Crypto’s Next Catalyst: Gaming — Part 1

Summary

• The gaming industry now generates over $130 billion in revenue globally each year. This is more than double the global movie (40.6B) and music industries (17.3B) combined.
• Gaming live streamers as a whole on sites like Twitch garner higher viewership and stronger engagement than most traditional sports and top athletes. Gaming influencers are the new superstars.
• Game developers could integrate smart contracts and non-fungible assets to enhance their item infrastructure and generate new streams of revenue. Non-fungible tokens can be used to create transparent digital scarcity, stimulate player engagement, and allow secure and monetizable ownership of assets.

Looking at DappRadar, exchanges have proven to be the most successful blockchain applications thus far. IDEX, consistently the #1 tracked dapp, maintains around 2000 daily active users and ~10,000 transactions every 24 hours. Within the entire Ethereum dapp ecosystem, there’s only about 10,000 daily transacting users. This is still a drop in the bucket compared to top apps that have tens of millions of DAUs. Which sector is most suited to usher in the next wave of mainstream adoption and what are some of the sensible use cases where this tech can bring the most value?

Screenshot of the Ethereum dapp landscape from October 9th, 2018.

A clear pattern emerges as you analyze the ecosystem landscape. We’re seeing an abundance of blockchain games jumping in and out of the top 10. Currently, almost all blockchain-based games have simple mechanics, boring gameplay, and charge exorbitant amounts for items that have little utility. New releases see a brief surge in usage after launch then quickly watch their user base fade. This is because most of these games lack depth and aren’t very fun. Frankly speaking, they suck.

Successful games from the traditional gaming industry have mastered the art of user retention and addictive gameplay. Blockchain-based games are in a nascent phase where they jamming blockchain features into an experience that’s fundamentally lacking and onboarding hurdles are too high compared to the fun level. This article is meant to serve as a primer for people unfamiliar with the size and viewership of the gaming market as well as ways blockchain features can enhance the industry.

AAA Blockchain-based Games

As the industry continue to mature, we’re going to see more AAA game developers enter the blockchain gaming arena. As the educational and technical challenges are overcome, many will likely employ a light touch integration that creates a valuable feature for gamers and improves inefficiencies around ownership, scarcity, and secondary item trading. For others, it may become a core element of the gameplay as the power of fully decentralizing a quality game starts to proliferate. Exciting projects like Gods Unchained, Axie Infinity, and Project Genesis are already starting to materialize that exhibit the right blend of decentralized features and high quality gameplay.

The $100 Billion Gaming Market

Most people outside of the gaming industry significantly underestimate its market size and influence. Leading gaming industry research firm Newzoo projects 2.3 billion gamers across the globe and $137 billion in global revenue this year. To put it another way, gaming revenue is more than double the global movie (40.6B) and music industries (17.3B) combined! There’s been a massive shift in the way we consume media over the past 10 years. Millennials aren’t in the living room with their parents watching reruns of Seinfeld. They’re in their rooms playing video games, watching YouTube videos, or watching their favorite gaming influencers stream live on Twitch.

The gaming market includes everything from playing casual mobile games on the train to high-octane competitive shooter games on a PC. Asia is currently the largest market in the world for gaming, both by sales and also by viewership. Live streaming has quickly become one the hottest online trends in China with much of this viewership happening around esports, the booming industry that has emerged around the world’s most competitive games.

The level of online viewership for esports has grown tremendously fast and collectively represents one of the most popular spectator sports in the world. This isn’t collecting cats or crushing candy. These are hyper competitive live events that require split-second decision making, masterful hand-eye coordination, and months of practice with your teammates. These matches are organized by leagues and are streamed live and watched by hundred of millions of gamers around the world. Esports are the new college football.

Live Streamed Gaming Events are Outpacing Traditional Sports

Who would want to watch teenagers clicking away playing video games you might ask? It turns out over 200M people per month on Twitch and 200M everyday on YouTube! Twitch, the Amazon-owned live streaming website, is the 14th most trafficked website in the US (35th worldwide) and host to 2M individual streamers each month. Similarly, sites in China such as Douyu and Huya boast even larger numbers. Just as you may never play football, but you enjoy watching the SuperBowl, gamers enjoy watching famous players stream their gameplay. Viewers can learn and interact with them through chatting, making it a more engaging experience than traditional televised sports.

