Why Blockchain is a Game Changer

Key takeaways:

  • The global gaming industry has gathered significant momentum over the past years amid the rapid rise of mobile games, i.e. smartphone and tablet games.
  • Future Blockchain games are unlikely to look like today’s games with a crypto spin. Instead, games will have to be reinvented to some extent.
  • Crypto games are still in their infancy and daily active users remain modest. Boosted by improved technology and developer tools more crypto games are in the pipeline.
  • Blockchain projects such as EOS and TRON are aggressively pushing for the development of games that run on their platforms to increase adoption.

In Steven Spielberg’s 2018 blockbuster movie Ready Player One, the citizens of an uninviting future escape their drab existence in the year 2045 by spending most of their time in a virtual reality world. When putting on their VR headsets, ordinary people enter a sheer unimaginable gaming universe called “The Oasis” where they can roam freely in the guise of an avatar. Players can enter a vast collection of diverse gaming landscapes including an extreme sports planet, Minecraft, Planet Doom, or astro golf, to name but a few. Importantly, the film popularized the idea of a “multiverse”, also referred to as “metaverse” – the virtual-reality based internet envisioned by Neal Stephenson in his 1992 science-fiction novel Snow Crash.

While the virtual freedom of movement experienced by the cinematic gamers is certainly impressive, the key advantage offered by the multiverse is the players’ ability to transfer assets across games. Collecting coins or rare items not only allows gamers to level up their characters or items but they will also benefit in completely unrelated games. In other words, succeeding in one game translates to progress in all other games thanks to the interoperability of assets. What’s more, virtual coins and rewards can be monetized, with gamers being able to exchange them into real-world items such as new gaming equipment.

Needless to say, the opportunities enjoyed by gamers in the movie are a far cry from the present-day gaming landscape. This is where blockchain might come into play. It has the potential to redefine gaming in terms of ownership of digital assets, interoperability of games and governance. Regarding the latter, there is a need for improvement with respect to decision making, a game’s future direction and the distribution of financial rewards. But gamers should not hang their hopes up too high, at least in the short to medium term. A major reason for the deferred implementation of a Ready Player One-style multiverse is the fact that such an endeavor is fundamentally incompatible with the business models of today’s highly successful gaming behemoths. Hence, to many gamers, dreams of a functional VR multiverse where users have full control over digital items that are provably rare appear like a distant utopia.

That is not to say that today’s user experience is bad. It’s quite the contrary. The global gaming industry has gathered significant momentum over the past years amid the rapid rise of mobile games, i.e. smartphone and tablet games. Mobile has become the largest gaming sector by revenue in 2018, surpassing even the combined PC and console sectors. The number of active video gamers worldwide was estimated to be roughly 2.2bn in 2017 and is projected to grow to 2.7bn by 2021. Accordingly, the global video games market is projected to grow to USD 180bn by 2021 from an estimated USD 138bn in 2018. To put this in context, the global music industry is just a fraction of this with revenues amounting to USD 19.1bn in 2018. Meanwhile, the largest 25 public companies by gaming revenues generated a total USD 94.1bn in 2017 – an increase of 29% compared with 2016 vs. an increase of only 14% for the overall gaming market in 2017. This highlights the ongoing consolidation of the industry, as growth for the largest game publishers (including Tencent, Sony, Microsoft, Activision Blizzard, EA and Nintendo) and distribution platforms such as Apple and Google once again outpaced growth of the total gaming market. Other publishers such as Valve and Epic are running their own heavily-frequented game stores. To our knowledge, none of these companies has big plans for blockchain.

Broadly speaking, games fall into three categories of business models: The first type is games that come in hard copy format. They used to be distributed through retail stores in the form of floppy disks, game packs or DVDs. Nowadays, users can also purchase them online via digital copy on platforms such as Steam or Origin. The second type of games is the free-to-play business model where users typically play online. Gaming companies in this category focus on mobile or social networking platforms. Revenues are usually generated through in-app purchases or in-game advertising. Mobile games have become by far the largest and fastest-growing gaming segment catapulting developers of social games such as Zynga (FarmVille) and King (Candy Crush Saga) into the center of the gaming realm. Another free-to-play game that has become wildly successful is Epic’s Fortnite Battle Royale. The multiplayer game has turned out to be a compelling social experience with a broad appeal even to non-gamers. By March 2019, Fortnite had been played by over 250mn people registering over USD 2bn in global in-game purchases. The third category is different from the previous two in that it allows users to own their items and to make money out of them, broadly similar to the world encountered in the movie. Lineage, a massively multiplayer online role-playing game (MMORPG), falls into this category. The 1998 online game was a huge commercial success and is still popular with gamers more than 20 years later. Notwithstanding its popularity in Asia, the Korean developer NCSoft announced in 2011 to shut down its North American servers due to unprofitability leaving players that have invested considerable time into the game empty-handed.

