How NFTS Impact User-Generated Economies of Scale
Facebook, Twitter, Amazon, Airbnb, Netflix, and many of the most lucrative internet-based companies are platform-based, user-generated economies that are scaled en masse.
Both Facebook and Amazon have been among the few companies globally to see their valuations soar to over $1 trillion.
Economies of scale create major competitive advantages for players in respective industries, enabling enterprises to obtain cost advantages due to their scale of operation with cost per unit decreasing as scale increases.
Deloitte explains that “platform businesses are taking over every industry and are already a part of our everyday lives whether we realize it or not, from reading on our commute to work (e.g. Amazon Kindle), to borrowing money to open a small business (e.g. LendingClub).”
Unit economics has profoundly impacted the growth trajectories of innovative companies. But until the invention of blockchain and tokenomics, digital platform-based businesses operated in a top-down fashion; company shareholders enjoyed enormous profits from making users pay to drive traffic to their group, content, or sites.
Looking at social media giants as some of the most lucrative high-growth businesses in the world helps us to understand the scale of the opportunity that NFTs present: they have expanded the ownership possibilities of digital platform economies.
Imagine a Facebook where users could have bought a stake and enjoyed real ownership in the company’s IP; how many user-investors would there be today? How many hundreds of thousands of new businesses would the platform have enabled, where owners can profit directly from their ownership of Facebook’s ‘digital land’ as opposed to paying Facebook for ads to attract traffic to their external businesses?
This is the unique value-add that NFTs enable: changing the modus operandi of internet-based user-generated economies to one that truly benefits both the community and the platform developers.
Why NFTs are the next investment megatrend
In just three years, NFT assets have skyrocketed from $40.9 million in 2018 to over $338 million in 2020, according to Nonfungible.com – that’s a phenomenal 845% increase. The total value of NFT sales reached $250 million in 2020 before shooting through the roof at $2 billion total sale value in just the first quarter of 2021, surpassing growth expectations.
However, the $2 billion sale volume in Q1 was followed by a sharp drop in volume in Q2, signaling that the NFT market is still in its nascent stages and subject to strong fluctuations as the sector develops and matures.
Gaming NFTs offer additional value beyond acting as a collectible: player engagement, in-game utility, and the ability to capture and drive traffic to the digital land asset. This creates an ongoing use case for NFTs within the virtual world, expanding NFTs’ addressable market to include over 2.6 billion gamers worldwide.
With digital land NFTs serving as a true digital alternative asset, the gaming industry is at the forefront of innovation and utility for groundbreaking NFT technology; where players once competed for tradable assets which they could buy and exchange for virtual goods, digital land NFTs enable ownership of an actual stake in the gaming platform – empowering players to own their content and make a profit.
This is why the gaming sector, the biggest global virtual environment-based industry, stands poised to capitalize on the long-term NFT value – it’s the most obvious use-case for NFTs.
Recent gaming trends show the power of tech innovation to capture long-term value in gaming. A decade ago, when mobile games first came onto the market, many industry insiders were slow to pick up on their potential. But with the invention of the free-to-play business model and in-app purchases, it went on to become the largest gaming industry to exist, gaining over 50% of the $174.9 billion market in 2020, according to market researcher Newzoo.
Similarly, the NFT market has only just scratched the surface of its potential as a transformative mechanism for investment in digital assets and disruption in gaming.
Gauthier Zuppinger, chief operating officer of Nonfungible, told CNBC that his firm is contacted every day by promising projects, large companies, and banking groups all around the world that are gradually entering the NFT space.
Tech giants including Facebook and Microsoft have been betting big on innovation in augmented and virtual reality as big disruptors in the tech and entertainment sector.
And with key leaders in both finance and tech moving in to claim a piece of the NFT pie, the coming decade is set to bring an explosion of innovation, disruption and activity that could transform digital platform-based business models and the entertainment industry as we know it.
How NFTs are disrupting the gaming industry
As the perfect NFT use case, the gaming industry is undergoing its biggest disruption since inception, shifting from an entertainment-only model to an investment and play-to-earn model where players can earn, buy and sell valuable digital assets traded as NFTs. Digital platform-based industries are on the cusp of a new reality, where platform users become owners.
