The time is 2045, and 18-year-old Wade Watts climbs over a mountain of twisted metal and squeezes through a gap to reach a hidden freight car. He opens the back door to reveal a hideout containing computer parts, gaming gear and an all-encompassing treadmill.
Wade puts on his tactile gloves, grabs a VR headset from his backpack, puts it on his head, logs in, and is taken into a meta-space called OASIS ……
Ready? Top Gun
For those of you who have seen or read Top Gun, you will know that this is the prelude to what the movie/novel describes.
Top Gun is a science fiction-turned-movie depicting a teenager searching for an Easter egg in a virtual reality game that will allow him to control the game itself, all taking place in an anti-utopian future (2045, to be exact).
The film depicts an alternate universe of the future in which a large part of society spends its time playing games in virtual worlds. In today’s world, gaming has become more and more mainstream, taking up more of consumers’ time/disposable income/attention away from traditional media.
In this paper, we will explore the NFT gaming scenario through the following.
- why gaming is the most prominent use case for NFT
- an in-depth look at how NFT games differ from traditional games
- the size of the addressable market (addressable market)
- explore the future of NFT games
- the key drivers and risks shaping the future of NFT games
(1) What are the real uses of NFTs?
NFT games are not entirely new – CryptoKitties was one of the first games deployed on ethereum, launching in 2017. While there has been a recent uptick in interest in NFTs (the recent boom in the purchase of artistic NFTs), a use case is needed for the NFT fever to continue, and NFT games are one such case to counter the “NFTs are a passing hype”.
Just like DeFi is the main product market fit for Ether, games are the most prominent use case for NFTs. Why do you say that?
In the modern gaming industry, where in-game purchases of weapons and skins are on the rise, additional revenue increases a game’s average revenue per user (ARPU). Enthusiasts are willing to pay for in-game items that provide unique functionality or make players more “powerful” in the game.
Likewise, NFT tokens that can be used and provide utility to users will eventually have solid intrinsic value. Art NFTs with unique features or names become scarce (and therefore have some kind of buyer’s value), but as long as the holder can’t use it, it remains just a collector’s item. The only “value” inherent in Art NFT is its (i) story/association, and (ii) collector’s value/resale value.
Games provide value that art NFTs cannot: (iii) usability/player engagement. Usability allows NFT to become sustainable, the addressable market for NFT to expand, and attracts more mainstream adoption through player engagement. You can have a Hashmask NFT in a metamask wallet, but you can’t actually wear or use it.
Story, collectability, and usability are the three pillars of NFT value
(2) The Holy Grail lies in true ownership
Why would games apply to NFTs?
In traditional games, the props in the game do not belong to the holder. Purchases are non-transferable and should be considered a form of “lease” as the prop is locked into the game, with true ownership in the hands of the publisher as they have the ability to determine the properties, use, availability and price of the prop.
Since traditional games tend to exist on a centralized platform, if the game stops or closes, the prop in the game will also cease to exist and the prop can only be used in the game it is in.
Ultimately it is the developers and publishers who own the game and its content IP. From a cash flow perspective, it becomes a zero-sum game with a clear bias in favor of the developer/publisher (vs. the gaming community of users paying to play/purchase items).
In contrast, NFT games offer a paradigm shift from a zero-sum game to a positive-sum game that benefits all parties; props in the game can now be tokenized to obtain.
Interoperability between different DApps and game ecosystems, so that utility is no longer tied to a single game/application scenario
Immutability, ensuring that the prop will exist regardless of the game it comes from and preventing it from being tampered with or copied
True ownership, as the prop becomes the digital property of the holder, with a verifiable and permanent record on the blockchain, and can be freely traded or transferred
Not only that, but the current generation of NFT games also uses a unique business model that accumulates revenue for players through a “play to earn” model that rewards players for participating in the game’s economy and allows them to exchange in-game items for real-world fiat currency.
Games like Axie Infinity go a step further by introducing governance tokens and community vaults that delegate ownership and management of the game so that any decision making and cash flow accrual will ultimately be done by the player community rather than the game developers.
The value no longer goes to the game developer/publisher alone
Why would game developers be interested in using blockchain in their games? The upside potential is limitless – developers have the ability to design, produce and run “digital” economies that integrate with the real world and potentially charge fees for all transactions in the game.
If DeFi democratizes finance, NFT gaming enables the realization of a player-owned and driven community, while making it feasible to make a living from gaming as a way to make a living, from B2C to C2C.
