The Future of Entertainment and Gaming is Happier— NFT Primer 1
“I’m Going to the Online Concert and I’m Taking my Gucci Bag with Me!”
• People everywhere are spending more time online. Life itself has moved online, and digital reality has become reality. I often use the example of wanting to take my Gucci bag with me (or at least a unique token representing my Gucci bag) from the face-to-face holiday party to the Mario Party. Last weekend, DJ Marshmello played a live virtual concert in video game Fortnite, and it blew all precedent out of the water, drawing up to 10 million concurrent viewers. Marshmello playing live at “Pleasant Park” in Fortnite is very much like broadcast TV because it reaches the masses who love his many platinum songs and “tune in” at a specific time to share an experience. It provides the chance for content creators to deliver authentic experiences and for proximate brands to be present while avoiding the in-your-face advertising that younger generations loathe. Facebook and Google garner the bulk of digital ad spend, but consumer behavior differs between traditional TV, social media and search. At stake is the enormous bucket of TV ad dollars, which stood at $125 billion in the US alone last year according to Magna Global.
• As an early believer in how eSports could affect behavioral change, I was excited to dig into the newest video game tech phenomenon, Non-Fungible Tokens (NFTs). Almost a year ago, I started meeting with companies and talking with developers. The wish list of new companies to meet is growing but the early read had been that near term hurdles around the fledgling technology outweighed opportunities even though the long term case was compelling.
We are now seeing measurable positive change worth flagging-
- New platforms like dGoods, announced by Mythical Games, EOS Lynx, and Scatter on January 23. The value proposition is too compelling to think that short-term hurdles will prevent the new normal of in-game economies. Expect traditional video game publishers to notice sooner rather than later.
- Faster blockchains more generally
- Recent live events that draw millions of viewers at once.
• The observed changes are more strategic than technical. There is still much work to be done from a technical perspective. Additionally, the rules around these new online economies and new income streams for individuals and companies are still coming together.
• This evolutionary change is an early look into much larger behavioral change, which will happen over decades. Imagine a new ability to live online with your closet full of clothes (and Nike shoes?) accessories (Apple Beats?) trophy shelf of accolades (LinkedIn are you listening?) and even your tickets and lottery tickets to attend concerts and parties.
• Online Games such as EA’s SimCity were early pioneers in showing us the way. Newer games like Decentraland, which incorporate NFT technology, should change our mindset around the meaning of personal net worth.
QUICK PRIMER: NFTs and Blockchain Terminology (If you are blockchain savvy, skip this part)
What are NFTs? First of all, let’s try not call them NFTs anymore. This terminology reflects a self imposed challenge in the blockchain/crypto community, which is that most people have no idea what we are talking about. Call to developers (and admittedly to myself) — innovative, decentralized tech is awesome and has the potential to positively impact regular people all over the world. Adoption will accelerate if you ask a non-technical friend before naming your next invention.
An NFT, henceforth (as often as I possibly can) referred to simply as a unique digital asset, is an immutable, tokenized representation, or digital abstraction, of an asset. It is a unique thing, which means it can be owned as one would own an (analog) diamond ring or an avatar in a game, and it can also be bought, sold or traded. The ”non-fungible” aspect refers to its provable and unique representation of a given asset. It is a scarce object, meaning not only that its issuer can constrain its supply as needed, but also that its owner can distinguish its characteristics apart from all other imitators.
This enables digital use cases that far better mirror possession of physical objects than do our current Web 2.0 solutions. Unique digital assets can be owned as one would own assets in the analog world, and they can also be bought, sold or traded. Therefore, they can also be valued in a marketplace, which will lead to new and ongoing income streams and economies. A unique digital asset is a scarce object, meaning that its issuer can not only constrain its supply as needed, but also that its owner can distinguish its characteristics apart from all other imitators, guaranteeing authenticy. Why shouldn’t such assets be included in one’s overall “analog” wealth measurement, and if valuable enough, even be included in one’s Final Will and Testament?
