To set the stage for the size of the opportunity, Fortnite generated $3.6B of digital sales revenue in 2020, all being cosmetic items. FIFA Ultimate Team raked in $1.62B from players buying packs of cards and in-game currency. $2.6M was spent on the Counter-Strike marketplace in the last 24 hours. I believe all three types of economies could get 10-100x larger by moving away from shady middleware websites and moving to a decentralized platform instead. This could unlock 10s of billions of dollars of value for players and users to capture, rather than having it all go to the publisher. This is why it’ll be hard to see incumbents transition to these models, and it’d probably come from new games instead.

One core piece of infrastructure that makes a lot of this possible is the fact that in a blockchain-based world, NFTs can be used as a payment system rather than using fiat since they can be eventually be turned back into currency. This allows players to easily move across games, trading and exchanging items with other players who also want to try things out. They could also simply liquidate their inventory in a marketplace for real money, which is impossible in most traditional games. Increasing how easily items can be transacted will both increase their value, as well as making it easier for players to try out other games as they won’t feel “locked-in” to certain ones.

Time-based economies

Time-based economies are usually found in games where it takes a long time to unlock certain items or abilities, even though it’s not very hard to do skill-wise. MMORPGs that monetize through monthly subscriptions are a good example of this, as they want to make sure players spend a lot of time online. Buyers in these economies are usually paying to not spend time doing certain in-game tasks that might feel tedious, and would rather get to the endgame activities. Sellers are usually located in low-cost geographies that make it profitable to get paid ~$5-10/hour to play a video game.

For example, in World of Warcraft it takes a while to level up your character to the max level, which gives you access to better equipment, spells, new raids, etc. Over the years, a lot of “boosting communities” and sites popped up, which let you pay someone to play your character up to a certain level. The same is possible to get additional “gold”, the in-game currency of the game, or specific in-game items such as rare mounts. In 2014, 10 years after the game's release, Blizzard started offering a “Character Boost” in their store, which brings your new character to the maximum level by paying ~$60, but they still don’t allow players to pay for items or gold.

What limits time-based economies today:

• Lack of unified listings: There’s no official marketplace to buy these services, which hurts both supply and demand. As a buyer, I have to search online and sort through a lot of sketchy-looking websites, going on sites like Reddit to see if people used them before, etc. It’s very easy to get scammed. As a provider, I have to stand up my own website, put a payment system in place, work on my SEO to rank highly on the homepage, etc, which might not be worth it if I only plan to do this irregularly.

• No guarantees: given that this is an agreement made outside of the game rules, there’s no guarantee that the service will actually be completed once you pay. 

• Security risk: most of these activities require you to share your login information with the 3rd party. This is obviously a big security risk, as they could take over your account.

What the blockchain can enable:

• Decentralized “bounty” marketplace: using smart contracts, you could create binding agreements between both parties of the marketplace. This would allow anyone to participate as a seller by removing the reputation and marketing barrier; this would also eventually lower the cost as supply grows. By tying into the game directly, the marketplace can resolve the contract and issue payment once pre-determined criterias are met (i.e. completed this raid, this item entered the player’s inventory, etc). This would be a gaming version of Gitcoin Bounties basically. 

• Tokenized characters: rather than sharing your account credentials, blockchain-based games could have each character in an account be its own tokenized asset. This means that I could share the character for a limited amount of time with another account, and then automatically take it back. reNFT is an example of what that might look like. This would also work well with trading card games, allowing players to rent decks in Hearthstone or Magic The Gathering.

Skill-based economies

Skill-based economies are found in games with high skill caps. They usually have some items that can only be unlocked by completing a very high difficulty quest, or rank very highly in a competitive ladder setting. The supply side of these economies is harder to scale, and has higher variability in quality.   

In Halo 3 for example, players could earn the “Recon” armor by completing the “Vidmaster Challenges'', which were pretty difficult achievements. Some of them required users to do co-op missions at high difficulty, and players could pay for other experienced people to play with them and guide them through it. This is true in other games like WoW, Destiny 2, etc where groups usually have a “raid leader” that knows the ins and outs of the specific raid and can help new players navigate them. It can cost $1,000-4,000 for a Mythic raid carry in World of Warcraft. 

Skill-based economies share similar challenges to time-based ones such as lack of unified listings and guarantees, but also have additional issues.

What limits skill-based economies today:

• Lack of credentials: unlike time-based economies activities, the ones covered here require players to be fairly skilled at the game. There’s currently no easy way to verify that a player is actually capable of completing a task.

