Contributed by: Martha Reyes, Head of Research, BEQUANT
Welcome to The Matrix!
The year is 2022 and your avatar is interacting with others virtually in the metaverse. You’re gaming on a play to earn platform using NFTs in the metaverse.
So how did you get here?
Just as 2020 was the year of DeFi, 2021 proved to be the breakthrough year for NFTs and Play to Earn gaming. These have turned out to be popular use cases that just a year ago we would never have envisioned. Perhaps there will be new use cases in 2022 but what is clear is that GameFi will continue to grow as it straddles two vast worlds, gaming and finance.
NFTs are permanent, read-only records of ownership of an asset (digital or physical) recorded on a blockchain and not mutually interchangeable. The unique identity and ownership of an NFT is verifiable via the blockchain ledger. As such, they have the potential to unlock value, reduce intermediation, increase transparency and democratise access in a number of sectors. These include, but are not limited to, mortgages, art, music, the metaverse, and gaming.
NFTs are the perfect fit for gaming as players can own assets, earn tokens, and trade them in open secondary markets in a way that was not possible before, creating a virtual economy.
DeFi games require the player to own an NFT of a playable figure, an item of clothing, or something else, which can be created in the metaverse. This then gives the owner the right to participate in the game.
For example, a gamer could purchase an NFT of a vehicle and use that in a game similar to Sims, which would be hosted in the metaverse. They could then earn tokens that they can use to buy additional NFTs or monetise them in a secondary market. Some of these games, such as Axie Infinity, have become such hits, with up to one million daily active users, that the cost of owning the requisite NFTs, in this case Axies, has skyrocketed. Guilds have sprung up to support players by renting out NFTs, thus lowering the barriers to entry.
Through the generations, many have criticised teenagers for wasting their time playing computer games but in the GameFi space, players can increase the value of their NFT assets and sell them for a profit.
Secondly, players can play to earn, essentially earning money through a second stream. By playing, gamers can pick up NFTs as rewards for completing challenges. These have a utility in the gaming world and can be sold on marketplaces to make players’ time worthwhile. It brings a whole new level to the concept of professional gaming and has proved popular in developing countries as a way for people to supplement low wages.
GameFi opens up a new market of billions of gamers on mobiles and consoles alike. Gaming is not only a lucrative sector worth almost $200 bn annually, but a loyal one too, with players staying with a series for years, making micropurchases along the way.
According to a study by the Blockchain Gaming Alliance, in the third quarter alone, NFT games generated $2.3 bn in revenues. It’s no surprise then that there has been substantial investment into the sector this year, with Animoca Brands, the Hong Kong based blockchain game developer recently raising almost $300 million.
Large traditional gaming studios such as Ubisoft and EA are also getting in on the action. In 2022, expect a proliferation of new applications seeking to target existing players worldwide. This is without even mentioning the accessories needed to enhance the virtual reality experience.
Away from hardcore gamers, with more lockdowns brought on by COVID-19, and our increased digital interconnectedness through our mobile devices, it is not long until we are building entire cities in the metaverse.
In fact, Seoul already has!
People are purchasing land, building houses, hosting music and art events, and creating avatars on some projects. As these grow, people will want to replicate real-world cities with all the amenities, with places to meet people and participate in activities digitally.
With an increased amount of remote working, people could be joining their 2022 office party in the metaverse with their avatar. Microsoft has already declared that meetings will soon be held in this way. For remote studies in distant lands, students could attend lectures in a much better virtual environment than what is currently available.
It’s not all smooth sailing. High costs are an obstacle as NFTs and GameFi usage expand. In addition to the high cost of entry of popular games, there are gas fees on transactions on the Ethereum blockchain, which may improve with the shift to Proof of Stake in 2022. Sometimes, these fees can cost more than the value of the NFT. This is why alternative Layer 1’s have gained some ground, taking share away from Ethereum this year as they are more centralised but cheaper and with much faster execution.
Expect Ethereum’s dominance to potentially continue to decline in 2022. The Layer 1 alternatives include:
This trend could be averted if Layer 2 solutions on Ethereum evolve, such as Arbitrum, Optimism or Immutable X, which is a Layer 2 designed specifically for NFTs with zero gas fees launched this spring.
Ronin sidechain, launched in May 2021, and tailor made for Axie Infinity on the Ethereum protocol, is what helped boost users for that game as it slashed costs. Layer 2’s add an extra step and costs to any transaction so are not as popular as the “Ethereum killers”.
Interoperability, or cross-chain technology, such as Polkadot, could also be key to allow people to move easily from one blockchain to another.
COVID has increased our reliance on digital spaces, meaning our virtual assets and identities will become increasingly valuable to us. The ground is fertile for further development and adoption of GameFi and the metaverse in general, thanks largely to the rise of NFTs as a way to record digital assets.