility, liquidity, and expectation of future demand. While I mostly agree, it’s an imperfect heuristic because most gaming digital assets today are sold under closed economies — in other words, there is zero liquidity and expectation of future demand is minimal (the only way to liquidate your assets in a closed economy is to sell your account as a whole). Interestingly, this implies that many gaming digital assets derive value solely from (perceived) scarcity and utility.
But wait, aren’t digital assets just pixels in a game? What utility are they providing that is so valuable? This is where it becomes debatable, but I would argue that gaming digital assets offer fundamentally different levels of utility compared to physical assets. Let’s walk through a brief example.
When I purchase a physical shoe, I’m buying it for functional utility (protecting my feet when I go out) and aesthetic value (I like the look and design). Some shoes will also offer additional utility such as the prevention of injury through better shock absorption. Like shoes, most physical assets are designed with very specific use cases in mind; jackets keep us warm, backpacks help us carry things, cars transport us from point A to point B, and so forth.
In contrast, when I purchase a digital asset in a game, there are usually multiple levels of utility tied to it. A simple in-game shoe can bestow new skills, unlock entirely new gameplay variations, and even provide access to more content.
The list goes on and on. You’ll notice that some of the basic and enabling utilities loosely exist in the real world (e.g. special shoes designed for ice skating or rock climbing). The vast majority, however, are impossible to replicate in a physical setting (I challenge you to find a physical shoe that gives +20% walking speed!). Additionally, compounding utility is unique to digital assets in gaming — the more you own, the more utility scales. RPG gacha titles for example leverage this to great effectiveness; obtaining a new character opens up brand new team compositions and ways to play the game (e.g. freeze / taser comps in Genshin Impact). Well-designed characters will interact and synergize with other characters in clever ways, greatly augmenting the permutations of gameplay and thus how fun the game is. The more intricate these interactions are, the more utility can compound with ownership.
Given these characteristics, I believe the following is a more accurate framework for determining the value of gaming digital assets in closed economies:
Current utility (basic, enabling, compounding)
Expectation of future utility: will my asset be relevant in the future? What content will be built on top of my asset?
Difficulty to obtain: perceived “scarcity” (as there is technically no cap on supply), enforced by distribution curves (e.g. drop rates, time investment required)
Using this framework, we can start to see why people are willing to pay thousands for the best legendary gems in Diablo Immortal — they have amazing basic stats (resonance, combat rating), offer new ways to play the game (summoning a spirit wolf on attack), will likely hold utility for a long period of time (can be socketed in any rare or legendary gear that gets released in the future), and are incredibly difficult to obtain in game (low drop rates).
Similarly, we can use this framework to understand why cosmetics are priced much more reasonably in games (typically no more than $40-50), because of the limited utility they offer (if purely aesthetics). For example, the Crystalline Echoes cosmetic set (which looks super cool by the way) in Diablo Immortal only costs ~$15 USD.
Now that we’ve established a rough framework for (1) understanding why people play games and (2) determining the value of gaming digital assets, it’s time to dive into NFTs, which add entirely new dimensions and characteristics to digital assets.
Do NFTs and blockchain tech have a place in gaming?
Ethereum.org provides the following definition of NFTs:
NFTs are tokens that we can use to represent ownership of unique items. They let us tokenise things like art, collectibles, even real estate. They can only have one official owner at a time and they're secured by the blockchain – no one can modify the record of ownership or copy/paste a new NFT into existence.
Technically, NFTs are just lines of code that exist on a blockchain network like Ethereum. These lines of code govern the information about the NFT (metadata) and how it behaves on the blockchain. To put it in practical terms, they represent unique digital receipts for assets (e.g. an image or game item).
Because NFTs are created on the blockchain and powered by smart contracts, they have various properties that separate them from traditional digital assets, notably:
Uniqueness. Each token has a unique identifier that distinguishes it from other NFTs. Even if there are multiple NFTs of the same longsword with +5 attack, each will have a unique ID (i.e. think of it like a serial number on the asset). This constitutes the “non-fungible” part of NFTs.
Blockchain-managed ownership. The tokens reside in your wallet and are yours to freely trade / use, independent of any central entity that minted the token.
Composable ecosystem. Ability to leverage other smart contracts as building blocks for new applications, such as using NFTs as collateral in a decentralized loan or renting it out to others for interest / rev share.
