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I made it out to a party for the first time in a while in San Francisco. Friends of Gabby Dizon, founder of Yield Guild Games, gathered for a soiree at the Folsom Street Foundry, a place where the game and tech industries gathered often in pre-pandemic days.
Along with Dizon were James Zhang, CEO of Concept Art House, which just raised $25 million to fund its expansion into nonfungible token (NFT) art, and Miko Matsumura, cofounder of Gumi Cryptos, which invests in blockchain game companies. Plenty of their friends were there to welcome Dizon on his trip to the U.S. All three — Dizon, Matsumura, and Zhang — will speak about NFT gaming and “play-to-earn” at our GamesBeat Summit Next online event on November 9-10.
These are people who are true believers in NFTs, blockchain, and play-to-earn, and I know that many of them have been immersed in these ideas for many years. They’re not fly-by-night people. NFTs use the transparent and secure digital ledger of blockchain to authenticate unique digital items. By enabling game developers to find a new source of revenue — auctioning off rare items for high values and reselling them as well — they hope to bring a new business model to gaming that is as revolutionary as free-to-play was for Facebook games, massively multiplayer online games, mobile games, and eventually all games.
Anything with collectibles — art, trading cards, card games, and just about any video games — can use NFT technology to create items that are scarce instead of digital items that can be ripped off with abandon. An NFT is no different from money. If you believe in it, then it’s real. And it’s something that gamers themselves can profit from. At the party I attended, everybody believed.
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The benefits of NFTs
They also believe — perhaps in ways that are more easily challenged by skeptics — that NFTs will usher in the metaverse, another buzzword the skeptics don’t like that signifies the universe of virtual worlds that are all interconnected, like in novels such as Snow Crash and Ready Player One. Since NFTs can establish true ownership, players are no longer serfs on the lands owned by the lord of the manor — the game publishers. They can take their NFT items from games and one day use them in interoperable games in the metaverse. If a game shuts down, that’s no big deal as players will be able to take their avatars and other NFT items to another world. Their investment won’t be wasted.
That’s a lofty ambition that could prove extremely difficult given the delicate balances of game economies. It’s more easily done with games that have been designed by one company to work together, like the worlds inside Manticore’s Core — a collection of games where it’s easy to take your avatar from one world to another.
But NFTs have already changed the world with simpler benefits — the simple ability for players to view the time that they put into a game as an investment and the opportunity to get paid for that investment.
Years ago, I called this The Leisure Economy. Dizon at YGG calls it “play-to-earn,” and his term is prevailing in part because he is making it happen. It’s the idea that you can get paid to play games.
If you start playing some of these NFT games like Sky Mavis’ Axie Infinity now, you can make money by first leveling up your cute NFT characters (Axies) and making them more valuable. Each one is unique. You can fight with other players and win. You can also think of them as collectible pets and keep going back for more. Sky Mavis, based in Vietnam, was started by a team of missionaries with a view that NFT games could build transformative economic power for communities, particularly in developing countries where jobs are in short supply. It could even be a model for more developed nations as the coming of AI will likely wipe out a lot of jobs, Sky Mavis‘ Jeff Zirlin said.
You can sell them for a profit, and all of a sudden the time you invested in that game will pay off. You can make money from the game, and that’s exactly what happened with players in Yield Guild Games, which is guild of players gathered on Discord. This guild not only makes it easy for players to join NFT games. It also teaches them how to invest in titles where playing is an investment, like buying virtual land.
In the Philippines, many players leveled up their Axies, sold them, and pocketed money that was three times the minimum wage. That was very important at a time of the pandemic, when many jobs were wiped out.
Dizon and Zirlin believe that Axie Infinity created hundreds of thousands of jobs in the Philippines and they have since seen the formation of hundreds of guilds like Yield Guild Games. While the price to start playing the game is steep — players have to pay hefty fees to create their characters — the guild has scholarships that pay those fees for beginning players, who pay back with interest when they earn while playing. This film by YGG and Emfarsis captured the story of Axie Infinity in a poignant way.
This “play-to-earn” economy is being adopted by lots of other games — and, unlike Axie Infinity, many of those games won’t be pissed on by hardcore players as crappy blockchain games. We will see triple-A blockchain games taking advantage of play-to-earn, said Nick Tuosto of Liontree and Griffin Gaming Partners (one of the biggest game funds).
