Blockchain and Gaming — What’s in Store for the Future?

Disclaimer: this blog post was put together for informational purposes only based on my review and analysis. This should not be construed as a solicitation, offer, or recommendation to acquire or dispose of any investment, engage in any transaction.


By Mattia Mrvosevic — Co-Chief Investment Officer at Eterna Capital


Introduction


The gaming industry is growing so fast that data analytics and consulting company Global Data believes it will reach over $300 billion by 2025 [1], with billions of dollars in profit and over 2.5 billion gamers around the world.


According to Newzoo, the global market intelligence company for games, esports, and mobile [2], the PC market represents 25% of the total market share in 2019 and is expected to grow by 2.8% compared to 2018, the Console market represents 30% and is expected to grow by 7.3%, and the Mobile segment stands at the majority of the global games market at 46%, expected to grow by 9.7% this year, as shown in Figure 1 below.


Figure 1–2019 Global Games Market (Source: Newzoo)


The current trend of video games is to offer a “free-to-play” business model, whereby players can enjoy a game for free (i.e. the popular Fortnite) by paying for specific add-ons while playing (i.e. new characters, new costumes, new parts of the game etc.).


People are willing to spend thousands of dollars to buy additional downloadable content [3]. For instance, out of Fortnite’s $2.4 billion of revenue in 2018, over one billion was generated through the sale of in-game items [4].


If you are wondering why people are spending so much money on virtual items, you have to remember that beyond game-addiction, top gamers in rankings of the most popular games see million dollar prize pools when they win gaming championships. For example, Fortnite developer Epic Games created a pool of $30 million on the line for its 2019 World Cup, with the winner of the solos tournament receiving $3 million, and each player of the duos side receiving $1.5 million [5].


The sale of additional add-ons in the free-to-play model represents the main income of mainstream games and is what goes into the accounts of game developers.


Furthermore, add-ons that are bought or gained in the game are then sold on different marketplaces online, but, with important numbers like those presented in Figure 1, gaming platforms are unfortunately rife with opportunities for scams.


Video games face several issues


There are a lot of frauds in the current gaming landscape [6], but the most common types are:

  • Account takeover (ATO): in this situation a fraudster hacks the online account of their target and uses the account to send spammy messages to other gamers, for example sending a malicious link to what is a fake promise to receive free game add-ons to then steal username and passwords of their victims once they input the data via the malicious link. In addition, their victim’s account can be hacked too, and these accounts can be sold for big money especially if the player was performing at a high-level or had rare add-ons. Being hacked can of course cause frustration and bring players to leave a game.

  • Hacks on items for sale in the secondary market: there are many legal and illegal marketplaces in which people exchange game items for real money (including game money for real money). The main issue of these marketplaces is that the majority are not certified by the videogame publishing companies and, as such, don’t offer a secure environment to trade. Scammers get payments with real money and don’t deliver the promised item to their victims, or they can deliver a fake in-game item (using a hacked code) that doesn’t work once the victims start using it. In addition, some websites offer the possibility to buy hacked skills and characters.

In addition to these two types of frauds, payment fraud is a top concern for gamers [7] and one-third of paying gamers say that worrying about fraud makes them less likely to spend on add-ons. In addition, always according to the report published by Newzoo, a large amount of paying gamers (44%) think that the payment experience within games can be improved, with the majority asking to see more loyalty/reward programs offered for in-game payments, a simpler and quicker payment process, and having more payment options available.


Some marketplaces, such as Valve’s Steam Community Market, have become so big, that fraudsters use them to launder money by buying and selling in-game items that are then cashed out with real money by leveraging these platforms’ lack of traceability to the source [8]. Valve itself has admitted that worldwide fraud networks have recently shifted to using the exchange of items of their popular game Counter Strike to liquidate their gains.


Blockchain in Gaming


Fortunately, blockchain can provide several solutions to the aforementioned issues.