The specific use case discussed in my first post on the topic was Cosmetic Collectibles, citing the Fortnite phenomenon and a study in June 2018 which indicated that two thirds of players said they spent an average of $85 in the free-to-play game. Examples of opportunities for digital abstraction of assets and otherwise-burdensome processes are endless. Think: every watt of energy in a smart grid, every invoice issued by a vendor, individual credentials like a driver’s license, the issuance of land deeds, 1,000 set-in-stone copies of a rare trading card, characters in live events, and even more interesting, items that can be sold into and during live events, analogous to cotton candy and hot dogs at a baseball game. As unique digital assets evolve and retain this scarcity independent of the enforcement by any third party, it becomes clear how value accretion can accrue across peer-to-peer (P2P) in-game markets.
Ethereum blockchain: Most well-known as the underlying technology used for thousands of companies to raise capital during the blockchain mania of 2017. Creating and adding a block to the chain uses a proof of work (PoW) protocol, which means that mathematical equations must be solved, making it very secure at the expense of speed.
- ERC-20 Tokens are fungible, which means they can all be substitutes for one another.
- ERC-721 (First NFTs) Tokens were the first non-fungible tokens (NFTs) so they are all unique; first example of an application was Cryptokitties.
- ERC-1155 Tokens, created by Enjin, address the challenge that many games have thousands of in-game items and each must deploy a separate smart contract to the blockchain for every item type. ERC-1155 allows developers to store all items in a single smart contract and mint all game items in a single rule set. Also, it requires less Ethereum gas to deploy new tokens.
EOS blockchain: Unlike the Proof of Work protocol that Ethereum uses, EOS (aka EOS.IO) uses delegated Proof of Stake (DPOS), which means that instead of anyone and everyone having the ability to put up their own coins (“stake”) to validate and get rewarded, a rotating group of 21 “block producers” secure the network and votes are weighted. Blockchain purists generally don’t like this method which is perceived as more centralized. Speed jumps to millions of transactions per second, which is good for gaming. Another strategic positive is that gamers won’t be required to figure out the technology underlying the game to be able to play and they certainly won’t be required to figure out how to buy gas to play the game, which can get expensive when the network is congested.
This post is a first attempt to 1) outline the hurdles in mainstream gaming and 2) imagine the endless opportunities and new economies that will be enabled by the evolution in new underlying technology and platforms.
HURDLES: Despite Opportunities, there are Obstacles to Mainstream Gaming
The overarching hurdle identified has been a blockchain first, versus a video gaming first, approach. People don’t buy blockchains — they buy entertainment. With the video game business following down the path of the movie business, studios need to spend millions to create a multitude of content to get one hit. It is therefore less likely that a blockchain developer team will have the resources, talent and connections necessary to pull off a mainstream hit. Assuming video game studios will need to lead the charge on wider unique digital asset adoption, investors need to be aware of the current technical limitations they will have to overcome:
- Lack of a Metadata Standard
While I understand the concept of taking my closet of collectibles, identifiers and trophies with me, I never understood the rationale behind moving weapons between games, whether it was strategic or technical. My conversations with industry members have confirmed my doubts on both. Strategically, moving a weapon is analogous to moving a movie plot. Such moves would change both games’ original intentions and incentives. Even within one game, it is difficult to tamper with incentives as seen in Diablo III’s Auction House failure.
Technically, prior to 2019, no NFT/unique digital asset standard had the metadata support necessary for properly rendering item graphics or characteristics across different games. Concerns over IP infringement have cast a cloud over the concept, and most video game publishers are relieved to know they won’t have to design their games with the threat of others monetizing items that will leave the game. A studio head responsible for one of the top global franchises even pointed out to me recently that it isn’t yet technically possible to move items between games in a single franchise, where the look and feel may even be the same.
Even blockchain-native games have failed to achieve true interoperability. CryptoKitties recently partnered with fellow Ethereum-based project Gods Unchained to allow players to port their virtual cats for use in the latter. In reality, player’s kitties were only used for purchase of cat-themed talismans in Gods Unchained, with no battling or breeding functionality possible. While this type of inter-game exchange showcases an advantage of building on blockchain protocols, trading does not constitute true interoperability. Until the industry converges around standards for graphics and item characteristics (the latter potentially being reliant on consortium development?), unique digital assets will remain glorified bartering pieces outside of their respective games.