Gamers joining the Ready Player One worlds could suffer the same fate as the North American Lineage players given that the multiverse’s sole proprietor, so the movie’s main character is told, has the power to turn the Oasis off forever. One could argue that the staggering user experience (UX) delivered by the Oasis or games like Fortnite far outweighs the above disadvantages. Still, this cannot belie the fact that players are at the mercy of a trusted party that can lock out players at will, especially when games are discontinued. This cannot be in the interest of millions of players who spend a large part of their waking hours in virtual worlds without being able to secure their digital possessions. With a few exceptions, digital items such as those in Fortnite are issued into a walled garden by the creators of traditional games who retain full control over them. Since game publishers try to maximize revenues from in-game purchases, they have little interest in creating scarce items that gamers can extract, trade or sell. Put differently, gamers do not actually own them.

So far, the elephant in the room has been largely unaddressed by the large gaming publishers. For many gamers, the obvious question is why game developers do not simply introduce cryptoassets to their games, or better still, put their entire games on a blockchain that puts gamers in control of the items. However, this line of reasoning is far from a no-brainer and a crypto tweak is by no means a panacea. First, game developers are unlikely to jeopardize their blockbuster games by abandoning highly profitable business models that already work solely for the sake of adding crypto. If Epic Games were to tokenize Fortnite weapons or skins, it would cede control over the supply of in-game items - its major source of revenue. Likewise, tokenized items might also entail lower revenues if they are subject to digital scarcity and cannot be created by at the touch of a button by users willing to pay. Second, introducing blockchain to popular games is unlikely to increase user experience or usability right away, in part because of the inevitable technical trade-offs. Instead, it would likely lead to a lack of product/market fit, with developers not yet capable of building cryptoassets natively into blockbuster games. The gaming experience would ultimately suffer. Most of today’s gamers, especially the newbies, are unlikely to appreciate the value of a tokenized assets, especially if it affects the UX. As a result, word of mouth would not be spreading, thus weighing on usage and the network. If developers want to integrate blockchain into games, they will have to explore new avenues to ensure they are offering something the market wants. As pointed out by Tony Sheng who constantly provides valuable insight into crypto-related gaming topics, “adding crypto to existing game models is more likely to fail than to work.”

Chances are, future blockchain games are unlikely to look like today’s games with a crypto spin. Instead, games will have to be reinvented to some extent. Developers will have to get their teeth into scalability challenges over the next decade to get even close to a multiverse. People still remember when a spike in transactions involving the smart contract address of CryptoKitties were clogging the Ethereum network in 2017. This activity led to a massive backlog of unconfirmed transactions, notably slowing the Ethereum network. Unsurprisingly, the big gaming studios appear in no hurry to announce blockchain games based on immature technology. Rather, incumbents are likely to take an experimental route by releasing smaller games or initially yield the floor to independent studios. In November 2018, Arcade Distillery announced the first blockchain-based game on the Playstation 4 called Plague Hunters. Ubisoft, one of the largest video game publishers, created an experimental game called Hashcraft. Interestingly, Epic Games made its underlying Unreal Engine also available to developers of blockchain games.

