Categories: Ethereum

New to Blockchain: Turning In-Game Virtual Goods into Assets

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I recently started worrying about Catoshi Nakameowto. Last year, WIRED purchased its resident CryptoKitty, a cartoon cat with tiger stripes and trembling eyes, for $1.05. Since then, we haven’t seen her much. A so-called “digital collectible,” she lives a lonely life in perpetuity at an address on the Ethereum blockchain: You can look at her, but little else. Soon, though, her digital life could gain a bit more excitement—in the hands of game developers.

For developers, the technology that underpins Catoshi offers an intriguing twist on the economics of gaming. Virtual goods are already a $50 billion-plus annual market, making up the bulk of gaming industry revenue as players shell out for the likes of fancier virtual swords and new character outfits. But unlike a CryptoKitty, gamers don’t really own the virtual items they pay for: at the end of the day, they’re pixels that disappear when you delete the game. Companies like Andreessen Horowitz–backed Forte and Hong Kong’s Animoca, which invested in CryptoKitties last year, want to use blockchain technology to turn these ephemeral items into assets.

Kevin Chou, Forte’s CEO, previously founded Kabam, the mobile gaming company that was a pioneer of the so-called freemium model: Games that are free to download and don’t require a fancy console to play, but generate revenue by selling virtual goods. Chou’s insight was that people increasingly live their lives online, and put real value on their virtual experience. “Imagine a person who’s spending three or four hours a day playing a game and is plugged into the community, talking about what’s going on in their lives with their friends,” he says. That makes people more likely to pay for virtual items, whether to unlock new types of gameplay or simply because they look pretty. Kabam sold for nearly $1 billion in 2017, primarily to South Korea’s Netmarble.

But Chou says in-game economies have grown so complicated that developers have trouble overseeing them. As a result, they place limits. Game developers typically sell goods directly to gamers and keep a firm grip on the levers of supply and demand. There’s no mechanism for players to sell the virtual items among themselves—because they don’t actually own the things. “Right now these are basically command-and-control economies,” says Brett Seyler, Forte’s COO.

Some players find loopholes to buy and sell their in-game spoils. CounterStrike: Global Offensive, a popular multiplayer shooting game, became notorious for supporting billions of dollars in bets that use decorative virtual weapons, known as “skins,” as gambling chips to wager on matches. Valve, the game’s publisher, never explicitly allowed the practice, but third-party trading sites could let players trade by plugging into the game’s API.

Chou believes blockchain tools could make in-game economies a bit more laissez-faire. He credits CryptoKitties, which arrived in 2017, with the concept. “All these light bulbs went on around the industry,” he says. With a blockchain system, gamers could trade virtual goods securely, without developers having to manage the commerce; they could even arrange to take a cut of each trade. But CryptoKitties’ initial success—one of the cats was auctioned for $170,000 in 2018—was a red herring, Chou says. The hype eventually fizzled, leaving a bunch of deflated cats stranded on the blockchain. There wasn’t much to do with them, apart from creating more cats.

Forte is looking to first develop trading platforms within well-established games where virtual goods are already used. In February, the company announced a $100 million fund with payments company Ripple to entice game developers to start using its tools, which involve a mix of Ethereum and Ripple technology to do things like handle transactions and help developers visualize what’s going on in the marketplace. The first round grants will be announced later this month, Chou says, with the goal of having “hundreds of thousands” of players involved by the end of the year.

The question is whether the traditional gaming industry will embrace a business model that lets gamers trade—and the nascent tech behind it. Serkan Toto, an analyst at Kantan Games, sees blockchain trading as an inevitable extension of the marketplaces built by the freemium model. Currently, when gamers pay for a new sword or outfit, they’re simply paying for pixels to appear on their screen; they haven’t actually invested in a virtual asset. “With blockchain, you actually own these items, and in that respect it’s really different from what we have today,” he says. “That’s a major shakeup potential for the industry.”

That could also be perilous for game makers, Toto notes. Regulators are just now catching up to the freemium model with crackdowns on in-game spending—especially so-called loot boxes, where players pay for a haul of mystery items in the hopes of receiving a particular item. In Europe, some countries have banned the practice, calling it a form of gambling; this week US Senator Josh Hawley (R-Missouri) introduced a bill that would require developers to wall off loot boxes from younger players. But the concerns extend broadly to in-game spending, especially when it comes to kids.

“The defense that a company has against being regulated is that those virtual items have no value,” says Michael Pachter, video game analyst at Wedbush Securities. Trading, he adds, changes that calculus, and he’s skeptical that major publishers will take on the risk. There are other hurdles, he notes, like whether gamers themselves might rebel against new trading features that change how existing games are played.

Others are taking different approaches to blockchain games. Toto points to Animoca, which is focused on licensing popular brands, like Formula 1 and MLB, to build games with tradable race cars and baseball players. The company also invested last year in Dapper Labs, the makers of CryptoKitties, which CEO Roham Gharegozlou says is focused on building new experiences for your cat, like racing games, directly on Ethereum. But so far such decentralized applications, or dApps, have gotten little traction. Limited storage and speed mean Ethereum is fine for hosting a card game or a collectible item, but no good for the high-octane gaming of today. Not to mention what happens if you lose your cryptographic keys. (Your cat gets stranded forever.) But the company hopes to be there when the technology matures. “It’s purring along,” he says.

Toto compares today’s early blockchain efforts to micropayments a decade ago, before they became the ubiquitous way to buy items in freemium games. In other words, it’s early days, but with too much profit at stake for gaming companies to ignore. “We need basically one game that popularizes the concept,” he says. Still, that could take some time, with only flickers of interest from major publishers so far. Ubisoft is experimenting with blockchain technology, but hasn’t announced a game yet, while Fortnite creator Epic recently distanced itself from rumors that it was looking for blockchain partners.

It’s also unclear whether blockchain will prove the right fit for developers. Thus far, blockchain technology has struggled to find much practical use, not only due to technical hiccups but how to design economic incentives and integrate with the real world. A classic example is using blockchain tech to trace food supply chains and hunt down the source of, say, an E. coli outbreak; that’s great, as long as you can believe the head of lettuce you eat is the one that was tracked.

But Seyler says that perhaps the virtual worlds of games, with their tech-savvy participants and lack of real-world considerations, will be the place where blockchain technology can be tested and improved, a bit like how a self-driving car runs in simulation before navigating real-world streets. “Games will probably be the place where a lot of these technology and design problems are resolved first,” Seyler says. “It’s a great little sandbox.”

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