2. Suboptimal Transaction Speeds
The most mature NFT/unique digital asset ecosystem has developed on top of Ethereum, but with on-chain transactions clocking in at 15 per second, it’s difficult to envision an in-game marketplace on the scale of Fortnite or World of Warcraft not grinding the network to a halt. Developers have circumvented these constraints by deploying “side-chains” that aren’t constrained by the intentional inefficiency of the base protocol layer like Plasma and state channels but they lack the maturity necessary for securing billions in asset value for now. As Ethereum transitions to its Serenity milestone in the coming years, this may be much needed progress. However, the entire concept of a requiring a “side chain” implies that the underlying chain isn’t the right starting point, which has always led me to believe that there will be a new, superior starting point.
Also, while standards like Ethereum’s ERC721 allow for on-chain provenance and exchange, they provide little in the way of standardized methods or graphics. This has resulted in producing games that consist of little more than hot potato for 2D collectibles. While projects like Zombie Battleground have built around these limitations by implementing modular design patterns for their card game, it’s difficult to envision an Activision or EA-caliber game doing the same. While strategy game CryptoWars running on Loom’s dAppchain had a very strong launch and successfully avoided congesting the Ethereum network with game activity, it also sputtered at about ~500 simultaneous transactions.
Alternatives like the EOS blockchain and even cloud-based instances of Ethereum in Amazon Web Services (AWS) and Microsoft Azure provide greater transaction speeds by sacrificing some degree of censorship resistance. The recent announcement of the dGoods standard by Mythical Games, in conjunction with the premier wallet providers of the EOS network, suggests that developers are willing to forgo complete decentralization for usable architecture. I’ll make the case later in this report that studios’ need for oversight is compatible with this tradeoff.
Taking a look at today’s active users of the top-10 blockchain based games, one can see that overall adoption is nascent. At the time of writing, in the last 24 hours, only 290 individual addresses had engaged with the CryptoKitties smart contract and it ranked #12. In breaking down the top 10 games, one can see that the EOS and TRON networks have gained share from Ethereum, likely due to speed. Five are running on EOS, three are running on the Ethereum network, and two are running on TRON.
It is worth noting on individual games that most of them are 2D versus 3D, another indication of how early it is for blockchain games in the context of video games overall. For example, the top ranked game today, EOS Knights, has seen 5900 players in the last 24 hours. Based on multiple reviews, it is more about making a little bit of money by crafting and trading than an immersive entertainment experience. The #2 slot is taken by Epic Dragons, which has also drawn player attention less for its gameplay (its graphics are akin to an early 2000’s Macromedia Shockwave game) and more for its gambling mechanisms. Again, it is early and one can expect 2019 to be a year of great progress for blockchain gaming.
Putting these numbers into perspective, according to Statista, in 2018 the top three games by peak number of concurrent players were PlayerUnknown’s Battlegrounds at 3.2 million concurrents, DOTA 2 at 845,000 concurrents and CS:GO at 746,000. The range for CS:GO from ‘16 — ‘18 was ~400k — 746k.
3. Lack of Developer Tooling
The vast majority of modern video game development (e.g. 2D, 3D, VR/AR) goes through the Unity platform. Limited tooling exists for developers to easily integrate blockchain connections into their games, and Ethereum’s Solidity programming language remains a niche skill. Two companies, Loom Network and Enjin, have committed to crossing this gap with Unity software development kits (SDKs). Their efforts have remained limited to Ethereum, however.
There also remains the question of content creation suites for the players themselves. If studios want to foster player-driven content, the skill set required to contribute needs to aim for a lower common denominator than just industry-grade design engines. For example, the PC game CounterStrike has achieved a burgeoning modding community, with custom maps and weapons numbering in the thousands, by providing CS:GO Authoring Tools. Interesting sidenote: while players can earn over 6-figures annually playing CounterStrike, they do so through third-party proxies like Steam Credits or escrow services.
4. IP Integrity Concerns
Wider adoption of NFTs / unique digital assets implies a degree of composability. Players will want the flexibility to customize their appearances and trophy cabinets at a granular level. We’ve seen major brands dip their toes into the water when it comes to NFT collectibles, like the Dodgers hosting digital bobblehead night back in September. But whereas collectibles are discrete, standalone objects, the degree of brand risk increases once you consider the various contexts a player might use an issued NFT.
Google faced brand safety challenges in early 2017 when Chase Bank’s advertisements appeared next to unsavory content and forced the company to drop the websites they advertised on from 400,000 to 5,000. Similarly, Supreme would face backlash for a player wearing their limited edition Fortnite costume in conjunction with a swastika armband. Scarcity provides brands with a way to secure their perceived scarcity online, but the complete lack of downstream control post-issuance of the asset could wreak unnecessary havoc.