This decentralized ownership model creates a user-topia, offering players the ability to earn and invest while having fun and being rewarded for participation. Play-to-earn and digital land NFTs do what traditional games don’t, truly rewarding users for efforts, time or money spent in a game.
Developers will need a solid grasp of the legal and technical requirements of trading digital assets to make these player-driven economies succeed at scale, but the possibilities for NFTs to facilitate new digital economies and investment opportunities are expansive.
NFTs enable players to capture the utility and value of digital assets
Blockchain-enabled games focus on generating more value for players, creating a paradigm shift from player to stakeholder by:
In conventional gaming, in-game items are purchased as a ‘lease’ – and they are non-transferrable. NFTs enable in-game purchases that can be traded across multiple games and digital marketplaces, replacing traditional one-time purchases that are locked in a single gaming world.
In traditional gaming, items do not directly belong to the user. Given that assets are locked in the game, purchases are more like a rental that enables usage throughout the duration of the game, but which has no further utility outside the game. The developers and publishers still ultimately have ownership of all aspects of the platform and its intellectual property.
Blockchain technology transfers ownership of in-game assets from developers to players. Digital assets can be bought, sold to other players, or transferred to other supported games. Buyers have control over the usages, price, and attributes of the item.
In traditional games, players can lose their in-game purchases if the game shuts down. Since NFTs can exist outside of a specific gaming platform, these can continue to be traded or plugged into a new game. All blockchain-verified digital assets come with a permanent record on issuance that cannot be changed or duplicated.
NFT purchases prove rarity and authenticity through immutable records in the NFT’s underlying blockchain network. This network validates the uniqueness of each NFT and records its ownership history.
Sharing profit:NFTs enable a transformation of the traditional business model, shifting profits from the developers and publishers to the game’s community of players.
NFT-powered play-to-earn game Axie Infinity provides alternative income during the pandemic
Axie Infinity offers a fascinating case study for how digital land investing and NFTs have democratized platform-based earning potential.
Since its 2018 launch, Axie Infinity successfully tapped into the NFT play-to-earn trend, reaching an NFT trading volume of $28 million.
The number of daily active players is rapidly growing:
Axie features land plots and creatures that can be purchased with NFTs as players manage an ecosystem of imaginative fantasy creatures – Axies. The play-to-earn game has become one of the most profitable protocols on the market, generating $84.9 million in revenue in one month.
However, many Axie players come from low-income countries and have been attracted by the earning potential the game offers. When unemployment in the Philippines hit a whopping 40% when the pandemic struck last year, thousands turned to Axie Infinity and other blockchain-based online games as a way to put food on the table. For many of its unemployed users, play-to-earn gaming became a transformative income opportunity.
Tech writer Rex Woodsbury reported on the trend: “one 75-year-old man plays from 4 am to 10 pm and says, “This is my only entertainment.” His wife adds, “We’re praying to the Lord that Axie doesn’t go away. It’s how we pay for our medicine”.”
During the pandemic, playing Axie became a viable source of income in low-income countries: Philippine-based players comprise about 30% of Axie players globally, while Indonesia-based players make up 15% of the global share.
The surge towards blockchain-based games as a viable source of alternative income throughout the pandemic has shown how players can benefit when NFT investing unlocks access and reinvents outdated business models to democratize platform-based economies of scale.
NFT games gaining market-traction
Some of the most lucrative NFT sales have taken place on Decentraland. All of the land in the game can be bought, sold, and developed by the users of the game. Ownership of virtual properties is recorded and transacted on the Ethereum blockchain.
Decentraland gives landowners control of the content that’s published on their land; the utilities for the land can range from interactive services such as games, casinos, and art galleries to static 3D scenes. And developers are continuously creating new ways for people to play, socialize and interact on the platform.
Decentraland, which is similar to games such as Fortnite and Minecraft, is currently the fastest-growing virtual land investment platform. Its land must be bought and sold using its crypto token MANA. According to CoinMarketCap, MANA’s market capitalization is currently at $1.36 billion.
Role Playing Games
Role Playing, or RPG games, is another sector of the gaming industry undergoing huge disruption with the introduction of NFTs.