Twitch, because of its embedded chat and tipping system, is one of the most engaging ways to watch something. The streamer’s chat box turns into a stream of instantaneous reactions, references to other popular jokes, and direct interaction with the influencer through voice enabled donations and Q&A sessions. A typical 8 hour stream of a well known streamer will have thousands of messages sent and hundreds of dollars donated to the player through Twitch chat. StreamLabs, one of the add-ons used by streamers for donations, paid out $34 million in tips in Q1, up 33% from the previous quarter.

The infamous Drake & Ninja stream that broke the record for an individual stream with over 600,000 concurrent viewers.

Watching traditional TV has become far less responsive than gaming. Between reruns, depressing commercials, lack of live content, and no way to directly interact, the viewing experience is extremely shallow. With streaming websites like Twitch, this dynamically personalized content and ability to engage with the content producer in real-time deepens the experience and results in astonishing viewership for high profile events and popular players.

Esports Investment & Viewership

This is TV for the internet and the viewership levels are staggering. League of Legends, one of world’s most popular competitive games, had a World Finals viewership of 36 million unique viewers. That’s more than the 2016’s NBA Finals of 31 million. Individual gaming streamers, armed with nothing but a webcam and a colorful personality, are monetizing at incredible levels and becoming the superstars of tomorrow.

Investment is pouring into the esports space at a feverish pace. Traditional sports teams like the Yankees, Mets, Dodgers, and Cowboys are also putting up big bucks to build out the professional infrastructure around these star players in the Overwatch League. In the past 12 months alone, top teams like TSM raised $37 million, Cloud9 $25 million, Team Liquid $25 million, and NRG raised $15 million. This is perhaps the most valuable demographic in the world and investors are rushing to capitalize on this growth.

Live Streamers are the new superstars

At the center of this streaming phenomenon is Tyler “Ninja” Blevins, the most popular streamer on Twitch. In April, Ninja was #1 among all athletes worldwide for social interactions, beating out the likes of Cristiano Ronaldo and Shaq. Recently, the rapper Drake joined Ninja for a 6 hour session of the popular kid- friendly shooter game Fortnite. Together, they broke the Twitch record for viewership for a single individual with 635,000 concurrent viewers at the peak of the broadcast. Their stream went on for about 6 hours with concurrent viewership maintaining 400,000+ so the total unique viewership is estimated to be over 3 million. This level of viewership exceeds hit TV shows with multi -million dollar budgets like the Westworld season finale, which drew 2.1 million viewers.

Ninja garnered more Twitter interactions than any other athlete in April.

Ninja has about 150,000 paid monthly subscribers. Base subscriptions are $5 which give subs access to special Ninja-themed chat emojis, a prominent logo next to their name in the public chat box, and the ability to have their monthly resub message read aloud on stream to everyone watching. Ninja is bringing home over $500,000 each month just from his Twitch subscriptions alone. He also has a YouTube channel with over 18 million subscribers and over 3 million Twitter followers which he is monetizing. This doesn’t include any of the major non-endemic corporate sponsorships he has like Red Bull, PSD Underwear, and the recent UberEats deal.

The Fortnite Craze

Fortnite, the most streamed game on Twitch, is breaking records left and right. In March, Fortnite raked in $296 million in revenue , primarily from selling skins. A skin is an in-game item that changes your character’s appearance. They don’t make your character more powerful or likely to win. Skins are merely an aesthetic upgrade that can be shown off to other players and differentiate your character. The game is free to start playing and new skins are released throughout the week in the in-game store which are typically $10 — $20 each.

With Fortnite being such a big hit on Twitch, game companies are now enlisting big name streamers to play their new releases in front of this coveted demographic. We already see non-endemics like Geico, Mastercard, and Samsung deploying large marketing spends to Twitch influencers. It’s not uncommon to hear that larger streamers are getting paid $2,000 per hour to promote a new game.