5. Anti-Money Laundering Liability
Lastly, game studios face a raft of legal hurdles in building out full-fledged P2P economies in their games. As they bear the liability for exchange they facilitate, the threat of sanctioned or criminal entities laundering money through in-game items, or players evading taxes for income earned through gameplay and exchange, burdens their risk appetite. Without the ability to reverse on-chain transactions that raise these types of red flags, studios would have little recourse in either such a case. Moreover, in my industry conversations, it is apparent that figuring out how to incorporate money transmitter laws is an important piece of the build.
The shortcomings of the status quo can largely be chalked up to the early status of the blockchain space. In my opinion, none of these concerns represent insurmountable challenges that won’t be solved in the coming decade. The possibility for perpetual, parallel streams of income and user data represents an opportunity simply too enticing to pass up. To unlock this potential in the near-term, I anticipate that studios will compromise on transaction immutability in their blockchain implementations to enable P2P exchange of digital assets and services with the necessary oversight. While these digital assets may lack ideal permanence, they will provide a user experience that is far more conducive to mass market applications.
OPPORTUNITIES: New Entertainment Revenue Streams from Digital Asset Marketplaces
Digital assets represent the logical next step in video game development because their scarcity and durability empowers studios, content creators, brands, influencers, and players to derive income from gameplay. Consider the following: press reports indicate that Epic Games earned $3 billion in profit as the sole provider of Fortnite skins, dances, and trinkets, with no opportunity for player resale. Seven of 10 Fortnite players spent money on the game. What if brands and influencers like Supreme or Ninja had the ability to design their own? And what if they could produce those goods in finite, auditable amounts? And what if players could resell those used goods, with publisher Epic and respective content creators netting transaction fees, royalties, and user data each time?
By shifting in-game economies from B2C to P2P, platforms for digital marketplaces could emerge with exponentially greater volume than anything we’ve seen to date. Mythical Games’ platform dGoods, in collaborations with EOS and wallet providers, is one such platform that caught my eye. The company is clearly a video gaming first, not blockchain first, company with studio head veterans such as CEO John Linden (Activision, Seismic Games, Niantic Labs), Jamie Jackson (Freestyle Games, Activision), and Jeff Poffenbarger (Facebook Oculus VR). Add in technology veterans such as Rudy Koch (Disney, Activision, Blizzard), Stephen Cunningham (OpenX, IBM), Kurt Messersmith (Microsoft), Chris Downs (Arcuity, GrubHub), and the most recent exciting addition — Andre Johnson, who comes with both virtual reality wins under his belt and sports entertainment experience at Magic Johnson Enterprises.
In addition to those providing the enabling technology, many other groups listed above stand to benefit from the emergence of video game marketplace platforms. As barriers to content creation and exchange drop, the road to monetization no longer runs through outside channels like YouTube or Twitch, but directly through in-game platforms. This creates a compelling market cycle in which each group incentivizes the others, as value will naturally aggregate to the games with the most active communities. A positive feedback loop forms as players have a monetary incentive to create content worth purchasing, leading to influencers emerging from the crowd, who then attract brands whose cache raises game awareness outside of the community.
Let’s imagine how these incentives would manifest in a real game with the following thought experiment — a game that happens to be a lot of fun to play and also allows third parties and players to issue and exchange digital assets.
1. Content Creator and Brand Insights
Imagine you’re a renowned fashion house trying to navigate your brand across the digital divide between millennials and Gen Z. You know that in-your-face advertisements will have little appeal, and market research indicates that the new demographic craves unique expression. You could chase them with influencer campaigns, but paid posts have fallen out of vogue and you’re not even sure which flavor-of-the-month social media platform to target. As luck would have it, however, your marketing team identifies this online video game with significant traffic and decides to run an auction for 100 exclusive branded capes. They sell like hotcakes, initially generating media buzz and continue to circulate in the economy for years to come. Not only are royalties rolling in with each subsequent exchange, but transaction data indicates that your capes were most popular with Indonesian players — a market you had traditionally ignored. You pivot your Asian operations accordingly, perhaps becoming a household name in a country you otherwise would never have entered. The promise of digital assets for brands lies in this understanding that insights derived from virtual markets can drive strategy in physical markets, and vice versa.