And while players in wealthy countries like the U.S. are sitting on the sidelines waiting for better games, players in emerging markets like Venezuela, Brazil, Indonesia, Malaysia, Thailand, Nigeria, Ghana, and Turkey are embracing play-to-earn as a way to make a living in the digital world. They don’t care about fancy graphics because they phones can’t run them.
Zirlin is excited because of the income generation among underserved people around the world. About 25% of the players are “unbanked,” meaning they have no bank accounts. And 50% have not previously used cryptocurrencies, while 75% are new to NFTs.
They’re creating new jobs that never existed before, just like esports players and the influencers on TikTok, YouTube, Facebook, and Twitch. Millions of players are participating in this virtual economy, which goes as far back as 2003, when Linden Lab launched Second Life.
“It’s beautiful that we have been able to introduce crypto to people that have traditionally not been using it,” Zirlin said. “We’re getting this technology in the hands of the people that really need it. And that is super rare.”
Follow the money
I can hear the protests now. Blockchain games aren’t fun. They’re scams. They’re going to be regulated. They’re polluting the environment. These are legit concerns, but they will be dealt with in time. To test this idea, we can follow that old rule from Watergate. Follow the money.
All year long, I have been doing this. If you look at Google Trends, you’ll see that NFTs started picking up in February and skyrocketed after related NFT sales like digital art and NBA Top Shot took off. Dapper Labs has now seen sales and resales of those NFTs top $780 million. In March, an NFT digital collage by the artist Beeple sold at Christie’s for $69.3 million. It sounds so dumb. The popularity of NFTs have exposed se systems drawbacks too in numerous scams where people steal art and sell it as their own NFTs.
By May, the NFT market had crashed on Ethereum. Kotaku wrote that the NFT bubble had burst. But then it rose again in August and September, took a dip, but grew steadily. It’s been as volatile as cryptocurrency trading for Bitcoin, but it has steadily gone up. DappRadar, measuring the broader NFT market beyond just Ethereum, reported that NFT sales hit $1.2 billion in the first quarter, $1.3 billion in the second quarter, and a whopping $10.7 billion in the third quarter as games such as Axie Infinity took off.
As this was happening, the traditional game industry was sitting on the sidelines. Using its tried-and-true method, it was waiting for this startup market to sort itself out. When a victor emerged, the video game giants intended to swoop in and buy the winner. Threat eliminated. But this disruption won’t be so easy to manage.
For one thing, if everyone is doing a crazy thing, and you’re sitting on the sidelines while smart people are joining in, who’s the dumb one?
Consider Sorare, a 30-person studio in Paris that makes an NFT-based fantasy soccer game. SoftBank swooped in and invested $680 million in Sorare at a $4.3 billion valuation. Electronic Arts just bought Glu Mobile for $2.4 billion and Playdemic for $1.3 billion. That has given EA about 2,000 mobile game developers, up from 1,000 before that. But would EA’s board approve a $4.3 billion purchase of Sorare, a company whose assets could easily walk out the door? All of a sudden, the strategy of buying the winner no longer works. EA can’t buy Sorare, which is a maker of one of the fastest-growing soccer games. In Q3 alone, the NFT game companies raised more than $1 billion in equity-based investments, according to investment bank Drake Star Partners.
Dizon told me that he believes the startups in NFTs are going to win because they’re already becoming big, and they’re getting money from the hundred game-focused VC funds that have sprouted in the last couple of years. And they’re getting money from Andreessen Horowitz, which has become very bullish on games and NFT games in particular.
“The Axie team has triggered an earthquake in gaming and the industry is now forever changed,” said Arianna Simpson, general partner at Andreessen Horowitz.
Remember. Follow the money. Would you bet against Marc Andreessen and Ben Horowitz, the creators of Netscape? They’ve backed companies such as Coinbase, Skype, Medium, Zynga, Twitter, Facebook, AirBnb, Oculus, and Roblox. Sure, they’ve had duds. We could be in a tulip mania. But suffice it to say that smart money (and, yes, dumb money) has moved into NFTs. And the early investors are making tons of money while others are sitting on the sidelines.
Among big game publishers, only Ubisoft had the foresight to begin exploring blockchain a few years ago. It created an accelerator for blockchain startups and other tech innovators. And while it didn’t launch any blockchain games itself, Ubisoft just invested in Animoca Brands, which raised $65 million at a $2.2 billion valuation this week.
