NFT Interoperability in Gaming - The Second Coming of Virtual Assets
NFT interoperability is a massive unlock for game studios, IP brands and creators, and gamers. NFTs are currently the only viable use case of blockchain technology in gaming today.
This post focuses on the value of NFT interoperability, and the economic unlocks to follow. The following pieces are great complementary reads to this post:
NFT interoperability unlocks a Web3 gaming ecosystem that has sprouted hundreds of new companies in just a short period of time. As the virtual economy develops, NFT interoperability is front and center.
Three primary functions in Web3 gaming include game developers and studios, brands and creators, and infrastructure providers. Together they are building the metaverse worlds of tomorrow along with supporting infrastructure and applications.
Web3 Sector Map
Despite ongoing innovation, most Web3 games are plagued with recurring issues that still require meaningful solutions to:
Align incentives for all participants
Balance tokenomics that don’t incentivize mercenary behavior
Accrue utility based value to virtual assets and cryptocurrencies
Mitigate and eventually eliminate pay-to-play-to-earn mechanics, which currently allow players willing to pay more to win and earn more
Provide sustainable tokenomics solutions rather than create additional complexities by introducing an economy with one, two, three tokens + LP token + NFTs
Build fun games that incorporate NFTs and working P2E mechanics
Minimize and eliminate hacks that have cost players hundreds of millions of dollars to date
Eliminate bot usage by cheating players
Address potential legal issues such as securities and commodities laws
Despite these headwinds, teams continue to build and are confident the industry will eventually figure out solutions to the problems outlined.
One application of blockchain technology that has valid applications today in gaming are NFTs. The interoperability of NFTs unlocks new economic opportunities and adds value for developers and studios, brands and creators, and players.
Unlocking the Value of Interoperability
At its core, minting NFTs on blockchains enables:
Interoperability - allows players to access virtual assets across different games and metaverse worlds
Ownership - allows players to transfer or trade owned virtual assets in an open-market
Currently gaming studios and publishers generally own the entire stack of the gaming worlds they build. Outside of the core game engine, gaming studios create gaming mechanics, levels, characters, skins, maps, stories, economies, partnerships with brands, marketing, and ongoing content updates, coined games-as-a-service. Gaming studios can still build the entire gaming world components in a Web3 world and have the option to expand their content and grow users with minimal cost. Thanks to NFTs, game studios can incorporate 3rd party content and IP for characters, skins, maps, partnerships with brands, marketing, and ongoing content updates. All for less cost and time.
NFTs are great at settling ownership of virtual assets but game studios still need to port 3rd party NFTs into their game to fit the mechanics and graphics of the game. Blockchain doesn’t solve the porting problem. Ready Player Me recently raised $56M from a16z to make the porting process easier for game developers. As porting virtual assets eases, NFTs become more accessible and valuable since they can be used across more games. More brands will want to mint NFTs, increasing the number of addressable players (red line in graph) who may start gaming just to use their NFT in-game. Conversely, the ease of creating and distributing IP as NFTs will increase the supply of virtual assets minted (green line in graph). NFTs significantly increase incentives for all participants and enable the overall market to grow.
Developments in NFTs and tooling in asset porting capabilities will forever change the gaming industry and its current business models.
Thanks to NFTs, gaming studios and IP entities such as brands and creators won’t have to engage in lengthy, expensive one-to-one partnership processes. For example, look at all the different IPs featured in Fortnite below. Each character is one of the main characters in four massive media brands. Fortnite’s team added Rick Sanchez from Rick and Morty on June 2021, Naruto on November 2021, Darth Vader on May 2022, and Goku from DragonBallZ on August 2022. Every month Fortnite releases new outfits and playable characters. Establishing, organizing, and launching these partnerships required significant time and cost.
NFTs make the brand and game studio onboarding process significantly more efficient.
Instead of an expensive and lengthy one-to-one partnership approach to onboarding brands into games like today:
Brands and game studios will connect in a marketplace approach. IP brands like the ones outlined in the Fortnite example will mint NFTs associated with their IP. Any approved game studio can port the NFT into their game. Players who own the specific NFT ported can use it in any supported game. Players who buy the NFTs have full ownership of the NFT and the unique metadata that would inform game studios of the NFT’s attributes. The L1 or L2 blockchain used to record the ownership of NFTs is generally a separate entity from the IP owners or the game studios. A marketplace approach is the most likely approach to amass buy-in from competing IP and game studios, since no one competitor owns the platform which NFTs are minted on.
Interoperable NFTs increase competition forcing IP brands to build better virtual assets and game studios to improve the quality of games since exclusive partnership advantages will diminish.
The gaming console industry went through a similar phase when consoles competed on exclusive titles and partnerships, but ultimately, cross-platform games like Fortnite and Warzone ended up dominating the gaming market. Thanks to NFTs, the same dynamics will emerge, and exclusive partnerships like the one with DragonBallZ and Fortnite will cease to be competitive advantages since Goku will be an NFT outside the Fortnite ecosystem and can be leveraged by Fortnite and any other game studio that meets DragonBallZ standards. Brands only need to create NFT collections once and game studios can incorporate them instantly.
In this approach, all parties unlock more value:
IP entities reach a larger audience since their assets can be used across more games.
Games attract a larger audience when they port new 3rd party virtual assets.
Players gain increased ownership and additional value since their virtual assets can be used across multiple games.
Interoperable NFTs will disrupt gaming business models.
For IP entities, an interoperable gaming world is great because they can sell virtual assets to more players across more games and even earn royalties on future sales of virtual assets through secondary sales. Players will also be able to resell virtual assets legally. They won’t need backdoor channels like the ones that transpired with Runescape, CounterStrike, and, more recently, a Fortnite secondary market. Game studios will continue to sell their virtual assets in addition to 3rd party creator assets and earn additional revenues, almost acting as a distribution channel for IP entities.
Web3 Gaming Today
On its own, interoperability of assets is a worthwhile value-add of blockchain technology. However, it’s not the only endeavor of web3 gaming companies. Companies and projects leveraging blockchain incorporate P2E game models where players earn money for playing by receiving cryptocurrencies or NFTs, which can be traded for more cryptocurrencies and eventually fiat.
P2E endeavors aren’t a technical problem but rather an area requiring economical, legal, and incentive alignment innovation.
Such matters maintain no defensible differentiators but will be adopted across all games once solved. Thus it’s unlikely a first mover advantage in such solutions will be meaningful.
As a result, builders focusing on gaming infrastructure and building around NFT interoperability properties are the most valuable investment opportunities today.
For now, blockchain technology has tremendous potential for gaming simply with interoperability capabilities. The value-add to players is significant: bring all your virtual assets to any virtual world. The separation of gaming studios and IP entities invites more IP entities to participate in the future of gaming, which in turn will attract more players who can further connect with IP entities. Such capabilities unlock more than just gaming experiences. As infrastructure improves, interoperable and user-owned NFTs will be used in all aspects of metaverse experiences, from shopping, consuming content, providing services, working, socializing, learning, and (insert any other verb here).
To highlight my observations, I dig into the gaming project Treasure. It’s a great example of identifying an excellent market opportunity, the interoperability capabilities of NFTs, and the issues web3 gaming faces today with tokenomics and the struggle to build fun, engaging games. Read about Treasure here.