2. Influencer Monetization
Now consider your life as an influencer known for your competitive skills. Your predecessors earned their incomes through Twitch subscriptions and YouTube ads, but never earned a single dollar in-game. Times have changed: you issue tickets to exclusive meet-and-greets, work with a design firm to create your own costumes and items for sale, and even occasionally get tipped in public squares — all in-game. Digital assets and currencies have allowed you to earn an income in this digital world, without ever having to be on anyone’s payroll. This opportunity isn’t just limited to top gamers, either; a platinum album rapper is dropping his new album early to 1,000 ticket holders as a digital concert experience, while another socialite is hosting a convention just to see which of her followers designs the best items in her honor.
Just last weekend, we saw EDM DJ Marshmello play the first live-streamed virtual concert in video game Fortnite with all of the palatable excitement of an analog concert. As is typical in eSports, the press may have overstated the number of 10 million concurrent viewers because they didn’t adjust for people coming in and out, multiple devices etc. Still the numbers are huge. Epic revealed in November that there were 200 million total Fortnite players and a concurrent peak of 8.3 million so in fact, 10 million might make sense. Compare this to the Super Bowl — while total audience across all platforms clocked in at 106 million viewers, NBC called it the “most live-streamed Super Bowl ever”, with a 2 million average minute audience and 3.1 million concurrent streams. Again, in the first significant live event in a video game, streaming viewership rivaled the Super Bowl. Another reference point — regular season NFL games get roughly 300k — 500k streamers so it was multiples the size of the most valuable content on traditional TV.
The reason this is so important is that it is one of the first real examples of a live broadcast experience that could reach a global digital audience and dip into the enormous bucket of TV ad dollars, which stood at $125 billion in the US alone last year according to Magna. Viewership of traditional TV continues to drop precipitously, while sports has seen a slower decline. Meanwhile, the cost of a 30 second Super Bowl ad continues to increase due to the scarcity value of a large, live audience.
3. Player Content / User Generated Content (UGC)
But what if you’re just a regular player, someone who sees the game as a hobby? It becomes easy to make a side hustle out of the very game you’re playing for fun. After other players complimented your avatar, you’ve designed costumes and choreographed dances that can all be sold on the in-game marketplace, without the need for not so above board third-party services. Because of the game’s crypto wallet integration, you can even sell these goods for its native currency on your own personal portfolio website. While you know you’re not going to being playing this game forever, the ability to earn an income off of your experience has entrenched you as an ardent enthusiast. See press reports of CS:GO (Counter Strike : Global Offensive) players making six figures a year. What if new digital asset platforms enable many more games, which include thousands of items and blueprints, creating new career paths for entertainment creatives?
CONCLUSION
As time spent in digital venues continues to grow at the expense of time in analog venues, brands have a harder time finding us. Still, there is a pot of profitability at the end of this rainbow for those who can make it there. It has become more difficult for brands because they need to create new advertising inventory that will resonate with new audiences who are done with ‘in your face’ advertising. In addition to new inventory, the shelves from which new gems of content can be sold must be built. It also requires tapping into needs and wants in a less invasive way; the zeitgeist of privacy protection means that we are becoming more suspicious of companies who make a lot of money by using free software to extract information about us, even without our consent, only to repackage and sell it.
The good news for brands is that I want to take my Gucci bag with me from the face to face holiday party to the Mario Party. Also, experiences in digital are sometimes even more meaningful to me than analog experiences. Finally, while we dont want to see a can of Coca Cola sitting on a table in a video game, we are open to seeing something more creative and entertaining involving brands, like Marshmello performing in Fortnite.
Smart brands will figure out how to make money from more creative ad placement and also from transaction fees that track my digital Gucci bag. Both of these are a lot higher margin than billboards and TV ads. However, reaching this will require a media industry culture shift that asks — how do we meet consumers where they are? Instead, we are seeing more concentrated spending on the last bastions of traditional attention, like the ~$5 million Bud Light / Game of Thrones spot during the Super Bowl, which is analogous to catching a smaller fish with a bigger bait.
This report was written in collaboration with Maximilian Fiege, whose prior blockchain research was published by the Council on Foreign Relations. Angela’s stroke of luck happened in meeting Max at a Solidity bootcamp in SF, which they both attended just for fun.