What the blockchain can enable:

• Cross-game “skill” rating: as players move from one game to the other, their progress should carry across given that it’s all on-chain. This can allow them to skip introductory levels and jump straight to their level of play. This will make it more fun for players to jump across games. ArcX is building the equivalent of this for credit.

• Publisher-sponsored tutorials: as a game publisher, I could set up a system that gives new players X amount of credit to post bounties on the marketplace, effectively letting them pay for “training” sessions from experienced players. This benefits the game publisher because 1) it will make sure players are more easily onboarded and stay long term 2) gives incentives to experienced players to stick around long term. RabbitHole is the closest example in non-gaming use cases.

Loot-based economies

Videogame skins are the OG NFTs. You pay a bunch of money to look cool online, but they don’t actually have any intrinsic value. Players usually receive a “crate” or “loot box” from the game, and they can buy a key to open it for like ~$3-5 and get 1-3 random skins. Skins give 0 in-game advantage, they are purely cosmetic. These markets are purely driven by scarcity and demand; you won’t find expensive items in a game that isn’t widely popular. 

Counter-Strike had a peak of 747,598 players in the last 24 hours. In that time span, ~$2.6M of skins were transacted in the official Counter-Strike skins marketplace. This doesn’t include all third-party marketplaces and liquidity providers, so the real number is probably higher than that. Players can freely transact in this marketplace by selling or buying skins, but they can never take the money out of it; they can only spend their profits on other skins, or in the Steam marketplace (Counter Strike’s publisher) to buy other video games. If you want real money for them, you have to use 3rd party websites such as BitSkins, Gameflip, etc.

This isn’t limited to just cosmetic items, but also to fungible ones. Take FIFA Ultimate Team, Electronic Arts’ football simulation videogame. The game has a marketplace where users can buy cards that represent specific soccer players to put in their virtual team; they can then use them to play games. More expensive players are usually better, so the price is driven by in-game ability, not just aesthetics. Similarly, players can use fiat money to buy packs of cards or marketplace currency, but they are never able to convert it back into fiat and can only spend it in-game. Electronic Arts made $1.62B from Ultimate Team sales last year. 

Where loot-based economies can go wrong is when acquiring the items makes the game too easy to complete, and therefore leads players to churn quickly. Diablo III is a good example of this; at launch, Blizzard included a marketplace where players could buy items with real money. Once you acquire the best items in Diablo, the gameplay isn’t very deep, as most of the gameplay is actually repeating runs to find better loot. Blizzard shut down the marketplace shortly after launch and revamped the system to remove all player-to-player transactions. This is a good example of a time-based economy being treated as a loot-based economy; since the time spent to acquire items is the game itself, creating a marketplace is actually detrimental to the experience of the players. 

What limits loot-based economies today:

• Lack of withdrawal options: today you can invest money in these items, but it’s very challenging to get the money back out without going through unauthorized websites. This prevents a lot of players from buying more expensive items, as they might not be committed to playing the game for a long time. This is the opposite of a marketplace like OpenSea which allows you to leave at any time.

• Lack of clarity around rarity and drop rate: in traditional games, it’s impossible to verify the rarity of certain items, or how often they get awarded from loot boxes. This makes it difficult to properly price items.

What the blockchain can enable:

• Easy access to liquidity: a crypto game without a cash-out feature will not be supported by the community. Even if it happened, it’d be somewhat easy for a trusted marketplace to be built in order to allow players to sell their items for money in a trustless manner.

• Full visibility into real rarity: each item in a blockchain-based game will have all metadata public, and users will be able to compare all of them. Rarity Sniper already offers this for NFT collections, and the same use case will be applicable to gaming as well.

Let the games begin

While we’ve seen early experimentation in blockchain games with Axie Infinity, Gods Unchained, Parallel, etc we haven’t even scratched the surface. First of all, the most popular video game types aren’t available; there’s no high quality shooter or MOBA game with a blockchain component. Trading card games and autobattlers are pretty niche genres. On top of that, onboarding players into sidechains like Ronin is cumbersome and expensive due to gas fees.

Traditional game publishers are limited in what they can do due to regulation, as well as existing contracts with brand sponsors (see Fortnite and their Marvel partnership, for example) that cannot be easily translated to a fluid marketplace. There will likely be new game publishers rise in the crypto space, which will develop the game and engage the community in very different ways. I’m really looking forward to seeing all the innovation in this space, both as an investor and as a gamer!

If you are building anything related to what I mentioned in the article, please do reach out! I’m fanahova.eth#4314 on Discord or @FanaHOVA on Twitter