I’m excited about the potential of the intersection of eSports and non-fungible tokens (NFTs) to create a new digital economy of cryptogoods and digital memorabilia that could become one of the first mainstream uses of cryptoassets. In this post, I explore the potential stages of adoption by outlining three phases of NFT gaming we are rapidly progressing through reaching more consumers and a greater market value at each stage.
If you aren’t familiar with NFTs start here
Phase 1: NFTs for New Digital Collectibles (Digital Beanie Babies)
Rough Estimated Addressable Market Size: $50M — $100M
Rough Estimated Potential Users: 25k+
The first era of NFT gaming started with games revolving around native digital collectibles with basic utility. Cryptokitties pioneered this where people buy digital cats to collect and play the game by breeding them to create more unique and rare cats. Cryptokitties also showcased the value of interoperability being able to bring these assets to other games creating an ecosystem with independent developers building new experiences on top of it. This brought more consumers and developers to crypto through a new lens of the creative and fun possibilities beyond purely financial applications. At the same time, these type of games allowed creatives to earn their way into crypto through projects like Ethmoji that pays royalties in ETH for the use of items in larger compositions. However, most of these users were likely tech forward early adopters or already somewhat familiar with crypto.
Phase 2: NFTs for Sports Collectibles (Digital Baseball Cards)
Example: MLB Crypto Baseball
Rough Estimated Addressable Market Size: $500M — $1B
Rough Estimated Potential Users: 25M+ (Number of professional sports fans)
The announcement of MLB Crypto Baseball suggests that it will be the first crypto collectible game leveraging licensed sports IP with the potential to create “digital baseball cards”. This next era merges a traditional sport with a native digital good which opens up a range of interesting possibilities connecting offline and online experiences. For example, they can have the performance of the player on the field impact attributes of the digital good as new gaming companies like Unblockable have suggested. They could also take advantage of interoperability adding utility to these NFTs within their own or other fantasy or simulation sports gameplay, as well as have ownership of the good unlock new experiences at games from free concessions to season tickets. These games take advantage of hundreds of millions of traditional sports fans, many of whom play fantasy sports or own physical collectibles that could be interested in this new experience to engage with the teams and players that they love.
Phase 3: NFTs for eSports Collectibles (Digital Memorabilia)
Example: Gods Unchained, Fortnite + NFTs
Rough Estimated Addressable Market Size: $5B — $10B+
Rough Estimated Potential Users: 250M+ (Number of eSports fans)
The third phase that we could enter over the coming years would consist of either new or existing viral multiplayer games like Fortnite replacing traditional digital items like weapons and skins with NFT versions. There is already a small market for reselling Fortnite skins and accounts on traditional marketplaces like Ebay and Poshmark. However, utilizing NFTs would allow them to introduce provable scarcity to these items creating increased value, giving players access to the open infrastructure to easily trade these items for real money, as well as allowing users to bring these items to other games that could build experiences for them. We are starting to see the beginning of this with new turn based free to play games like Gods Unchained where each playing card is an NFT.
This would supercharge e-sports adding new incentives and revenue streams for players to develop talent and monetize it through the items they would earn. Imagine winning a battle and getting to claim the digital items of your opponents as loot that could be sold on open markets for thousands of dollars. eSports are already gaining rapid adoption with more viewers on major events than traditional sports like the NBA Finals. It also has a far wider global reach by default due to availability on free platforms like Twitch and YouTube. Imagine if these hundreds of millions of fans could have the opportunity to own an exclusive character skin worn by Tyler “Ninja” Blevins during a historic Fortnite battle that won him a world event. Traditional celebrities who also play these games could monetize their influence allowing fans to buy a character created or played by Drake.
In traditional sports an ordinary abundant commodity like a baseball is instantly turned into a priceless memento when it’s hit into the stands as a World Series home run or signed by a superstar athlete. At the same time, the monetary value of these collectibles is limited due to the challenges of proving authenticity as it’s sold from collector to collector. In the digital realm, an already scarce NFT can be turned into digital memorabilia when used in a pivotal moment in a popular game or by a popular player. In this case, the digital signature on the item proves its authenticity allowing it to continue to appreciate in value through secondary sales without the concern that the item is counterfeit.
