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Non-fungible tokens and virtual reality are two trends on the verge of a major breakthrough in 2021. But does it make sense to blend the two, tokenizing unique digital objects within VR worlds, such as user avatars and user-created content?
An NFT (non-fungible token) is a cryptographic token that represents a unique item of value. The underlying asset can be physical or digital: a work of art, apartment, CryptoKitty, song – anything that's unique. An NFT authenticates the object and allows to track all its changes of ownership on the blockchain, which is useful when buying expensive items.
There are also semi-fungible that represent items that are mostly identical to each other but have different IDs: for example, 1,000 tickets to the same concert, each with its seat number. Another example would be a limited-edition luxury bag issued in only 500 copies.
NFTs are more popular and more expensive than you might think: in February 2021, $70 million worth of non-fungible tokens were sold every week, and the average price was $3,000. CryptoKitties are the most famous example, though the most popular NFT project is actually CryptoPunks.
Fortnite has V-bucks, League of Legends has Riot Points, and Dungeon Fighter Online has DFO Gold. All these are in-game currencies, and they are used to buy weapons skins or battle passes, unlock character skills, and so forth. In-game currencies are fungible: very V-buck is just like any other. In this sense, they are the same as cryptocurrencies, where all LINK tokens, for example, are exactly identical. Indeed, many blockchain startups suggested replacing regular in-game currencies (each of which can be used in only one game) with crypto tokens that could power multiple games.
By contrast, the things you buy are not interchangeable: the AK-47 Case Hardened skin that was sold on Steam for $150k definitely isn't the same as a regular skin that sells for $2. Some of the artefacts are downright non-fungible (unique), while others are partially fungible (limited edition).
Clearly, these artefacts and skins have a lot in common with NFT tokens. The advantage of using NFT-based artefacts is that you can carry them from one game to another and that you can really own them, just like you own any crypto token. After all, you can't truly own a DOTA 2 weapon skin, because you can't sell it outside of the game.
Indeed, many NFT-based projects are essentially games, often focused on collecting and exchanging items: CryptoKitties, F1 Delta Time, Gods Unchained, Axie Infinity etc. Objects in these games can be just as pricey as in CSGO or DOTA 2: recently a user paid $110,000 for a virtual Formula 1 racing car in F1 Delta Time. He explained that the NFT was worth it because it's 'the first of its kind' and 'indestructible'.
We've seen that NFTs can be very useful in gaming and that their popularity is on the rise. But what does all this have to do with virtual reality?
After several years of cautiously growing sales and unclear prospects, virtual reality finally made a leap in 2019 and 2020. According to Statista, 5.5m headsets were sold in 2020, to grow to 11m in 2021 and 43.5m in 2025. Covid-10 lockdowns gave the industry a much-needed boost: research by Omdia shows that in 2020, total consumer spending on VR finally reached $1 billion.
In the past, crypto enthusiasts would jump upon any trending industry and try to inject blockchain and tokens into it – even when there was no use for them. So does the VR market actually need NFTs – or is it just another case of 'let's tokenize it just because we can?'
Here's what Alex Blagirev, Deputy CEO of Sensorium Corporation and SENSO project, has to say on the matter:
'The latest generation of virtual reality experiences are a cross between multiplayer games and social media, and they have a lot of in-game content that it makes perfect sense to tokenize. The most obvious example is the user's avatar itself – your virtual twin, the 'digital you'. In the future, you might be able to travel between different VR metaverses, bringing the same avatar with you everywhere. It's like playing the same character in different video games.
Another use case is access to premium content. For example, in our Sensorium Galaxy metaverse, users will be able to attend live performances by world-famous DJs. The tickets will be sold for our in-platform currency, SENSO, with a 20% discount compared to buying them with a credit card. SENSO is a regular cryptocurrency that you can buy on exchanges like Poloniex and KuCoin, but you could easily imagine every ticket being issued as a semi-fungible NFT. This way you could easily sell the ticket online if you can't attend.'
Also, let's not forget that VR worlds are filled with 3D objects: avatars can change hairstyles, clothes, and even accommodation. Some platforms, like Sensorium Galaxy, already feature prototype stores where you can shop for accessories with native SENSO tokens. It's easy to imagine that in the near future, each accessory will be accompanied by a semi-fungible tokens, and that some items will be truly unique and selling for fast amounts of money, just like the $110k F1 Delta car we've mentioned.
Content creators' intellectual property rights are yet another area where NFTs can be very useful. In those VR platforms where users can add their own content – 3D objects, spaces, and characters. For instance, in VRChat all the 'worlds' are created by users with the help of the specially provided SDK for Unity.
Right now these designers don't have an easy way to register their intellectual property rights. In a free-to-use platform like VRChat, this is not a problem, but in a VR metaverse where you can buy artefacts or pay for access to exclusive events and locations, creators may be able to monetize their content. Imagine that you've spent months designing a VR nightclub (similar to those in Sensorium Galaxy's Prism world): you might want your copyright to be registered and protected, so that you can charge a small fee for entry.
By the way, this NFT-based approach to intellectual property is very different from that used by another major VR project: Facebook Horizon. There, users are encouraged to build their own VR games, meeting spaces, and 'worlds', but the terms of service state that “if you create or upload content to Horizon, you grant [Facebook] permission to store, copy, and share it with others.” This might mean that creators practically sign off their rights to the content to Facebook.
Right now the vast majority of NFTs are issued on the Ethereum blockchain. It's a simple, well-tested process, and there are two common token standards: ERC-721 and ERC-1155. However, there are two problems: scalability and transaction fees.
Ethereum is desperately trying to scale, and if the transition to Eth 2.0 goes to plan, in a couple of years we might have a network where you can pay $0.10 for a token transfer and see it confirmed in less than a minute. But as of March 2021, you can pay a gas fee of $10-15 and still have to wait for two hours. The mempool is overloaded, and miners understandably prioritize the transactions with the highest gas fee.
Alex Blagirev continues:
'If we are talking about a beautiful and unique avatar worth $5,000 or more, the gas fee may not be a problem. But would you be prepared to pay a $15 fee to buy a $5 NFT representing a new hairstyle for your avatar? Probably not. Besides, if we were to tokenize thousands of in-universe items, the sheer number of transactions would bring the network to a halt, like it happened with CryptoKitties in 2017.
Ethereum as it is right now is simply not a good platform for a massive NFT-based VR universe. You have to look at other, more scalable options, such as Polkadot or Cosmos.'
Indeed, the interoperability framework Polkadot may be the best candidate for new NFT gaming projects. It already has one – SubstratePunks. With the upcoming introduction of Ethereum bridges, Polkadot will also be able to support ERC-721 and ERC-1155 tokens, though native standards will surely appear.
As for Cosmos, it even has a ready-to-use SDK module for building NFTs and a plan to create a set of cross-chain NFT standards, though there are no proper Cosmos-based NFTs dApps for now.
The use cases are solid – all we need is a non-Ethereum implementation
The NFT-VR pairing has a lot of potential. It would allow you to transport an avatar from one virtual universe to another or sell it on blockchain marketplaces; you'd be able to monetize your content; and anything you buy in the VR world would well and truly belong to you.
On the other hand, there is the challenge of technical implementation. Ethereum is too slow and expensive to power a large-scale VR metaverse, such as Sensorium Galaxy or even VRChat. You'd need NFTs issued on a different blockchain, one with a much higher processing capacity and near-zero fees. Only if this challenge is solved in 2021, NFT-based VR platforms can finally take off.
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