(3) Three levels of data estimation (Juicy TAMburgers)
As gaming has become more mainstream, its addressable market has grown. The digital transformation has led to the emergence of full-game digital downloads, mobile gaming, microtransactions, subscriptions, and eSports.
In fact, gaming has become one of the fastest growing media sub-sectors, with the global gaming market expected to grow from $160 billion in 2020 to $200 billion in 2023E (according to NewZoo, a leading provider of gaming market intelligence).
In 2020, 74% of total gaming revenue is generated through in-game transactions, indicating that players are generally willing to spend money in games.
Newzoo’s Gaming Market Forecast
estimates that there will be approximately 2.7 billion gamers worldwide in 2020 (expected to grow to 3.1 billion by 2023), 54% of which are located in Asia Pacific, driven by mobile penetration and the prevalence of F2P mobile games. Please keep this in mind when discussing the “make money from games” model later.
What is the potential for NFT games? Top-down speculation in three parts: (A) Total Addressable Market (TAM); (B) Serviceable Available Market (SAM); (C) Serviceable Obtainable Market (SOM)
(A) TAM (the largest possible market)
200 billion USD in 2023E, with a CAGR of 8%.
Based on Newzoo’s analysis of the overall gaming market
(B) SAM (the segment suitable for NFT games)
Approximately $155B in 2023E, from $200B x 77% share of in-game revenue
Evidenced by the growing dominance of F2P games that are profitable through microtransactions
(C) SOM (sub-segment that can be conservatively captured by NFT games)
One way to estimate this is to calculate the implied in-game revenue per player and multiply it by the estimated number of cryptocurrency-native players
We can estimate the implied in-game revenue per player by dividing SAM by the estimated number of global players, which gives us a result of $50 per player in 2023E ($155 billion divided by 3.1 billion players)
What does the estimate of the number of cryptocurrency-native players look like? There is no clear answer, but there is one metric that captures the cryptocurrency user base, namely the number of active wallet users per month
Players will need a web 3.0 wallet to access and play NFT games
Given Metamask’s leadership in web 3.0 wallets, we can use Metamask’s number of monthly active users (MAUs) to extrapolate the cryptocurrency user base
In April 2019, there were 264,000 MAUs on Metamask
It was recently announced that Metamask surpassed 5mm MAUs in April 2021
The implied CAGR from April 2019 to April 2021 is 335%; assuming MAUs will grow at this current CAGR with a 25-75% cut, we get the following range of CAGR and MAUs through 2023E
Projected 23-year MAUs based on Metamask monthly active users
Multiplying the implied game revenue per player with the estimated range of Metamask MAUs in 2023E, we can derive an annual SOM (service available market) size of about $1 billion to $5 billion by 2023E, with a player base of about $2-100mm.
Market size of NFT games by 2023
For comparison, Axie Infinity, the #1 NFT game on Ether, only has 58,000 daily active users, which illustrates that we are still in the early days of NFT game development.
Note that these numbers are speculative at best, as two variables (MAU growth and game revenue per player) are subject to the general volatility of the cryptocurrency market; actual game revenue per player (in fiat currency) is likely to be significantly higher than the above estimates.
Annual market size by 2023
While this market size measurement is only a guess, these numbers can be considered conservative given that we ignore the cyclical nature of cryptocurrencies (adoption growth and fiat value). Assuming a CAGR of 335% for MAUs over 19-21, our implied SOM (size of accessible market) is about 2.4% of the TAM (total addressable market).
There is a saying that growth drives 80% of returns – being in the right industry at the right time is half the battle won; and NFT gaming + cryptocurrency adoption is clearly still in the early stages.
(4) Successive generations of NFT games
NFT games aren’t exactly new – back in 2017, the release of CryptoKitties marked the beginning of widespread adoption of the first generation of NFT games. In fact, CryptoKitties’ massive popularity became an issue for Ether scaling, as the game accounted for 25% of network traffic at peak times.
Developers typically spend months or even years building and releasing a game, and there are huge costs associated with development and marketing. For example, Dead Redemption 2 is one of the costliest blockbusters (known as a AAA game) with development costs of $540 million and 8 years.
This development cycle translates into multi-year trends within the gaming industry and typically follows the lifespan of different “generations” of consoles. Again, NFT’s gaming prospects should be viewed through the lens of the development cycle.
Using the use of an S-curve to illustrate the intergenerational development of NFT games
First Generation (2017-2019)
The first generation of NFT games was largely based on digital collectibles, many of which were inspired by traditional online collectible card games, such as Hearthstone Legends.