In less than a year from its initial launch, the game now has 125 million players and has announced its plan to give away $100 million in prizes through 2019 through live streamed competitive events. The game has gotten so popular that parents are now enlisting tutors to help their children excel at the game. Fortnite has even been mentioned in over 200 divorce filings.

Selling Skins is Big Business

When you think of the word collectables it usually means a physical object like a sports jersey or a rare baseball card. The worldwide traditional collectibles market generated more than $370 billion in 2016. Just as a basketball superfan was willing to purchase the shoes Michael Jordan wore in his famous 1997 “flu game” for $100,000, gaming fans can be similarly obsessed with collecting exclusive digital memorabilia.

Earlier this year, an esports fan paid $61,000 to purchase a rare skin for his in-game rifle that was owned by a famous player who had just won a major Counter-Strike tournament. While this was among the highest ever paid for a cosmetic in-game item, the skins trading market has been booming for years. According to a Narus Advisors report, gamers spent an equivalent of nearly $5 billion on skin trading and wagering in 2016. The market is already massive and this is only from a few games.

This rare skin previously, owned by Counter-Strike player Skadoodle, sold for over $60,000 after his team won the ELeague Boston Major tournament.

Games like Fortnite feature a closed item system, whereby items are non-transferable to other players and can never be sold. This creates a situation where the value of your digital goods are trapped inside that particular game’s economy. Items cannot be liquidated and players cannot move their digital wealth to other gaming ecoystems. Games like Counter-Strike popularized tradable skins and have given birth to a multibillion dollar market, but I believe this is just the beginning. What if there was a way to enhance this booming item infrastructure and bring true digital scarcity to the gaming world?

Blockchain Gaming Use Cases

The gaming industry can serve as the educational trojan horse towards mainstream consumer adoption of blockchain applications. As a gamer and avid crypto enthusiast, I believe there’s a strong correlation between the two. Gamers already grasp the concept of digital asset trading and are technologically savvy enough to adopt new trends early. Gaming is already the largest entertainment medium by far and it’s ripe from blockchain disruption.

In a time where dapp adoption is sorely lacking, the gaming industry can be the conduit for which our industry can showcase some truly useful applications that enhance the experience for gamers. Part 1 explores what I believe to be the lowest hanging fruit, non-fungible tokens. Creating transparent digital scarcity within games through the use of non-fungible tokens, enhancing the trading infrastructure of digital assets, and leveraging the Twitch streaming phenomenon to educate and onboard new users.

Non-Fungible Tokens

Digital collectibles have garnered massive interest in the blockchain space in recent month mostly due to the proliferation of non-fungible tokens (NFTs) stemming from CryptoKittie’s success. Simply put, non-fungible tokens are a special type of crypto token used to represent digital assets that are unique. If you give someone a $20 bill and they give you back two $10s, you both understand that it’s the exact same value. Money has fungibility. If you were to give me your car, and I bring you back the same make and model but it’s not “the same” these objects are non-fungible in terms of value.

Different types of collectibles from physical to digital.

Whether it’s a 1st edition X-Men comic book, an original work of art, a signed Michael Jordan jersey, or a digital trading card, NFTs can track and represent ownership in a variety of assets. The traditional gaming industry is already accustomed to concept of unique assets with skins and legendary items. Currently, game items are not created using a blockchain or similar public tracking system so there’s no way to distinguish between 2 that look the same. Moreover, valuable items in-game are typically not tradable and have no transparent issuance mechanism from the game’s creators. This creates a world of artificial scarcity and having to trust the developer about ownership history.

Applying NFTs to Game Economies

There are thousands of digital items that exist that look the same but are owned by different players and have different ownership histories. A certain item might have been owned by a world champion, giving it extra value similar to an autographed home run ball in the world series. Without some kind of digital signature, it would be impossible to know which exact item belongs to a famous gamer unless you asked the game developer directly to verify its authenticity.