Transparency. Each NFT transaction is permanently recorded on the blockchain and timestamped, for everyone to see.
Interoperability. Thanks to open community standards (e.g. ERC-721), you can use them across multiple ecosystems (e.g. different wallets, marketplaces, etc.)
Immutability. Ability to programmatically enforce persistent properties that cannot be modified after the NFTs are issued (e.g. capping the supply of a rare item).
With this basic understanding, we can now apply the frameworks established in the previous sections to draw some insights.
Does it make games more fun?
In the first section of this post, we explained that people played games to experience something new, and therefore the best games are worlds with infinite possibilities. NFTs fit nicely into this narrative, because composability acts as an accelerant, and ownership acts as the incentivization for the development of new experiences in a game. Below are a few examples that illustrate this potential:
In Guild of Guardians, token-purchasing and liquidity mining are enabled through Sushiswap (a decentralized exchange), rather than having to build this type of functionality from scratch. In the case of Skyweaver, the developers opted to fork Uniswap and launch their own ERC-1155-based exchange called Niftyswap. By leveraging other protocols to handle token purchasing and NFT trading, these developers abstracted away the complexity of some elements of game design. This allowed them to focus on adding new experiences to the core game, which leads to faster development cycles and higher quality content over time. As the ecosystem matures, we will undoubtedly see more applications emerge that can interact with NFTs.
In Project Hive, players can “contribute-to-earn” by designing custom item skins, minting it as a NFT that they own (if it gets chosen in a community voting event), and receive royalties from sales of the skin. This introduces a new way to play the game, especially for players who have a penchant for art & design. Harking back to our framework — more gameplay paths ultimately leads to more fun.
In motorsport game F1 Delta Time (which has since shut down), users can purchase sections of NFT-generated racetracks and share “dividends” from all activity taking place on those circuits, including race entry fees. Another example of NFT ownership expanding scope of gameplay (play as a track manager vs. a racer) to unlock more fun.
Square Enix (one of the most respected game developers globally) outlines a similar vision in their latest shareholder letter:
However, with advances in token economies, users will be provided with explicit incentives, thereby resulting not only in greater consistency in their motivation, but also creating a tangible upside to their creative efforts. I believe that this will lead to more people devoting themselves to such efforts and to greater possibilities of games growing in exciting ways. From having fun to earning to contributing, a wide variety of motivations will inspire people to engage with games and connect with one another. It is blockchain-based tokens that will enable this. By designing viable token economies into our games, we will enable self-sustaining game growth.
Square Enix believes that true ownership-based incentivization can drive meaningful player contributions in games, and introduce more possibilities for growth. One specific use case that comes to mind is making user-generated content more viable to implement in games.
A brief interlude on user-generated content
Despite being a powerful tool, very few web2 games are able to effectively tap into user-generated content (UGC). For example, Peria Chronicles was an ambitious sandbox MMORPG under development by Nexon with an emphasis on user-generated content. Players can not only craft towns, but also entire quest lines and dungeons for other players to explore (similar to Minecraft, but less instanced and not based on pixelated graphics).
The game was highly anticipated (and would’ve been the first of its kind for the genre), but was eventually suspended in 2019 after many years under development. If I were to speculate, Nexon probably realized that (1) the user content creation infrastructure would’ve been too costly to build from scratch, and (2) it would’ve been very difficult to maintain a healthy number of high-quality creators. NFTs can help solve the latter problem with ownership-based incentivization, but I personally think content-creation tools aren’t robust enough (yet) to build truly compelling content in 3A titles. I think we’ll first see a lot of cosmetics, instanced side content (e.g. Genshin 2.5’s custom domain creator), and basic avatar models (e.g The Sandbox’s VoxEdit tool).
The bottom line
I should emphasize that these technologies are not a panacea that will “fix” bad games, and they entail risks just like any other enabling technology. An obvious one is content dilution due to lack of controls around player contributions (imagine if a Porsche mount was added to a medieval castle siege game).
That being said, I do believe that NFTs and blockchain tech, when implemented thoughtfully, have the potential to deliver greater levels of fun in our favorite games.
Would the financialization of gaming (through token-based open economies) do more harm than good? Is it sustainable in the long term?
