Why Video Game Makers See Huge Potential In Blockchain—And Why Problems Loom For Their New NFTs

When Ubisoft released a collection of limited edition non-fungible tokens (NFTs) inside of military shooter game Ghost Recon Breakpoint in December, it should have been a watershed moment. The French company behind popular franchises Assassin’s Creed and Far Cry became the first major publisher to include NFTs in a title, what might have heralded a monumental shift in using blockchain technology in gaming.

Instead it was a dramatic blunder and the blowback was swift. Players complained about the 600 hours of playing time (almost a month of playing 24-hours a day) needed to earn just one free item–a cosmetic helmet for in-game avatars. Attempts to drive revenue were even more dismal: one report said just 15 NFTs were purchased for a total of $400.

“It was a little half done,” says John Linden, CEO of blockchain platform developer Mythical Games, who says the key to success with NFTs is to fully integrate them into a game’s native economy so that users have a stake in it. “They just bolted it on. It’s not really a technology to be bolted on.”

Welcome to the cutting edge of video games. Companies from EA Sports to Zynga are eyeing blockchain as a potential pipeline of fresh revenue for global gaming, an industry Fortune Business Insights pegged at more than $200 billion in 2020. Gaming-related NFTs generated $4.8 billion of revenue in 2021, according to data from DappRadar, and represented roughly 20% of all NFT sales during the year, which includes popular items from NBA Top Shot, CryptoPunks and Board Ape Yacht Club.

Is it the early days of a major shift akin to free-to-play and mobile or just another stream of virtual assets enjoying hyper-inflated–and unsustainable–values? While it’s too soon to tell, one of the industry’s leaders, OpenSea, just raised $300 million at a $13 billion valuation. Until the future becomes more clear, here’s a quick guide on the world of blockchain gaming to get you up to speed:

What is blockchain gaming?

It’s an approach where the digital items inside video games–things like collectibles, weapons and cosmetic skins–are real world assets, similar to stocks or bonds, in the form of non-fungible tokens (NFTs). Since NFTs are stored on the blockchain, a public and decentralized ledger, it gives the “right to transfer” to the consumer, giving them control of their own virtual assets. Says Linden, “Everyone has the opportunity to become entrepreneurial in these games.”

What’s the big difference?

Control. Publishers can’t pull the plug on blockchain assets by shutting down a title or removing features from games. The in-game NFT items can exist beyond the lifespans of games and retain value as long as there is demand. Blockchain gaming also introduces the notion of a “play-to-earn” model that “compensates [players] for the time that they spend grinding in those games,” says Nick Casares, head of product at blockchain incubator Polyient Labs. That could come in the form of taking a rare item off the platform to sell elsewhere or accumulating in-game tokens that can be converted into cryptocurrencies like Ether.

Where did the idea come from?

Online multiplayer games such as Runescape and World of Warcraft, which both launched in the early 2000s, proved the utility of robust in-game economies and spawned grey markets that, in some cases, saw consumers spend real money to unofficially buy game accounts or items on third-party sites like eBay. Second Life, a forerunner to the metaverses of today, popularized the use of digital currency that corresponded to real world assets more than a decade ago. While more of a “gamified market” than game itself, CryptoKitties, the collectible virtual pets platform released by Dapper Labs in 2017, was an early success story and inspiration for many blockchain game pioneers, according to Linden.

What is the state of play?

The rules are still being written. Blockchain games of today are “very simple and crude,” Casares says. Unlike titles from major publishers like Epic Games (Fortnite) or Activision (Call of Duty: Warzone), he notes blockchain games aren’t as sophisticated as today’s offerings and have limited interactivity. Meanwhile, Ethereum, the most ubiquitous blockchain platform, is getting ready to launch a more robust 2.0 version while other platforms are emerging.

Despite the slow build, several games have broken through, notably Animoca Brand’s The Sandbox and Sky Mavis’ Axie Infinity. The Sandbox, which some consider a prototype metaverse, is a 3-D open-world mobile game that allows users to buy, sell and develop digital real estate. Its proprietary in-game token, SAND, has a market capitalization of more than $5 billion and, in November, Softbank led a $93 million investment round into the platform. Axie Infinity, which “for all intents and purposes was digital Pokemon for the blockchain,” according to NFT platform Hungry Wolves founder Adam Hollander, generated more than $2.3 billion in sales as of October 2021 and boasts 2.5 million monthly active users, some of which use the game as their primary source of income.

What’s the downside here?

There is still quite a bit to be sorted out, says Linden. Some entire blockchains require more electricity than certain countries, placing strain on the environment and premiums in the form of “gas fees,” or the money it costs a user to tap the network. The play-to-earn model, where users gain and lose assets, raises the question of whether gambling laws should be applied. Other applications, where groups of users pool their money to buy a single expensive asset could someday fall afoul of global securities regulators. Further, the use of in-game tokens and currencies that correspond to real world assets also brings up worries of market manipulation and other possible violations of securities regulations. While future iterations of Ethereum, or other potentially more efficient blockchains, could offer a more environmentally friendly solution and cheaper fees, the regulatory concerns are not so easy to solve. “Anytime you create systems where a certain type of behavior can be incentivized, you are running the risk of creating an environment that encourages gambling-like activity,” Casares says. “I think once we have more clarity from regulators, we’ll have better frameworks and ideas and approaches for guiding people either toward doing the right thing or actively discouraging them from doing the wrong thing.”

What’s next?

It all depends on if and how quickly the big game publishers fill the pipeline. So far, enthusiasm has been muted. Linden sees in the hesitance an echo of mobile gaming’s early days, when users scoffed at the new abridged versions of the titles that were being released. (Mobile gaming has since exploded, and a record eight games generated revenues greater than $1 billion in 2021, according to mobile app data firm Sensor Tower.) Ukrainian game studio GSC recently canceled the NFT-related elements of its upcoming S.T.A.L.K.E.R. 2 game. Valve, the parent company of video game platform Steam, banned blockchain applications this past October. EA Sports and Epic Games have both expressed interest in the technology, while Zynga recently announced a partnership with blockchain gaming platform Forte to develop NFT-based games.

The upside? Interest in NFTs doesn’t seem to be wavering. DappRadar, which tracks global NFT sales, says that transactions totaled roughly $25 billion last year from nearly $100 million in 2020, while major crypto exchanges like Coinbase, which has more than 70 million users, are preparing to launch NFT marketplaces. Linden is a believer: He sees Ubisoft making another run at the technology and major developers releasing titles that include NFTs as early as this year. Hollander is a believer too. “We will start looking at the world in a pre- and post-Coinbase era,” he says. “A year ago, the large majority of people that are deeply into NFTs today didn’t even know what an NFT was.”