Chapter 5: Okay, so maybe web3 enhanced games and NFTs aren’t dead!
5.1 Ownership of Assets
I believe in the long-term inevitability of digital ownership and that gamers will come to expect, and demand, ownership of digital goods just as they do with physical goods. Physical and digital experiences are blending; this is already the case for Gen Z and Gen Alpha and will become true for older generations, especially as spatial computing attains mass adoption.145 If ownership of goods is valued in the physical world, then, as physical and digital converge, it seems inevitable that
ownership of goods will likewise be valued in the digital world. Further, if a gamer pays $15 for a skin in Fortnite and has a choice between owning it or not owning it, which option will she choose? It seems evident that the gamer will choose the web3 version over the web2 version. Even if the price of the skin goes down, the gamer still owns the item and can choose whether to hold it or recoup a portion of the purchase price in a secondary sale (or lend the item out or add it to an NFT AMM liquidity pool). This isn’t dissimilar from the old days when gamers would buy a new game at GameStop and when they were tired of playing it, sell it (usually for less than the purchase price), and buy a new game.146 In fact, at the end of its fiscal year 2011, GameStop sold $5.6 billion in new games and hardware compared to $2.6 billion in used games and hardware (with zero resale royalties accruing to the
relevant game developers).147 Finally, I fundamentally believe that gamers should own the time they spend in games, e.g., if a gamer spends her valuable time
progressing her hero, she should own that hero.
In gaming today, whoever owns the centralized servers owns the virtual items. Enhancing games with web3 allows players to own the assets in the games they play and transform purchases of in-game virtual items from pure expenditures to assets owned by gamers. There are also in-game and third-party marketplaces that provide a source of liquidity for these virtual items. If there is a liquid market for the virtual item, it can be resold potentially at a profit for the gamer and accrue a royalty for the game developer and/or the gamer. We all know that many games have significant “side economies,” where assets are traded in violation of the game’s or the platform’s rules; these economies could be brought directly and lawfully into the game economy itself.148 This is not to say that having an open game economy is
145 Andrew Dworschak, Co-Founder and CEO of Yakoa, puts it best:
“The rise of spatial computing and augmented reality is offering a paradigm shift in how we view the world around us. We’re stepping into an era where reality isn’t just defined by the things we can physically touch. Instead, we’re blending our physical reality with virtual augmentations that bring their own form of value and ownership.” Brevan Howard Digital is an investor in Yakoa. Spatial computing is a technology that enables computers to blend in with the physical world in a natural way. Apple’s Vision Pro is a spatial computer.
146 https://www.gamestop.com/trade/?cgid=video-games&tileView=list
147 https://www.gamestop.com/trade/?cgid=video-games&tileView=list
148 According to one report, black market sales of gaming accounts amounts to $1 billion annually.
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easy – it’s not! 149 It’s like running a small country of gamer citizens (or large, if a game like Fortnite). But this isn’t new. Games like Second Life and EVE Online (discussed in Chapter 8: But Isn’t Everything Old, Just New Again) have had in- game economies for nearly two decades where complete monetary systems, taxes, royalties, inflation, rewards, and property rights are determined. One key difference with web3 is that economy rules can be encoded in smart contracts so they can’t be changed without gamer consent and the players can verifiably own all assets. For example, if a gamer creates a killer mod, the gamer can be paid for her work via smart contract. Finally, ownership — whether through earned virtual goods, virtual goods given away for free, or virtual goods that are paid for — creates a sense of agency and potentially turns gamers into even more prominent advocates for the games they love, which should lead to increased UA, engagement, retention, and monetization.150 We’re obviously early in this process, but we’re starting to see this thesis play out. Game studio, Boomland, developed a web3 game called Hunters On- Chain that is identical to a web2 game called Hunt Royale except that Hunters On- Chain uses NFTs and tokens in place of in-game characters and currency. The web3 game currently has 4.5x higher Day 30 retention, 7.2x higher average revenue per user, and increased spending from whales compared to the web2 version.151
In these early days of web3, it’s important to ensure that gamers have proper disclosure as to what type of ownership they have. Even on public, permissionless blockchains, virtual assets can be subject to additional control because they’re not
149 While this has worked well in some web2 open economies like Second Life, it has arguably failed in others like Diablo III’s auction house. Or did Diablo III’s real money auction house really fail (which is the mainstream narrative)? Game economist Philip Black has a different view than most.
Black notes: “And while Blizzard did remove both the real and virtual money auction houses from Diablo III, they were far from a failure. Conversely, they were a smashing success. 50% of
players regularly engaged with the auction house (!), with some players bringing in enough to supplement full-time incomes. Sound familiar? Jay Wilson, Diablo’s game director, further conceded the auction house performed as intended to combat account fraud.”
150 I cover aspects of Second Life later in this essay and also encourage examination of Diablo III’s Auction House, specifically what led to Blizzard shutting it down in 2014, two years after it launched (to the extent it actually failed, I believe it had more to do with the specific nature of gameplay in Diablo, the type of items available in the store, and a failure to design the marketplace with as much thought as the gameplay itself). While EVE Online has a robust 20-year-old economy, it’s not
necessarily “open” because gamers can’t convert in-game virtual currencies or items to fiat (see But Isn’t Everything Old, Just New Again?... and what about money transmission for a discussion on the U.S. regulatory considerations when converting virtual currencies to fiat and/or to an asset that is considered a “convertible virtual currency”). Nonetheless, an interesting turn of events occurred at GDC 2023 when CCP Games, the creator of EVE Online, announced that it raised $40 million to make a new blockchain based AAA game set in the EVE universe. EVE is estimated to have ~9.5 million players and ~270,000 active players and is a niche game with an entrenched 20-year, older community. In 2003, when EVE launched, the mean player age was 26. As the player base expanded, the mean age also increased – to age 33 by 2014. I couldn’t find any data on what the average age of an EVE player is today, but I would guess early 40s. It will be interesting to see if the new web3 EVE game is able to pull existing users over and/or attract a new, younger generation of gamers.
151 https://venturebeat.com/games/new-player-centric-web3-tools-prioritize-gamers-while- streamlining-development/
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“native” assets but, rather, assets managed by a smart contract that may have a privileged administrator. An example here are certain stablecoins, where from time to time an issuer like Tether or Circle freezes or seizes funds in response to theft and/or to comply with sanctions or law enforcement requests.152 It’s likewise possible for a game developer to have some degree of control to intervene in legitimate cases of loss or theft, but of course once this capability exists, a game developer could use this control for arbitrary purposes. Further, even if the virtual item exists on-chain and under the control of the gamer who purchased or earned the asset, there is no guarantee that the virtual item will exist in-game (until the game state / game logic itself moves fully on-chain). In instances where the game environment is rendered by proprietary software under the control of the game developer, the developer could choose to disregard the on-chain state of the virtual item owned by the gamer.153 Games with web3 elements will be developed across a spectrum from fractionally on-chain to fully on-chain and no matter where a game sits on that spectrum, it’s important that game developers provide full and accurate disclosures so gamers understand what they own (or don’t own) and the potential risks, fragilities, and the like associated with that ownership.154
152 https://tether.to/en/following-investigations-by-tether-okx-and-the-us-department-of-justice- tether-voluntarily-freezes-225m-in-stolen-usdt-linked-to-international-crime-syndicate/
153 For more information, I suggest reading this, an essay called “My First Impression of web3” by Moxie Marlinspike, creator of the messaging app Signal as well as some counterpoints to Moxie’s essay detailed here.
154 Thank you to Cem Paya for his feedback in this paragraph.
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