Game add-ons, gameplay inputs, players’ accounts can be propagated and secured by the blockchain, allowing a better game experience and giving developers the possibility to formulate new genre of games by leveraging elements that are unique to the blockchain.

In particular, developers can benefit from blockchain technology in different ways [9] [10] [11] [12] [13]:

  • Real ownership: all in-game items can be placed on a blockchain, for example using Ethereum’s ERC-721 standard that allows each in-game asset to be represented by a unique, non-fungible token (NFT), meaning that each item is virtually unique and, as a result, not interchangeable. This means that players can be sure that the items are linked to their game wallet and will be theirs forever, with developers being unable to take these items back (those in charge and running the servers are currently “omnipotent and indisputable”, as they have the complete power to edit rules and items).

  • New revenue streams for developers: Blockchain technology enables game publishing companies to also embed rules into their smart contracts codes that enforce a transaction fee upon each transfer of the asset (i.e. the in-game NFT). As a result, users are free to trade their assets as they see fit, and publishers can generate revenue beyond the primary market.

  • Decentralised marketplaces: putting in-game assets on a blockchain potentially allows the creation of decentralised marketplaces, whereby gamers can freely exchange items in a trust-less way. Smart contracts in fact allow users to be confident that they are receiving authentic items since they are tethered to the blockchain.

  • Reward programs and play-to-earn gaming: every game or every game publishing company can have their own token that can reward people when playing if they achieve certain milestones, rewarding them either with tokens tradable for game add-ons or real money. This will result in higher engagement rates among players due to the greater value perceived by the users, and could bring much more people to gaming as they can see this as an additional source of income by leveraging a play-to-earn mode.

  • Inter game transfers: once game add-ons are put on the blockchain, these can easily be moved across different games, with people avoiding the need to start from scratch to gain certain items, improving the user experience by allowing the user to have a unique identity with items used across multiple games.

  • Fair Gameplay: the implementation of blockchain prevents hackers and cheaters from disrupting the game, making the playground safer and transparent. In addition, players can be sure that game publishing companies put transparent rules to manage in-game items (i.e. having a specific probability to find a certain rare item can be verified on the blockchain).

  • Better payment experience and opening to new markets: blockchain is known to bring significant benefits for payments [14]. Adding several digital currencies as a way to buy items can also enhance the experience and respond to the requests of younger generations [7]. Accepting global payments isn’t easy — developers’ ability to accommodate gamers in Brazil, China or India requires them to run a provider that accepts both the card and the currency, and this doesn’t even account for people who are unbanked. By leveraging blockchain, gaming could see a large inflow of new capital.


Current status of blockchain in gaming


Figure 2 — CryptoKitties — Genesis


The most notable application of blockchain in gaming is probably that of CryptoKitties, a crypto-collectible game on Ethereum where users breed and collect unique cats represented as ERC-721 non-fungible tokens. The entire scope of gameplay turns around buying and auctioning these cats to trade and breed. As of December 2nd, 2017, Genesis, the first ever created cat, was sold for ~$115,000 on that day. The game’s popularity in December 2017 congested the Ethereum network, causing it to reach an all-time high in number of transactions and slowing it down significantly.


The interesting “On Chain Chess” project [15], a project that studied the possibility to put the game of chess to run directly on-chain in Ethereum via smart contracts, proved that running a game entirely via smart contracts is incredibly costly. For example, to verify a checkmate, all possible moves have to be calculated and verified, which is unfeasible on the blockchain. The team actually implemented the logic in Solidity (Ethereum’s programming language), only to find out it exceeded the current limits of a transaction, so it is computationally extremely expensive to verify and not suitable to be run on-chain. Chess is a simple game, so the prospect for games running on smart contracts seems minimal at this moment in time.