There is a long list of infrastructure to be developed to even fully realize phase 1 before progressing through phase 2 and 3. This includes base layer blockchain scalability and 2nd layer off chain solutions like Plasma and state channels. There will also need to be user friendly wallets, marketplaces like Rarebits, and decentralized exchanges like 0x to make it easy to buy, use, and trade these assets. Console game platforms like Xbox, PlayStation, and Nintendo could integrate wallets and exchanges into their core operating systems to accelerate this.
New Hardware for Display
While there is significant progress leveraging NFTs to create programmable digital goods that have utility within an ecosystem, there needs to be more work to embrace the element of collectibility. I’d argue the best way to do that is to focus on better ways to display (or show off) NFTs to your friends. What’s the point of buying the $140k Cryptokitty if the only way you could show it off was in a mobile wallet like Toshi on your phone.
Let’s compare that to physical art or memorabilia. Some wealthy individuals may purchase expensive art or collectibles as a non-monetary store of value and keep them in a secure warehouse. However, many people buy these items to be able to display in their homes or offices, provoking thoughts and starting conversations around interesting pieces.
We’ve already seen users build galleries to showcase their Cryptokitties in VR on Decentraland. You can now buy physical items like coffee mugs from Cryptogoods with a picture of your Cryptokitty requiring ownership of the digital asset to purchase. Now there needs to be even better ways to display your NFTs in the physical world.
This would require new kinds of physical cases or frames combined with cryptowallets to display this digital memorabilia. For low to mid value NFTs this could consist of a simple PlayStation screensaver app on top of a PS4 future hot wallet that uses your TV as the frame to showcase your collectibles. For higher value items, there could be modern standalone digital frames like Meural connected to hardware wallets utilizing multisig security.
Displaying NFTs and digital memorabilia in homes, offices, and public space would rapidly drive awareness and interest in the asset class and technology behind it. In five years I expect to walk into the office of a crypto company or the home of entrepreneur and see NFT based digital art or memorabilia displayed prominently.
Barriers to Adoption
There are several other challenges that need to be overcome for NFTs to get widespread adoption beyond the existing technical and infrastructure limitations. The first is concern from gaming companies that replacing existing centralized digital items with NFTs would cannibalize their revenue. If users can buy items on an open market from each other they wouldn’t need to purchase everything directly from the developer.
I would argue that if users know that they can easily trade or sell their items they may be more likely to spend greater amounts initially to purchase them adding a powerful speculative motivation rather than just for personal pleasure as buying centralized items generally is today. Game developers could also code into the NFT a percentage that they would earn on secondary sales. At the same time, popular games would have the opportunity to build entire economies that extend their game further into player’s lives bringing greater exposure to the game leading to increased growth and engagement.
The second challenge is in educating users on how to securely store and protect these digital assets. For NFTs to provide the benefits of interoperability and tradability they require non-custodial wallets for users to directly own and hold these digital bearer assets. If users are responsible for custody and these NFTs have high market values, there will be significant attempts at hacking and theft. Users will need to learn how to identify and avoid these attempts or will need to trust custodial wallets that would limit the benefits that NFTs provide.
Long Term Implications for Gaming and Crypto
Ultimately, as we move through these phases there is the potential for NFTs to become a multi-billion dollar market in the next few years that could grow to become significantly larger as “sound digital goods” that represent a multi-trillion dollar opportunity as argued by Tony Sheng and John Pfeffer.
While there are a growing number of professional video game players today, it is limited to only the best of the best that can make gaming their career through prize money, sponsorships, and monetizing Twitch audiences. NFTs + eSports could create the “killer use case” by drastically increasing the number of people who can make a living playing video games. At the same time, this could lead to hundreds of millions of users creating Ethereum based wallets giving them access to the world of cryptoassets and dapps.
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