To review what has happened in recent weeks, Zhang’s Concept Art House raised $25 million, Galaxy Interactive to raise a $325 million fund to invest in blockchain games, Bitkraft raised a $75 million token fund, Sky Mavis raised $152 million, Dapper Labs raised $250 million, and Mythical raised $75 million.
You can see the Axie treasury on the blockchain. It has 36,300 Eth (the Ethereum cryptocurrency) and 18.3 million Axie tokens in it, Zirlin said. The worth is $7.47 billion, according to measurement firm CoinGecko. Yield Guild Games’ tokens are worth about $6 billion — not bad for 11 months of work. Both projects are worth more than the value of Ubisoft, a 35-year-old video game company.
I’ve heard that these companies are all going to burn down the planet with mining costs that burn so much computing energy that they will cause climate change. If Bitcoin prevails as the biggest currency, that is a threat. But Ethereum is No. 2 and it will be forking in a way that leads it away from the computing-intensive “proof of work” systems to “proof of stake,” which won’t burn down the planet while still taking advantage of the added security that blockchain brings against problems like hacking.
On top of that, a bunch of companies like Dapper, the maker of the Flow protocol, are creating Layer 2 protocols that sit on top of Ethereum and do the transactions “offchain” in a way that does not generate huge “gas fees.” This handles thousands of transactions per second in a way that offsets environmental damage. And for all of those hardcore gamers who keep bringing this up as a reason they won’t play crappy NFT games, do they consider the environmental damage of plastic cases, disks, stores, or the environmental costs of our existing financial system with physical banks in every neighborhood, as well as their data centers and cost systems that take a big fee on every transaction?
Innovators are leading us away from those environmental costs and are figuring out offsets. This is a serious drawback, and yet the true believers feel like it’s been used to tar the NFT community as uncaring. And it’s a problem that tech can overcome.
In talking to Zirlin, Matsumura, Zhang, and Dizon, I learned about some philosophy behind the true believers. They believe NFTs can change the world. For instance, the decentralized technology of blockchain could cut out the middlemen and the platforms. With blockchain — which uses a lot of computers to verify a digital thing — one player can trust another player enough to engage in a peer-to-peer way. That’s like trading a used item without going through eBay. Or making a remittance payment to your home country without doing a bank wire transfer.
You take out a lot of unnecessary fees. And you can preserve privacy. If the big tech companies can’t be the middlemen anymore, you no longer sacrifice your private information to do the transactions you want. If you invest five years in an MMO character and decide to sell it, that’s no longer breaking terms of service. You sell it and you pocket the money and don’t pay a huge fee to a platform.
The missionaries believed property rights incentivized players to act more like founders and employees rather than users. These rights include being able to sell your game assets to anyone in the world, earning liquid tokens for playing/contributing, and being able to own a piece of the game you’re playing. They also believed that play-to-earn unlocks new types of work around digital metaverse economies, just as Uber, Airbnb, and DoorDash created new types of jobs and professions.
“It’s a great example of incentive alignment, or co-ownership, between the game developer and community,” Zirlin said. “And it’s a model that we think is going to transform the way that builders and users interact, going forward. And we think that it’s going to transform the way that the internet works, where it’s going. I think it will create a more open and more fair, a more empowering version of the internet, a little bit more in line with actually what the original creators of the internet envisioned.”
This is Web 3, the successor to Web 2.0, which was all about the centralization of power in the hands of tech giants who amassed huge followings on the internet. Web 3 decentralizes the power, puts it back in the hands of users, and it even leads to a project model instead of a company model. Kevin Chou, cofounder of Kabam, discovered this by decentralizing his rewards startup Rally as a project. Axie Infinity is more like a coalition of players, investors, and the company, Sky Mavis.
“We put the infrastructure into the game to grease the wheels of the economy, and NFTs are permeating mainstream culture,” Zirlin said. “And money has gotten more abstract over time, from shells to gold to paper money, to fractional reserve banking, and now to full digital currencies. Historically, whoever has been in charge of this abstraction of money has been able to define the future of culture and entertainment. I think that’s happening right now.”
This is disruptive, revolutionary stuff. And the traditional game companies are waiting for the regulators to weigh in.
Game developers prosper
Some traditional game companies are recognizing the threat. Last week, Valve told the maker of Rust that it would not allow any NFT game companies on Steam, its huge digital distribution platform.