Another example of a blockchain game based on Ethereum is Decentraland, a virtual reality world. The project raised $24m via an ICO in August 2017 and sold out in seconds. Decentraland represents a map composed of 90,000 ERC-721 NFTs that correspond to unique positions in a 300x300 grid. Here land owners can create their own scene through the Decentraland Builder tool and script different activities through the Decentraland SDK. Each land owner can trade their parcel for MANA (the currency that govern Decentraland). In Decentraland, players can trade pieces of land among each other, but cannot travel the world and wander across districts yet — this “world-explorer” feature is close to be released, but for the same reasons as the “On Chain Chess” game, it is doubtful that every single input and interaction will be recorded as an Ethereum transaction given the platform’s limitations.


Figure 3 — Decentraland


A different approach to gaming is provided by Enjin [16] [17], a blockchain project that is providing a suite of tools and resources for gaming on Ethereum. Enjin has its own token called ENJ, whose primary function is the minting of non-fungible ERC-1155 tokens, NFTs specifically designed for gaming, that enable more efficient trade and transfer on the Ethereum network than is possible through ERC-721 alternatives.


Enjin has an official partnership with Samsung and it is now working with Microsoft to pilot tokenised rewards for developers who use Microsoft’s Azure platform (the giant’s blockchain enabled cloud computing service). Microsoft plans to reward developers with NFTs which have a limited supply.


Another corporate that is exploring blockchain is Ubisoft. It has recently signed a partnership with DLT-driven gaming platform Ultra [18] [19], described as Steam on the blockchain, where users can earn digital currency, buy games, and resell them.


Ubisoft is the gaming giant responsible for the Assassin’s Creed franchise, Far Cry and many other popular titles. Ubisoft is currently tasked with being a corporate block producer of Ultra, though it is interested to become a technical block producer, which will require the company to actively contribute to the development of the platform while also providing support to the other corporate block producers.


Figure 4 — Ubisoft


Beyond traditional affirmed companies looking into the blockchain space, many new gaming related blockchain companies raised money in 2019. For example, in November 2019 Mythical Games [20] [21], a Los Angeles based company, raised $19 million, bringing total funding since the launch to $35 million. The round included many international investors such as Galaxy Digital and #Hashed.


The aim of Mythical Games is to create blockchain-based games where players can make money through digital ownership.


While the road ahead is very interesting, there are still many challenges to solve in order to exploit everything this technology can offer to the space.


What are the main challenges encountered by blockchain applied to gaming?


As seen in the previous chapter with the example of the On-Chain Chess project, we are still far from seeing an entire game developed on-chain. But companies are using blockchain in different capacities to exploit its potential.

Some of the limitations that we are currently facing are [22] [23]:

  • Scalability: because blockchains tend to be much slower than centralised networks, this may limit adoption of blockchain based games on a global scale (just think about the CryptoKitties example). New scalable platforms such as Algorand, Tezos, Dfinity etc. could serve as a catalyst to solve the limits imposed by scalability.

  • Centralisation: Not all blockchain-based games are fully decentralised. The majority are actually running on centralised servers, bringing the limitations of centralised architectures with them.

  • User Experience: blockchain infrastructure is currently congested with elements that are too difficult or that take too much time to be tackled by the users, including creating accounts, installing wallets, managing private keys, etc.


Conclusion


Blockchain can support the gaming industry in different ways. The first implementations of blockchain in gaming are already on the horizon, with large gaming companies experimenting with NFTs. We expect blockchain to be implemented within other aspects of the gaming experience, such as through decentralised marketplaces, play-to-earn models and inter-game transfer of assets. However, we are at the very early stages of this technology and it remains to be seen whether a full game can be built on-chain given the existing limitations within blockchain infrastructure.


One thing is for sure, blockchain is already enabling developers to formulate new genre of games by leveraging elements that are unique to this technology, thus enhancing the gaming experience and empowering the growing gaming market.


The potential for blockchain in gaming is clear to see, and a shift towards free-to-play gaming means the need for such solutions in the market will continue to gain interest.



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