NFTs (non-fungible tokens) are the new next-big-thing in gaming. I discussed last year the traditional in-game collectible, but NFTs and blockchain present a disruption to the very concept of owning an in-game collectible.
Many startups are promising exactly that, but despite a breakthrough year of millions in funding and billions in valuation, blockchain games have not penetrated the gaming mainstream. They have not reached /r/gaming’s front page in a positive light and have never exceeded 10K average daily Twitch viewers as a genre. Explanations for this are numerous, including the nascency of the industry (started in 2017), low consumer awareness, financial barriers to entry, and games that are just plain not fun and feel more like work than play.
Some think that once the industry gaming giants enter this space with their expertise and resources, then blockchain will truly take off and disrupt gaming as we had known it. However, the industry has not aided the rise of blockchain gaming in 2021, and I see three factors that point to major developers continuing to hesitate on blockchain through 2022.
1. AAA developers are still unconvinced about blockchain’s role in gaming
When a tech innovations is unequivocally exciting, companies race to acquire startups, build out capabilities, and beat each other to the market. For example: 5G for the telecom industry, streaming for media & entertainment, and mRNA vaccines for pharmaceuticals.
In blockchain’s case, the gaming industry is still figuring out whether this is a tech that they even want. Without a positive consensus, it is unlikely that the industry will move quickly to build or buy blockchain capabilities.
Some companies have made positive remarks…
- Take-Two: CEO Strauss Zelnick called himself a “big believer” in NFTs while noting its financially speculative nature and limited use cases so far. Whether Take-Two plans to leverage blockchain is unknown.
- Electronic Arts: CEO Andrew Wilson called NFTs “the future of our industry.” Despite this, EA has not officially confirmed blockchain games in their pipeline, saying that “it’s still early to figure out how that’s going to work.”
- Ubisoft: Ubisoft is the early adopter of blockchain among AAA developers. 2021 was a big year where they confirmed development of Play2Earn NFT games, invested in Animoca Brands, supported web3 startups, and launched Quartz (more details below).
…while others are ambivalent or pessimistic about blockchain:
- Epic: In a series of ups and downs, CEO Tim Sweeney called NFTs an “intractable mix of scams,” but had the Epic Game Store allow NFT games in response to Steam’s ban, but with strict limitations, including clarity on the role of blockchain and lack of access to EGS’ payment service. Then a follow-up tweet from Sweeney suggested Epic itself is not planning on leveraging blockchain in their games.
- XBox: Microsoft head of gaming Phil Spencer is skeptical of NFTs due to its speculative nature, stating that some developments in the space “feel more exploitative than about entertainment.”
- Valve: Games using blockchain technology were banned from Steam via an update to its publishing rules in October. No official reason was provided.
- Industry associations: French union Solidaires Informatique Jeu Vidéo (which represents many Ubisoft employees) and industry journal GamesIndustry.biz have both expressed strong official criticisms, citing the speculative nature of NFTs and negative environmental impact
2. Gamers do not want NFTs and cryptocurrencies in their games
A major red flag for any new product launch is if the customers themselves do not want it. In the case of blockchain gaming, gamers are vehemently negative against NFTs and Play2Earn, its main use case. Journalist Jason Schreier says he has not seen this level of vitriol in his thirteen years of coverage, hypothesizing that:
“NFTs tests players’ trust in a new way. Every game that uses NFTs…is designed around an economy where players can buy and sell digital items to one another. As a result, every player is incentivized not to have a good time but to make as much money as possible…When a video game is coupled with an economy that can impact your real wallet, everything feels different. Your brain shifts from enjoyment to work.”
In 2021, a few major gaming companies tried to launch blockchain products, but each faced a harsh backlash. These failed early efforts will likely discourage peers from following suit anytime soon with their own blockchain launches.
NFT launches by major gaming companies:
- Discord: Just an image hinting at an NFT product was enough to outrage users into threatening to cancel their Nitro premium subscriptions and for Discord to walk back their plans.
- Ubisoft Digits /Quartz: Reception to the December launch of Digits (the NFT for in-game cosmetics in Tom Clancy’s Ghost Recon: Breakpoint) and Quartz (its marketplace) was terrible. The announcement video was downvoted to 95% dislikes before being de-listed, employees hated it to the point that the CEO held an impromptu town hall, and even more embarrassingly, the news went viral that Quartz had sold only 15 transactions in the ten days after its launch.
- S.T.A.L.K.E.R. 2: GSC Game World’s heavily anticipated game, set to launch in 2022 as a Microsoft exclusive, had announced an auction of NFTs allowing owners to be scanned in as NPCs. An immediate massive backlash caused the developer to reverse their position the next day and cancel everything NFT-related.
The stark difference in reception between the blockchain game startups and major gaming companies can be attributed to two very different playerbases. Today’s blockchain game players are drawn not from the main gamer population, but from the web3 savvy and from those attracted to a gamified form of earning and speculating in a decentralized environment.