Game developers benefit from NFT monetization and Web 3. Consider Sky Mavis, creator of Axie Infinity. It has two million daily users for the game, but the game isn’t on an app store. It’s not on iOS or Android. It’s available on the web. And still it has millions of users and lots of revenues and lots of people making money trading. It is by far from perfect. But it can reinvest that money in its games, and it is doing so.
Back in April, Axie Infinity had 3,000 daily active users. It is still getting noticed on its own, even after cutting out the middleman, and it can afford to share more of the wealth generated by the game with the players themselves. Axie takes just 4.25% of each transaction.
In that way, Axie Infinity is part of a social movement. This level of ownership and accessibility within the Axie economy is upending society and creating an economically viable digital nation, Zirlin believes.
Axie has grown to be the largest NFT gaming ecosystem and has amassed players around the world with more than two million daily active users logging into the platform in August. Axie Infinity has already achieved $33 million in daily transactions, for a total volume of over $2 billion. Again, without being on the app stores, Zirlin points out that Axie Infinity is one of the top 60 games being streamed on Twitch. Not bad for a company with 60 employees.
On top of that, the game developer Sky Mavis only owns 20% of Axie Infinity. Those who own the AXS tokens own the game, and that includes Sky Mavis, the players, and investors who have bought its governance tokens. All of those parties get a voice in how Axie Infinity is run.
Dizon said he knows of other projects where the game developers themselves are getting paid in a combination of fiat (U.S. dollars) and tokens. Those tokens give them a say in what happens with the games. That’s a kind of communism. But it’s communism with benefits, since those tokens will allow them to participate in the reward if the game becomes extremely valuable. If they build a great game, the tokens become extremely valuable and the workers get to reap the rewards.
The Hollywood model
One model already mimics this structure, and it’s Hollywood. When artisans gather to make a movie, they don’t form a company. They gather together to work on the project, and then they disperse. They get paid union wages and they move on. In this case of blockchain projects, they could also get a share of the proceeds in the form of tokens.
Hollywood doesn’t have the same problems with things like “crunch,” or unpaid overtime, that game companies do. If the game industry’s workers toiled together on projects, they could get access to the upside and also be mobile enough to leave projects for new ones that pay them well. The structure of blockchain gaming would make it easy for game developers to join projects, get a piece of the action, and move on. And if the traditional game companies say they want to buy a part of a project, the owners of the project may just say, “Screw you.”
Dizon tells me gaming projects are forming as we speak.
I fully expect to see an exodus of people from traditional game companies to the NFT projects, particularly as the triple-A blockchain games arrive. Companies like Forte and the NFT platform companies are trying to make it easy for the triple-A game makers to make the transition, and I can see developers moving over because they know the traditional game companies will move to slow. I know an executive at a very big game company who is taking a job at a blockchain game company.
At last night’s party, I met one fellow who was working at an established game company with billions of dollars of sales. He said he had a few offers from NFT game companies and was considering them in part because he had a fear of missing out, or FOMO. I reasoned it out with him. He agreed that he should hold out for a real game, one that was fun to play because of its gameplay and could also take advantage of NFT benefits. He also believed in play-to-earn, and I pointed out how hard it would be for traditional companies to buy their way in. And he said it was just a matter of time before he made the move.
It’s still risky. The regulators may cry foul. And one important question is, “Where are the real games?” We still have to see them. Phantom Galaxies from Blowfish Games and Animoca is coming in 2022 and it looks pretty cool. I hope there will be more soon. The believers tell me they are coming.
It turns out we’ve had a lot of demand for NFT gaming panels at our event. We’ll discuss these ideas in a thorough and efficient way and help you sort out the future, whether you’re making a career move or a company making a bet on its future.
The speakers on that front include Witek Radomski, chief technology officer at Enjin; Eric Schiermeyer, CEO of Gala Games; Yat Siu of Animoca Brands; John Linden of Mythical Games; Jeff “Jiho” Zirlin of Axie Infinity maker Sky Mavis; Roham Gharegozlou of Dapper Labs; Piers Kicks of Bitkraft and Delphi Digital; Amy Wu of Lightspeed Ventures; David Kim of Wdny.io; Mitch Zamara of Million on Mars; Amy Jo Kim of Game Thinking; Chase Freo of Op Games, Lars Doucet, game development consultant; Andrzej Mazur of Enclave Games; and the iconoclastic Brooks Brown — who is not a fan of NFTs as currently executed.
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