Understanding the providence of a digital item used by a world champion or famous streamer is a power feature that could create a large for market for digital esports memorabilia and “celebrity skins”. Non-fungible tokens, which act as digital representations of unique items, allow this type of transparent verification of supply and authenticity without having to trust the game developer. The issuance date is time stamped and the total supply is available through a block explorer for anyone to independently verify. Player’s truly own their assets as they can be held externally from the game in a personal wallet.

Blockchain enabled items can even carry over into sequels of popular games or represent 2 seperate items across 2 different games, creating a multiverse like Enjin is working on. Going one step further, NFTs can even “own” other NFTs. In this case, transferring the token composition means transferring the entire hierarchy of items, similar to a bundle. An interoperable world of linked game economies and truly rare assets is quickly developing.

Creating True Digital Scarcity

In the current paradigm, game developers are their own central banks. They internally, and non-transparently, dictate an item’s supply and how many can be bought. This usually means an infinite amount. These items are made artificially scarce, creating uncertainty for gamers over the future value of their assets which are also non-transferable in most cases. There’s no public supply cap on how many of each item currently exists or its inflation rate. Bringing enhanced transparency to in-game economies is a big step and will become increasingly crucial for reputable game developers.

Small and medium sized game studios are always looking for ways to introduce interesting new gameplay mechanics to compete and differentiate with industry titans like Fortnite. Being able to apply true digital scarcity to rare items could be a huge boon for the already booming skins market. For gamers, the result is more secure ownership of their assets, a reliable trading environment, and verifiably scarce collector’s items. Streamers and game developers can use these exclusive items to enhance marketing campaigns through tipping and gifting.

Example of weekly skins and cosmetics from Fortnite.

Game developers that choose to create an item as a NFT are making a credible commitment about the item’s supply and lineage that players can independently verify. In my view, there’s a sense of disdain for certain developers who rely too heavily on selling an infinite number of skins and forbid open trading systems. This would be a huge step in a wider ethical discussion on transparency within the gaming industry and allows players to monetize their assets.

New Revenue Streams: Secondary Trading Revenue

There’s a lot of discussion on whether opening up an in-game economy to secondary trading grows the overall size of the market or cannibalizes sales. While there’s validity to both sides, I believe having an open system where players can trade assets with high liquidity and transfer digital wealth across ecosystems deepens the experience. Players will feel more compelled to spend more knowing they aren’t taking a 100% loss on all in-game purchases. Marketplaces that are largely trustless and smart contracted based open up new streams of revenues and make trading a safer and more secure environment for players.

Open systems create a positive feedback loop where players can receive tangible rewards for time spent in-game and they can monetize that value. As seen in games like Counter-Strike and Magic The Gathering, a widely adopted open item system creates a robust secondary market for trading and wagering. When applied to competitive games, this results in higher viewership for events as having something on the line makes spectating more fun and engaging. Game developers, once adopting an open system, could capture this secondary market revenue by utilizing smart contract-based marketplaces.

The majority of Counter-Strike item trading and wagering happens on 3rd party, fully centralized marketplaces. These grey marketplaces are operated outside the control of the game developer who receive no revenue despite transaction fees being high (typically 15 -20%) and billions in volume. Game developers could capture millions of dollars in trading fee revenue if they were to bring this secondary trading in-house. All trades would be tracked and executed automatically, resulting in less fraud. A revenue share between the seller, developer (and potentially streamers), along with valuable data like ownership history, would all be transparently baked in.

Increasing Engagement on Live Streams

My favorite potential use case goes hand in hand with the Twitch streamer phenomenon. Game developers could create NFT skins and give them out to famous players to distribute to their streaming community and at in-person events. This should increase ROI on game promotions which as I mentioned earlier are increasingly becoming the main marketing vehicle to promote new games and spread brand awareness.

Epic Games, the developer behind Fortnite, could release 1000 limited edition Ninja branded skins in celebration of his latest tournament victory. Ninja would give these skin away to his viewers and show them how to operate a wallet. Viewers who won or earned these exclusive items could use them in the game game or instead choose to sell them on a marketplace. Imagine the boost to adoption of Ninja demonstrating using MetaMask on stream to 100k live viewers. While it’s unlikely Fortnite, which is already a money printing machine, would opt to do this, the next Fortnite might.