The biggest critics of blockchain gaming claim that open economies are detrimental to games because they defeat the purpose of gameplay (i.e. why play when you can pay). They will point to Diablo 3’s infamous real-money auction house (RMAH) as the cautionary tale here; however, as with most things, there’s more than meets the eye. Having played D3 when all of this was going down, I’d argue that the removal of the RMAH was less a function of the open economy that it enabled, and more a function of the poor underlying game design at the time. Let’s explore this a bit further.
When Diablo 3 first launched, the core gameplay loop was notoriously horrendous. Those who played vanilla D3 know this — progression became marginal once you’ve reached a certain point in terms of gearing.
This was because Diablo 3 at launch had really poor item design — legendary gear (the rarest drops) was more often than not weaker than rare gear, and had minimal utility (stat sticks with no special skills, no change to gameplay when equipped). Best-in-slot was usually a full set of rare gear with high trifecta (critical chance, critical dmg, attack speed) rolls. The core end-game loop was thus more akin to “kill monsters for slightly higher stat rolls” rather than “kill monsters for really cool loot that unlocks new experiences and ways to play the game.” It’s a subtle difference, but the former almost sounds like a chore! Imagine grinding 30 hours just for 1% additional crit damage. No thanks.
In a healthy open economy, there is a balanced tradeoff between selling a rare item that you just obtained in-game vs. using it as an upgrade for content progression. In other words, balance between “fun” and monetary value. In vanilla D3, the tradeoff was tilted heavily in favor of selling once you’ve reached a certain gear level, because the core gameplay loop became boring (sounds eerily familiar to some play-to-earn games…). If an item is going to provide 10 more hours of fun, you’d be less inclined to sell.
When items are designed to unlock new experiences for the player, it doesn’t matter if you can “pay to win.” Let’s say a piece of legendary gear you bought on the auction house tripled the amount of arrows you shot — that alone can deliver multiple hours of fun and keep you immersed. The devs eventually realized this, and implemented a massive “Loot 2.0” update which completely overhauled the item design philosophy. Unfortunately, the RMAH was shut down shortly after the update, so we didn’t get to see if it could have worked in the new regime.
In summary, people got bored of the game because there was only 1 gameplay loop, and it was broken. The auction house may have accelerated this realization, but it was by no means the core factor. Scroll through the forums / reddit, and you’ll see that some players found the RMAH experience to be positive (as it provided an alternative end-game loop).
I know this is against the current general consensus of the community, but I actually enjoyed playing the AH. …the idea that I could be farming inferno and have an item drop that's worth billions of gold (or hundreds on RMAH) is also a thrill, granted a different one.
TLDR; item design was the problem in D3, not real-money trading.
But if open economies can work (many MMORPGs have some form of P2P trading), why do so many games still employ closed economies (or elements of it)? The heart of the issue really lies in one word: monetization.
When you sell an item directly to players, you keep 100% of that in gross revenue. In a closed economy, every new player who wants that asset must pay the game directly (since it’s untradeable).
When you enable player trading through an open economy, new players that join can now purchase items directly from other players who have already acquired the asset (which could be at a discount or premium, depending on the context). With web3, developers can easily charge a take rate on these transactions.
I’ve built a rough model comparison that illustrates these dynamics below (Figure 3). This simulation is obviously an oversimplification of actual game economics, but highlights that the monetization potential in open economies depends on two key variables: (1) liquidity premium and (2) trading activity. With web3 games, the hope is that NFTs which impart digital asset ownership can drive the liquidity premium (if I own an asset, I’m likely to pay more for it), and also encourage more player contributions (which drive higher engagement and thus higher transaction volume).
While no one can predict how token-based economies will evolve over the next few years, the bottom line is that web3 has the potential to sustain powerful virtual economies at scale.
Challenges abound, but promising opportunities ahead
Given we are still in the early innings of crypto, I believe this post only scratches the surface of what will be possible in the future. Things could look very different even just 1 year from now. While I remain cautiously optimistic, I’m also incredibly excited to see how gaming companies experiment with web3 and NFTs over the next few years. If anything, gaming companies have always found innovative ways to grow, so definitely count me in for the ride!
Thanks again for reading! Please feel free to leave a comment below as I’d love to hear your thoughts or feedback, including any specific topics you’d like me to cover next.
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Very nice