Developers were concerned about the lack of meaningful applications for blockchain technology and the various public misconceptions about cryptocurrencies at the time.CryptoKitties was the first game built on ethereum, and the team behind it sought to address the lack of functionality that prevented sustainable development of digital collectibles through gaming. Since games are generally free, developers profit by taking a small percentage of all blockchain transactions in the game.
Early NFT games tended to have idle/passive game experiences that relied on time-based actions to collect resources over time. For example, CryptoKitties games revolved around collectible gameplay, where unique cats with different characteristics were “bred” based on a combination of two crypto cat “parents”. Gameplay is also primarily 2D in nature, with basic graphics and animations, and many of the games are inspired by classic games such as Pokemon and Neopets.
The first generation of games also includes EOS Knights (an idle RPG built on the EOS platform with the main goal of saving villagers from orcs), EtherGoo (a competitive idle game built on Ether where users aim to accumulate as many “goo” as possible), Etheremon (a Pokemon inspired CryptoKitties version, built on Ether), and others.
However, the first generation of games lacked long-term player engagement, as evidenced by the demise of CryptoKitties. The lack of a proper in-game economy, where players had to spend money to PK against others, and concerns about digital scarcity led these games to a “pay-to-win” model.
Trading activity on CryptoKitties has dropped significantly over the years
Second generation (2019-present)
The current generation of NFT games is part of the second generation and focuses on increasing long-term player engagement (something that was lacking in the first generation) through the in-game digital economy, specifically with the help of Play-to-Earn (P2E).
The P2E model enables players to earn income in the form of in-game tokens/rewards. These in-game tokens/rewards can be used both in-game and traded on public exchanges, as well as cashed in as the player’s local legal tender.
The forerunner of the second generation P2E model is Axie Infinity, a Pokemon-inspired NFT game in which players battle, collect, raise and build a land kingdom for their digital pets (called Axies) in an open universe. The game is currently the #1 game on Ether, with about 58,000 daily active users (over 10x growth since October 2020) and over 7k ETH in cumulative revenue since its inception.
It is so popular because of a variety of well-designed ways for players to earn income, including.
Earning love potions (SLP, utility tokens needed to propagate new Axies) through daily quests, PvP and PvE games, which can later be traded or cashed in
Earn Axie Infinity Shards (AXS) governance tokens through game rewards
Breed and trade individual Axies for profit
Accumulate resources (and potential capital appreciation) through in-game land ownership
Eventually earn the revenue that can be earned from pledged AXS tokens through the community vault from in-game fees
All of these earnings can be traded on public exchanges (e.g. Uniswap, OpenSea) or cashed in as fiat currency (e.g. SLP/PHP pairs on Binance P2P)
Axie Infinity has witnessed exponential growth over the past 12 months
Unexpectedly, a large percentage of Axie Infinity players come from developing countries like the Philippines and Indonesia, attracted by the potential to earn (potentially) significantly more than the daily minimum wage.
The innovative “game for money” ecosystem motivates players, expands the addressable market for NFT games, brings more players into the cryptocurrency ecosystem (who would not otherwise be interested in cryptocurrency), and drives up participation levels as gaming becomes essentially a part of one’s life.
Other second-generation games include Gods Unchained (the first NFT online trading card game where players earn packs of digital cards that can be sold for ETH), AlienWorlds (a browser-based simulation where players mine and compete for the in-game resource Trilium), and various sandbox platforms (such as Decentraland and The Sandbox).
Third generation (coming soon)
The upcoming third generation of NFT games is expected to have a more refined gameplay experience, take advantage of making money with games, combined with better game design/graphics that can reach the level of low-budget AAA games.
If money-making is the driving force behind the popularity of current NFT games, then upcoming 3rd generation games will begin to enter the larger mainstream gaming community as production values increasingly align with traditional AAA games (along with the financial incentive that comes with making money from the game).
This is where we may see the rapid growth of NFT games using the S-curve, and potentially the last generation of NFT games that large game developers are directly involved in.
A few upcoming high-profile games include
F2P MMORPG based on Thanabus fantasy metropolis, built on top of Ethereum (Polygon)
Developed by independent developer Bright Star Studios (backed by Play Ventures)
Positioning itself as the “ultimate sandbox MMORPG” with customizable skins, items and lands, as well as unranked, fast-paced PvP and PvE gameplay.
There will also be an ERC-20 premium currency that players can use to trade or cash in.
