I didn't expect that my first venture into real estate would be a small plot of land right next to a capital city... in a video game.
Why? you might be asking... well, this is an experiment. It could very well amount to nothing other than some silly looking NFT on OpenSea, or it could become a new form of passive income, where my digital livestock can earn real yield.
At the very least, i'm helping support the team at EmberSword build out their vision for a play-to-earn MMORPG – which i'm more than happy to do.
So what's the hype about NFTs?
As i've covered in other articles, Non-Fungible Tokens (NFTs) are a new form of digital asset, very similar to the cryptocurrencies you've probably heard about like Bitcoin or Ethereum.
What makes them different than a BTC or an Ether, is that instead of representing a fungible asset, like a currency, NFTs are a uniquely tokenized representation of a digital asset, thanks to ERC-721. What gives these tokens provenance is that every exchange can be traced, all the way back to inception. This helps verify that the NFT one is buying is legitimate, and was signed by an authority that minted the specific digital asset.
Fungible = Assets that can be interchanged, with no difference between them.
Non-fungible = Assets that can't be duplicated. Each one is unique.
As the cryptoverse matures, so do the applications of blockchain, cryptocurrencies, and smart contracts. One of the latest hot topics is the NFT market. Just as certain physical art pieces, or collectible trading cards hold value in certain circles, NFTs can be the digital equivalent of collector's items.
One has even sold for $69 million dollars. Was that a wise investment? We will see... i'm thinking not. While I believe there is a real use case by representing value through digital ownership – there's a huge bubble for these items right now. Even Jack Dorsey is getting in on it.
Really – who's in the market to buy a tweet?
Maybe Jack will change his mind one day and want his tweet back, who knows.
While the space is maturing, it's been a free-for-all. People are buying anything they can get their hands on with the word 'NFT' on it. Check out NonFungible for some stats on the different NFT markets.
One of the most successful real-world applications has been the creation of digital NBA highlights, having ownership represented by an NFT. TopShot has pulled in $230 million so far for these new-era trading cards.
Everyone is clamouring to find that 'killer dApp' using NFT technology. It's an exciting frontier, but big sales headlines need to be taken with a grain of salt.
Hot Take: NFTs are only valuable if they can be resold.
Since anyone can go and create an NFT, many high-profile influencers have been grabbing as much in primary sales as possible. But the real value comes from the market demand for these digital collectables. It's only been about 1-2 quarters of mass market appeal, but there is some confidence that a secondary market exists for these items.
It appears the blue chip NFTs are able to hold their demand, but the long tail isn't showing too much fruit. Even the data shown above isn't without it's flaws.
Let me introduce you to the concept of wash sales:
Just because it appears that there is transaction volume in the secondary market, doesn't meant that it is legitimate. We need to remember, wallets are anonymous.
There's nothing stopping someone from selling an NFT to themselves multiple times, at increasingly higher prices to simulate demand, and to jack up the price of an asset.
Just imagine being that guy who buys an NFT thinking it is in hot demand, only to find no market on the other side.
That's why i'm personally skeptical of these art-based NFTs. While i'm sure the Beeple NFT and other key assets will have some liquidity among high net worth collectors, there is a better probability of owning a dud. Crypto is risky enough, thanks. I'm much happier holding my Ether right now.
But, I AM optimistic that there is a ton of potential for NFTs in gaming.
NFTs in video games
Why video games?
A market already exists for in-game virtual item sales – currently approximated at $15 billion dollars.
If you've ever played any of the top cult-like online games such as Fortnite, League of Legends, Call of Duty, Counter Strike, or even many RPGs like World of Warcraft or Minecraft – you will be well familiar with the casino-style marketplace that exists for skins and other cosmetic items. There are even real world markets for farming in-game currency.
One of the biggest limitations is that these items are essentially on-loan from the game creator. No player actually has custody of the items they have purchased. They just get to use it at the discretion of the publisher. If the game runs out of steam, or releases a sequel – there goes the value of your items.