CNBC interviews Ninja on Fortnite success and making over $500,000 per month on Twitch.

NFT skins are verifiably rare and provably authentic collector’s items. The unique identifier, which is the digital signature on the blockchain, would be used to prove the authenticity of pro player ownership, without having to rely on direct verification from the game’s creator. I believe this transparent issuance and fluid tradability will create something akin to pro player memorabilia in the digital realm. Players would be able to track down which exact skin is Ninja’s personal one that he wears in-game or auctions off to charity. A good analogy would be Lebron James taking off his jersey, signing it, and giving it out to a fan during an NBA game.

Education & Integration

There’s a lot of theory crafting, but no major players in the traditional gaming industry have made a significant move yet. Unfortunately, most large game developers still see blockchain as a nascent industry that’s risky and confusing to get involved with this early on. Because of this, small and medium sized game developers will be the first to experiment with these new features. They’re more likely to adopt new tech early in order to compete with the Blizzards and Riot Games of the world.

User onboarding is probably in the industry’s biggest pain point right now. On ramps like Coinbase are one small piece to solving this problem, but we need to make loading and using a wallet painless with as few steps as possible. Scalability, while partially solved by creating private sidechains, still hasn’t been demonstrated with a large game and requires a block explorer for the public to verify transactions. Developer API tools and sidechain solutions like Enjin and Loom Network should help alleviate this issue in the near future, followed by sharding longer term.

Education will be key during this early adopter phase with lackluster quality games and mainstream onboarding hurdles. Game product teams and upper management need to become familiar with the integration requirements and world of crypto. Saying ERC-721 non fungible tokens is the quickest way to lose someone’s attention so being more thoughtful with marketing terms like limited edition items and streamer skins is a better approach that still conveys the concept to mainstream players.

The Future of Blockchain Games

I predict in the next 5 years we’ll see a massive World of Warcraft style game that’s largely decentralized and adopted by tens of million of players. The middle class of gamers, the ones that aren’t making hundreds of thousands of dollars a month streaming, deserve a better type of AAA blockbuster game. A decentralized World of Warcraft that employs radical transparency and gives players ways to monetize their digital assets is the killer gaming app. Seeing a game like this succeed will incentivize the largest game developers in the world to adopt this technology.

While I don’t think we’re there quite yet, watching first person shooters emerge like 8 Circuit Studio’s The Genesis with the right mix of first person shooter gameplay and space exploration gets me excited for the future. I already see some extremely promising projects coming to the market later this year such as the strategy digital card game Gods Unchained made by Fuel Games. Gods Unchained has consistently been a top 5 games the past couple months with only pack opening functionality available.

I look forward to winning monthly ETH tournaments with my legendary filled deck of provably rare cards in what Fuel Games is calling the world’s first blockchain-based esport. These types of decentralized “forks” of already popular games (Hearthstone in this case) offer better monetization possibilities for the majority of players by allowing them to truly own and sell their rare items.

Promising blockchain games I’m keeping my eye on.

Conclusion

The tokenization of game assets is a sensible tech improvement that will introduce transparent digital scarcity into game economies and enhance how players trade and monetize their valuable items. Paired with popular Twitch streamers to help educate the masses, NFT items could create a deeper level of player engagement and appreciation for verifiably scarce collector’s items.

Gamers should increasingly demand this type of transparency and accountability as developers retain far too much control over their game’s economies and competitive infrastructure. The lack of tangible rewards back to the players, despite top gaming companies seeing their stock prices increase 300% — 600% over the past 5 years, is opening up a huge opportunity for a disruptive game to capture millions of players.

Organizations like the Blockchain Game Alliance are excellent initiatives to help educate the thousands of game developers worldwide. In an ideal world, the average gamer shouldn’t need to be an expert in using a wallet or making their first trade on an exchange to start interacting with smart contracts. The blockchain features should be abstracted away and used to create useful features that gamers appreciate while not inhibiting fun and usability. Thoughtfully applying blockchain tech to AAA quality games with millions of users will radically accelerate awareness and usher in the next million blockchain users.