And unfortunately for blockchain hopefuls at the major game studios, their customers are solidly in the mainstream gamer camp, the ones who are approaching NFTs from a position of mistrust after years of increasing microtransactions, loot boxes, and pre-order mishaps. Friendly faces would have to be found by new companies with a clean reputational slate, targeting people not yet jaded by the gaming industry’s monetization tricks, and that is exactly what the startups today are positioned to do.
3. For the gaming giants, blockchain currently presents too little return for too high risk
All business endeavors face risk, and blockchain is no example, with the reputational risk from environmental concerns, the risk of scams and hackers, and even regulatory risks. But unlike other use cases of blockchain, major game developers are unlikely to realize sufficient return to justify these risks.
Different types of risk in blockchain…
- Environmental: A well-known problem with blockchain is the huge amount of energy it consumes. Environmental concerns are already being cited by critics of NFTs in gaming, and criticism will only increase as awareness of blockchain games increases.
But this risk may be mitigated in the future — new proof of stake blockchains, like Tezos, are greatly reducing energy footprint compared to proof of work blockchains. For example, Ethereum’s 2.0 upgrade is expected to reduce energy consumption by up to 99.95%. Jumping in too soon before energy efficiency improvements come to fruition may result in reputational damage for a major company already under public scrutiny. - Scams and hacks: Scammers have taken advantage of people’s lack of understanding of blockchain to the point that the U.S. FTC has warnings about cryptocurrency scams. And despite blockchain being touted as unhackable at its advent, various blockchains have still been hacked, including Bitcoin and Ethereum, and even by North Korean hackers this year. This adds to the uphill battle for game studios to try to convince skeptical customers.
- Regulatory: This week, the South Korean government has asked Google and Apple to block Play2Earn NFT games from their stores due to the games’ speculative nature. China, which has already banned cryptocurrencies, has warned against NFT games as well. Whether or not this heralds a wave of regulations on Play2Earn across the globe, all game studios will need to contend with regulatory uncertainty for NFT games. And this is before considering the inevitable taxation of Play2Earn earnings, as the Philippine government is working on.
…but limited upside in the gaming
On the other side of the risk-return tradeoff, the potential return of leveraging blockchain is limited for a major game developer, whether it is a new Play2Earn game or a blockchain implanted into an existing game.
The main use case would be an NFT marketplace of minted in-game assets, where a smart contract gives the developer a cut of each sale. But the Steam Marketplace today already serves this function. In-game cosmetics, trading cards, and other accessories drop from games; and for each player sale, a percentage is split between the developer and Valve. Though NFTs would allow each item to be unique and trackable, it is unclear what the value of this would be*. As we see from Ubisoft Quartz, who cares if each common pants and gun skin has a unique identifying number? And unlike blockchain, the Steam marketplace provides protections against scammers and account hackers, and likely uses a reasonable amount of electricity. PC Gamer called blockchain a “glorified Steam marketplace,” but in some ways, it may even be a step backward.
(*Excluding niche use cases such as items used by celebrities or public figures, which can be worthy of NFTs but ultimately present small revenue potential.)
As for non-Steam games, those with in-game collectibles sell via a combination of loot boxes and in-game shops (e.g., League of Legends, Overwatch). Many of these companies may not even want marketplaces, NFT or not, since they would cannibalize existing sales channels.
Currently, there is limited financial and strategic value in blockchain for a major game company, and this is before accounting for all of blockchain’s inherent risks. In just the past few months, top blockchain game Axie Infinity saw major ups and downs that signal potential volatility in blockchain gaming as a whole, though this could also just be the usual vicissitudes of a nascent industry. This turmoil means that a major game developer may find it safer to hold off on blockchain for now and instead, work on their core suite of games while reassuring investors that they are monitoring the situation.
In conclusion
2021 was the breakthrough year for blockchain gaming, and 2022 promises even more. Star Atlas, powered by Unreal Engine 5, is calling itself the first metaverse AAA blockchain game while Wolf Game is expected to provide a truly novel gaming experience, and these are just two examples. With all the momentum last year from NFT sales and funding, blockchain gaming deserves its spot on the radar of entrenched industry players. Though many signs point to gaming giants taking a passive approach toward blockchain for now, their hesitance may be a blessing for the startups and investors fighting in this space.
In the long-term, blockchain may be native to all AAA games, or blockchain gaming and Play2Earn may fork away from traditional gaming. To better understand this, we will need to consider not just who is playing blockchain games today, but who will in the future? Community guilds (e.g., Yield Guild Games) and marketplaces (e.g., Fractal) that have sprung up to serve blockchain gaming are clearly targeted towards the Play2Earn demographic rather than the mainstream gamer, but can the two groups one day merge together in the same platforms? However blockchain gaming ends up evolving, I am sure that the gaming establishment would be more than happy to welcome a new type of gamer to the ranks.