If a publisher doesn't support player-to-player item markets, black markets have formed where in-game goods can be brokered for fiat dollars. Usually, if publishers get wind of these actions – the player is banned and their assets seized. Not a great way to foster an economy, is it?
Despite all of these hurdles, the market still exists. This signals to me that there is a massive opportunity just waiting for a solution to make it easier to trade.
By interfacing NFTs with in-game items, all parties can benefit. Here's how:
- Real ownership for players
If game publishers layer in NFTs for valuable in-game items, when players make an investment or find that rare drop, they can actually own it in real life. This can create an abundance of opportunities, especially for developing countries – where playing a video game could potentially put food on the table. What an amazing way to foster global commerce, and create opportunities for wealth creation.
But what about the publisher? Why should they care to do this? Altruism? Unfortunately, that won't get you too far these days. Many in-game items are strictly sold with engineered obsolescence, where publishers destroying the value of old items in order to get consumers to keep buying new ones.
So what can be done to counter this incentive for publishers?
- Royalties on resale
Since NFTs are minted and transferable on Ethereum, their value exchange can be programmed. The opportunities here are endless, but one of the major revenue generators could be the ability to embed royalty payments directly into the token.
For example, a game publisher creates 100 limited edition superman cape NFTs and sells them to their players. This scarcity can drive real demand within the community. Players can put up a cape for sale, using NFT markets like OpenSea. When a transaction does occur, a portion of the sale can be sent directly to the publisher.
The image below depicts an example:
Breaking it down for those that haven't seen a block explorer before, this is a snapshot of a real blockchain transaction:
- From: represents the user selling the goods
- To: represents the smart contract marketplace of Rarible, and how the fees break down to various parties. Note a portion automatically gets paid out to Rarible.
- Tokens Transferred: the actual exchange of the NFT that was purchased
- Value: represents how much the NFT was purchased for
This enables game publishers to create in-game economies and preservation for games they release. The more these items change hands, the more recurring income that gets generated. Nothing's stopping publishers from perpetually creating new items, but resale creates an additional revenue stream while also adding value to their primary stakeholders – the players.
- Persistence and item history
We can even take this farther. NFTs exist within a layer outside of any single game, as they are stored in a blockchain. This means that ANY application is free to openly interface with it. This is where the term metaverse comes from – the interoperability of multiple virtual universes all having a way to communicate with each other.
Have you watched Ready Player One? We are closer than you think.
By creating tokens that can programmatically interface with in-game events and other systems, it creates an environment where any in-game item can create an identity and history of it's own personal accomplishments – across games. This creates even more ways for publishers to capture audiences and add in additional layers to their virtual experiences.
Even among the same item, NFTs can be independently valued. This means, that an item that was first to kill a boss, or used by an influencer during an esports tournament can have additional bonuses in-game, further compounding it's value in the market.
It's like how in today's trading card market, a PSA 10 Charizard is worth more than a PSA 5. In function, they are the same, but an outside source added properties to the cards that create a history of value.
This all culminates in the ability for in-game items to appreciate in value over time, further compounding monetization opportunities. Since in-game items have actual utility, and are more liquid than a piece of digital art, I am hopeful that by introducing NFTs to this existing market, it can find product-market fit and create brand new digital experiences.
When it comes to land, this is just another form of in-game item NFT. However, like in the real world where land can bear yield – so too can the digital equivalent.
As players explore a game world and interact with the land, either harvesting materials, slaying monsters, or trading loot in a store – this can all be traced back to what plot of land these items were sourced and sold.
When a player goes to sell an item, the game world can reference the NFT properties to yield commission for both the publisher AND the land owner.
This relationship can create an interesting yield model, where the return of a piece of land becomes a function of the volume of in-game item sales, the events that happen on the piece of land, and how much items sell for.
This enables a land NFT to have deterministic value. How much value can it create? Well, that's a great topic for another article. We can deep dive the concept, and see what kind of economy would need to exist for a piece of land to be a worthwhile investment.
What will come from all of this?
Maybe nothing, but from a technology perspective – I think it's incredibly interesting.
For now, I can show off my shiny new collectable. When the game launches, we can look back and see how accurate my predictions were.