RPG games weave immersive storytelling with fantastic fantasy worlds in which players take on the role of characters in a virtual setting – but now characters can earn NFTs through gameplay. As characters progress through the game, they can sell their loot for in-game currency and buy a stake in the game through NFTs.
Unlike a digital land NFT investment, where the buyer can purchase land and choose to build property or other income-generating add-ons, RPG games reward players for their time and effort grinding for loot and assets.
For example, the RPG game Lost Relics has enjoyed renewed engagement since introducing NFTs. In the past two years, thousands of new monthly players have joined the bandwagon to enjoy the innovation and earning capacity NFTs provide. NFTs offer actual in-game utility and are being bought and sold for hundreds, if not thousands of dollars.
Lost Relics has also added new functionality with the addition of community-created items. Fans can introduce and propose new items to be created by the developer and then play with and trade these items on approved marketplaces.
Other virtual land games that have come to the fore and enjoy fast-growing popularity include Somnium Space, Cryptovoxels, and The Sandbox. Parcels of land for these sites and digital assets can be bought and sold on blockchain-based markets such as OpenSea.io and NonFungible.com.
Why NFTs are set to disrupt mainstream gaming
Some of the most popular, mainstream games today are set for disruption, as NFT-powered play-to-earn game start-ups grow in popularity.
Some of the biggest games globally, such as Fortnite and Roblox, use a business model that would see a massive value-add if NFTs are introduced. They are free-to-play games that rely on item shops or in-app purchases with in-game currencies.
Fortnite, for example, was one of the most popular games worldwide in 2020, with over 350 million monthly active players and revenue of $5.1 billion. To make in-game purchases, players convert fiat into Fortnite currency – Vinderbucks.
Similarly, Roblox – which saw a 45% increase in revenue from $508 million in 2019 to $924 million in 2020 – generates its income through the sale of virtual currency, Robux, which is used to purchase virtual items.
Although these big-name, mainstream games rely on the purchase of shop items and game accounts, they don’t have full-blown marketplaces of their own. This means they don’t truly reward their player community for the money, time, and effort spent acquiring assets.
Players are essentially paying to lease an asset for the duration of the game. When the player exits the game, all value invested is lost. This has given way to busy black markets where players trade, buy and sell from each other.
The black gaming trade markets are an offshoot of the pent-up demand for true ownership in gaming. NFTs could replace the gap for decentralized markets currently filled by black markets.
When will NFTs reach mainstream gaming? – following the innovation S-curve
Gaming is a vibrant, dynamic, multi-billion dollar industry – forecast to surpass $138 billion in 2021.
At present, NFT games are still a niche market yet to expand into mainstream gaming but developers are ramping up in-game economies as NFTs become assets of interest and exponential growth.
As was seen with the expansion of Axie Infinity in the Philippines – stronger incentives expand the addressable market, attract more players, and drive up engagement levels.
If play-to-earn drives user uptake with the current generation of NFT-based games, coming generations of games will follow suit, attracting the larger mainstream gaming community and traditional gamers. This could be followed by large game developers entering the space, allowing NFT gaming to shift into the mainstream adoption of S-curve.
“Every truly innovative high-tech product starts out as a fad-something with no known market value or purpose but with “great properties” that generate a lot of enthusiasm within an “in crowd”. That’s the early market. Then comes a period during which the rest of the world watches to see if anything can be made of this; that is the chasm.
“If in fact, something does come out of it – if a value proposition is discovered that can predictably be delivered to a targetable set of customers at a reasonable price – then a new mainstream market forms, typically with a rapidity that allows its initial leaders to become very, very successful.” – Geoffrey Moore, Author of Crossing the Chasm
The development cost of an AAA game is high, so large game developers have so far taken a cautious approach towards NFT adoption, working mostly through incubation labs. The large, dominant-player gaming developers will likely only take the risk of financing a large-budget NFT game once NFT gaming is well on its way to becoming mainstream and the indie developers have laid the groundwork.
But within just a few short years since CryptoKitties first captured the public’s imagination, there’s already a stream of established, old-school gaming brands staking a claim in NFT gaming.