On the other hand, blockchain projects such as EOS and TRON are aggressively pushing for the development of games that run on their platforms to increase adoption. Both protocols are permissioned blockchains that centralize block production in the form of a delegated proof-of-stake (DPoS) consensus mechanism, thereby sacrificing decentralization for high throughput and scalability. TRON recently announced a blockchain game fund in the order of USD 100 mn to lure gamers to their platform. Around the same time, Mythical Games raised USD 16 mn in a Series A funding round to develop games that run on the EOS blockchain. As shown by DappRadar, a website that tracks decentralized applications, EOS and TRON already dominate gambling dapps when it comes to daily active users. While 19 out of the top 20 gambling dapps run on either EOS and TRON, the number of daily users is rather unimpressive. The top gambling application attracted a mere 4,300 daily active users. Although it is still in its infancy, blockchain gambling’s road to mass adoption is likely more straightforward than its gaming counterpart. Importantly, the addition of crypto does not materially change the product/market fit. The dapps are still catering to gamblers, with the providers taking the familiar fee. Novel projects such as Fun Fair, which promises a secure and transparent gambling experience using its own utility token while running on the Ethereum blockchain might have a hard time competing against thousands of EOS and TRON gambling dapps.

The state of gaming dapp adoption is equally lackluster. The roughly 5,000 users in the top gaming application EOS Knights suggest that blockchain games are still a long way off. Another crypto game, however, Gods Unchained by Fuel Games, stands out. Although it only had an average of 80 daily active users during the first week of April, its smart contract holds about 7,100 ether – or the equivalent of USD 1.2 mn, more than any other crypto game. The collectible card game draws heavily on Activision’s Hearthstone game which is based on the World of Warcraft franchise. In August, the winning bid for one of the game’s cards was the equivalent of USD 60,000. According to a Breakermag article, the game is easy to use and has a “frictionless on-ramp” for players that have never played a blockchain game. CoinDesk named Gods Unchained the “Title to Watch” for 2019, not least because the game developer is backed by Coinbase Ventures. Perhaps more interestingly, the trading-card game uses off-chain gameplay but utilizes the Ethereum’s ERC-721 standard for non-fungible tokens (NFT) that allows for the creation of unique digital assets traceable on the Ethereum blockchain. Further, game developers can integrate the same NFTs in other games akin to transferability feature experienced in the movie’s Oasis.

Speaking of the multiverse, a company called Enjin has built a platform that allows blockchain game developers to cooperate in order to create multiverse-style experience based on the Ethereum blockchain. The availability of Enjin’s game design software development kits (SDKs) on the Unity, Unreal, Godot and Lumberyard development platforms is clearly a breakthrough for the blockchain game project. Meanwhile, developers of six blockchain games have teamed up using the Enjin platform to create a multiverse that allows players to use their characters and items across the different games. The Enjin toolbox allows developers to build games with multiple settings where players can own, transfer, trade or sell items. The ecosystem lets gamers create crypto items using the underlying Enjin coin (ENJ), an ERC-20 token, as in-game currency. Further, the game developers introduced the ERC-1155 token standard which is essentially a smart contract that can manage multiple token types. Technically, the multiverse-capable player is an ENJ-backed ERC-1155 token, with “levels” as a single metadata variable. Multiple games render this token differently. Similarly, the item is an ERC-1155 blockchain asset that can be leveled up and that is rendered differently depending on the game. The smart contracts also allow gamers to “melt” their in-game items into ENJ. The currency can then be used to buy items (weapons, skins, upgrades) in the same or in other games.

In light of the constantly improving features, Bitcoin pioneer and educator Andreas Antonopoulos has suggested that gaming might be the breakout application for Ethereum. But crypto adoption in gaming will most likely not happen overnight. Blockchain arguably opens up new possibilities with the potential to grant gamers and developers a voice. There has been a lot of buzz around the part that smart-contract platforms such as Ethereum, EOS or TRON could play in the future of gaming. While discussing the challenges of on-chain scaling are beyond the scope of this article, the issue remains a major headwind. Among the reasons blockchain will continue to appeal to gamers is the fact that it allows cryptographically-provable ownership over virtual goods, no matter whether they’re obtained while playing or through a purchase at an external cryptoasset marketplace. And players would no longer be stuck with items in games that fail to gain traction among or unexpectedly shut down.

It remains to be seen what the future of crypto gaming holds and what a blockchain-based multiverse experience will look like should it ever be realized. We understand that for at least the next decade, it will look radically different from the vastly superior Ready Player One counterpart but may compare favorably in terms of centralization. While the multiverse in the movie has a sole proprietor that inherits “total control of the Oasis” and even the power to turn it off forever, no such central authority is likely to exist in the blockchain multiverse.