Gaming and Non-Fungible Tokens

Gaming and Blockchain

The global gaming industry generates revenue across three market subsets: mobile, PC, and console gaming, which together are valued in the hundreds of billions of dollars and growing. However, while industry incumbents profit from this robust growth, players generate little lasting value for themselves. After investing in expensive consoles, PCs, or mobile devices, players enter gaming environments that offer a tiered-access user experience. In these traditional games, money flows in one direction: Players must spend money to access in-game content and exclusive features.

In contrast, blockchain-enabled games — many of which are decentralized applications (dApps) — focus more heavily on generating value for players. This dynamic introduces a paradigm shift that allows players to better capture the utility and value of assets acquired through in-game purchases, regular gameplay, or promotional events. For instance, when a player purchases an armor upgrade in a traditional game, their only benefit is enhanced gameplay within the context of that one game. However, in a gaming ecosystem that utilizes cross-platform non-fungible tokens (NFTs), the same armor can be tokenized in a way that transforms in-game purchases into transferable assets that may confer benefits across interconnected games or be exchanged for money or other digital assets.

Underlying blockchain networks enable the generation and deployment of these NFTs within multiple gaming environments. Because NFTs are unique and can be designed to retain value beyond the game in which they originated, blockchain-built games have the potential to expand gaming economies dramatically, establish new gaming categories, and fuel development of new games. To explore how this process might unfold, it’s important first to understand NFTs.

Non-Fungible Tokens 101

Non-fungible tokens aren't exclusive to the blockchain gaming industry. These tokens can represent digital and real-world assets like artwork, real estate, collectibles, and even personal identity. As a result, NFTs have a wide range of practical applications that appeal to multiple industries and use cases, and their adoption is accelerating. In contrast to most other digital tokens, NFTs exhibit three distinct characteristics:

• Non-fungibility: As the name implies, each NFT is a cryptographic token that represents something unique or non-fungible, meaning it’s not interchangeable with another NFT. The metadata inside each NFT exists as a permanent, unalterable record on the blockchain. This record describes what the token represents, similar to a certificate of authenticity, as well as the token’s ownership history and transaction record (title). In contrast, many cryptocurrencies, such as bitcoin (BTC), ether (ETH), and other utility tokens, are fungible — i.e., one BTC is effectively identical to any other — and therefore are not unique in this sense.

• Rarity: The scarcity of each NFT is a crucial component of what makes them desirable. For instance, in the CryptoKitties game, users collect and breed digital cats that are each embodied by a designated NFT. Some of these CryptoKitties are considered rare collectibles, which consequently increases their asking price among collectors who value their provable scarcity. In 2018, a CryptoKitty named Dragon sold for 600 ETH, which was the equivalent of $170K at the time.

• Indivisibility: Cryptocurrencies like bitcoin are divisible into smaller units, given their fungibility and intended use as a medium of exchange. In contrast, most NFTs must be bought, sold, and held as a whole unit and are therefore indivisible — in the same way that you cannot purchase 10% of a concert ticket or 60% of a plane ticket.

Now that we’ve discussed the defining characteristics of NFTs, we can begin to explore the advantages of deploying these tokens in the context of online gaming.

The Benefits of Gaming NFTs

Although many NFTs use Ethereum’s ERC-721 token standard, NFTs are also prevalent on several other networks, such as TRON (Blockchain Cuties), EOSIO (EOS Knights), and NEO (Blocklords). The many benefits of decentralized gameplay include:

• Ownership: Traditional in-game purchases are one-time, non-transferrable investments that remain locked in a single gaming world. In contrast, using NFTs in gaming environments grants players ownership of their in-game assets instead of game developers. Through blockchain technology, gamers can save in-game purchases, sell them to other players, or move them into other supported games.

• Provable Scarcity: Collectors value rarity and authenticity, and the scarcity of in-game NFT purchases is provable through the immutable records embedded in an NFT’s underlying blockchain network. This distributed public ledger validates the number and uniqueness of each NFT as well as its ownership history.

• Interoperability: Traditional online games exist on centralized servers. As such, in-game assets exist within proprietary systems that don't communicate with others. In contrast, decentralized games exist on independent blockchains that act as the backend framework for other interconnected games. As a result, game assets represented by NFTs can be designed to be interoperable across different environments. For instance, two games built on the Ethereum network can feasibly support the same in-game assets like vehicles, armor, or even entire characters.

• Immutability: When a traditional online game shuts down, users traditionally lose all of their in-game purchases. NFTs, however, exist independently of a specific gaming platform and live on the blockchain itself. As such, in-game purchases can be bought and sold regardless of what happens to the game, and new games can be designed to plug into an existing blockchain protocol. Furthermore, blockchain-enabled game assets cannot be duplicated or tampered with because of the permanent record each NFT generates upon issuance.

NFTs and the Future of the Blockchain Gaming Industry

Although the adoption of NFTs in the gaming world comes with benefits, it also presents significant obstacles to overcome. Most notably, NFTs need to be made more appealing and intuitive to mainstream consumers who might not be technically oriented. And because NFTs possess intrinsic value, there's a risk that some will be used predominantly as speculative assets. This potentiality could motivate players to purchase in-game assets with the hope of selling them for future profit instead of using the assets within the gaming ecosystem as intended.

Despite these challenges, the potential for profit within the gaming industry will motivate more non-blockchain-focused brands to experiment with NFTs, likely by forming partnerships with third-party blockchain projects that have the technical expertise needed to bring their vision to life. Simultaneously, the broader success of gaming dApps will likely play a role in further catalyzing NFT infrastructure improvements and drive the development of innovative solutions that unlock mainstream adoption.