The classic Japanese video game producer Taito has joined forces with Next Gaming and Celer Network to bring blockchain to old-school arcade puzzler Bust-A-Move, enabling e-sports players to compete with real money.A leader of home console video gaming, Atari, has launched its own Atari Token which will be in use within third-party games or apps such as Decentraland or Sandbox. It also dedicated an entire division to NFT gaming – Atari Blockchain, in order to “focus on the immense possibilities of crypto and blockchain-enabled games.”And perhaps most noteworthy, PlayStation is working to become one of the first mainstream gaming platforms to incorporate NFTs. The Six Dragons is set for release on PlayStation 5. It features over 300 in-game items that can be traded, sold, or held to strengthen in-game characters. The Six Dragons will use the Ethereum blockchain for its NFT trading.
With the groundswell supporting mainstream adoption of NFT gaming gathering steam, it will become harder for developers to watch and wait on the sidelines, evaluating opportunities in blockchain gaming.
We will increasingly see traditional gaming companies move into NFT gaming, incorporating lessons learned with play-to-earn and the groundwork laid by the early adopters.
Digital land gaming NFTs are gathering steam, but what makes it attractive for investors?
Decentralization of investment opportunity
Mark Pascall, the co-founder of BlockchainLabs New Zealand, explained in an interview with Bitcoin Magazine how blockchain can create more equal systems and expand investment opportunities: “The blockchain space is more than just a new technology layer, it’s a fundamentally different way for organizations and societies to operate.
“It should get us to a more equitable place where it’s not just the high net worth people in Silicon Valley or in Singapore or in London who are the financial investors making the big money — it should democratize that space.”
Through blockchain technology and smart contracts, we can share in a fairer system where everything can be tokenized, fully liquid, and tradable. This will enable more assets to be purchased and traded online and remove previous barriers to trading and investing.
“How I think about it is that the internet democratized knowledge, the blockchain will democratize wealth,” he added. “That’s the positive future that a lot of people in the blockchain space see, and that’s why we’re passionate about it.”
Digital land NFTs enable investment in a potentially lucrative, high-growth asset at a fraction of the cost of traditional real estate, opening up investment to an entirely new demographic for whom the traditional real estate was out of reach.
And fractional ownership of assets – through tokens – further breaks down barriers to investment. Platforms like the Metapurse fund are redefining investment by bundling digital assets and fractionalizing ownership.
The Decentralized Finance trend
Decentralized Finance (DeFi) is a new, blockchain-enabled way to interact with financial applications and manage investments without reliance on traditional financial players.
DeFi facilitates financial transactions such as investments, insurance, loans, and savings using smart contracts hosted on blockchains such as Ethereum. DeFi aims to create an inclusive financial system and is one of the fastest-growing areas in financial services.
Digital platforms, fintech, and banking are undergoing a radical transformation.
The emergence of cryptocurrencies, challenger banks, and banking and investment apps such as Monzo, Revolut, Nutmeg, Clim8, Atom, and Tandem has captured a significant market share by making banking and investing easy-to-access, user-friendly, and widely accessible.
They have also enabled new, more personalized ways of engaging with customers.
There’s an undeniable zeitgeist surrounding the democratization of business models and investment. Crowdfunding and tokenomics, where platform users are also shareholders, are increasingly coming to the fore, delivering positive change and greater equality of profit distribution.
The appetite for democratized investment, digital land, and other digital assets will only grow. And like any iteration of technology that brings new functionality, the use cases and market will mature and develop over time.
As part of the DeFi sector, the NFT market is drawing eyeballs from leading voices across sectors.
Jan Strandberg is the Chief Growth Officer and co-founder of the digital wealth management platform Yield App.
He has leveraged his passion for digital assets and decentralized finance to drive the success of Yield App, which reached $400 million of managed assets within six months of its public launch in February 2021.
Prior to joining the company, Jan was the Head of Marketing at crypto company Paxful, where he worked for over four years after joining as only its fourth member.
During his time there he oversaw the growth of the customer base from 50,000 users to more than 4.5 million, and expansion of weekly revenues from US $100,000 to over $44 million as he managed a team of more than 45 people and established offices around the world.
A well-rounded online marketing professional, Jan specializes in SEO, SEM, and content marketing and uses creative analytics, research, and cutting-edge strategies to drive results – turning impressions into visitors, visitors into leads, leads into customers, and customers into advocates.
The Rise of Digital Land and NFT Investing
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