Land play and ownership (50% of the revenue generated within EmberSword is expected to be distributed to land owners in the form of the ERC-20 Premium Currency (Source)
Launch planned for 2022 with alpha/beta testing in 2021
Upcoming land sale on May 27, with 12,000 of the 40,000 plots available
Star Atlas Star Atlas
MMO space exploration RTS and RPG with three factions cooperating or competing for resources, built on top of Solana
Developed by a team of about 40 people, working with other Solana projects such as Serum, Stardust, Raydium, etc.
Positions itself as a AAA quality metaspace, developed using Unreal Engine 5 (cinematic visuals) with VR support; has NFTs, DeFi and a gambling element via “Play-for-Keys” where NFTs are burned if the player loses an engagement in deep space (similar to Runescape’s Wilderness).
In the game, players cooperate through a DAO-based guild system (a partnership with Yield Guild Games was recently announced).
A dual token economy is implemented through ATLAS (the game’s trading currency) and POLIS (the game’s management token).
Earliest pre-alpha release planned for Q1/Q2 2022.
Upcoming token generation events, the “Galactic Asset Offering” and an in-browser minigame launching on July 24.
Epic fantasy MMORPG set in a meta-space ruled by five player monarchs called Citadels (“feels like a giant DnD co-op adventure world”), built on the Gala network.
Developed by Gala Games, a blockchain game developer led by Zynga co-founder Eric Schiermeyer.
Land ownership is in the form of ERC-1155 NFT with up to 1,625 deeds in total; the in-game currency will be used in conjunction with Gala Network’s GALA tokens and Brave’s BAT tokens.
The game is based on HTLM5 as an instantly playable web game, allowing developers to avoid paying the 30% platform tax charged by Apple and Google Play.
An alpha version with a small playable area (for Gala Gold members) is planned for release in Q4 2021.
NFT deed and building sales launched earlier this year.
Generation 4 (near future)
In the past, large game developers have taken a passive approach to NFT games, primarily by funding crypto-native developers through incubation labs (such as Ubisoft’s Entrepreneur Lab). The development cost of a AAA game is high, so these large developers will only take the risk of big-budget projects once NFT games become mainstream.
With crypto-native indie developers laying the groundwork for mainstream adoption, it seems reasonable to assume that subsequent generations of games may see large developers directly involved in the production of large AAA games (combined with the lessons learned from past generations, particularly play-to-earn). As cryptocurrency becomes increasingly mainstream, we will see more and more traditional game companies take the plunge into NFT games.
(5) Key Considerations
The following are some of the key considerations that are generally taken into account when evaluating spaces and specific topics.
What are some of the things to look for right away in a game?
Player base (and growth): Online multiplayer models are great because the network effect they bring can be a great source of competitive advantage. The more people who play, the better the experience, thus creating a virtuous circle, especially for existing big companies
Engagement: The other side of relying on network effects is the need to build and maintain the player base itself. This is where gameplay and in-game economic incentives come into play
Gameplay: an important factor in the level of engagement, is this a game you would enjoy playing for hours/continuously?
Token economics: is there a valid, open value economy in the game? Can any in-game token capture the value of the ecosystem? and can it be easily traded and cashed in as real-world currency? What is the inflation rate? What is the digital scarcity of in-game items?
What are some of the key drivers of the NFT game?
Mainstream adoption of cryptocurrency will increase the popularity of NFT games
Adoption of DeFi as a “Lego block” for gamers to cash out/earn additional income (earn additional income in the game)
Better infrastructure (in terms of technical tools and blockchain scalability)
E-sports will help promote NFT games while scaling wallets
A mobile version of the NFT game will help target a more diverse audience
What are the key near-term risks?
Slowdown in mass adoption of cryptocurrencies
Poor UI/UX of existing games and apps, leading to accessibility difficulties and reduced engagement levels
High gas fees for transactions (potentially addressed by L2/sidechain and 3rd generation L1)
In summary, gaming provides a compelling use case for NFTs – it allows players to truly own their game props and enjoy the value accruing from the game economy while earning a living through gaming. Developers are given the privilege of creating a vibrant virtual economy from which, if carefully designed, they have the potential to make huge profits.
This is the experience of going from a zero-sum game to a positive-sum one.
Wade Watts had fun while earning an income, and James Halliday enjoyed the fruits of his labor.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/play-the-game-to-make-money-p2e-is-not-the-end-game-nft-game-development-generation-and-outlook/
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