In late March, hackers pulled off a brazen heist, stealing $625 million from the blockchain that powers the popular video game Axie Infinity. Although not well known in the United States, Axie Infinity is the most prominent and popular example of the new gaming model, where users are paid to play. This innovative game and earn business model gives players a financial incentive to stay in the game for the promise of regular income. It does this by minting non-fungible tokens or NFTs that represent in-game characters known as “axies”. Inspired by Pokemon, axies are digital creatures, each represented by an NFT that players can use to battle, cultivate or trade. When hackers believed by the US government to be linked to North Korea broke into Axie Infinity in March, they wiped out the earnings of many players.
Axie Infinity asks important questions about the nature of play, the nature of play, and the relationship between play and work. In order to participate in the game, players must purchase three axes, the prices of which can vary greatly. In the last year, it has cost more than $1,100 just to start playing the game. Such a high entry price would be a barrier for any other gaming platform, but the promise of Axie Infinity’s design is how NFTs have created a unique economy where players earn surprising amounts of income. The “play-to-earn” model, as it is often called, has the potential to turn the gaming economy upside down. Axie Infinity takes a 17% cut of every in-game transaction, generating $700 million in revenue in 2021 (though those numbers have since plummeted along with the fall in cryptocurrency prices). Big tech donors have taken notice. A recent $152 million capital injection into Sky Mavis, the developer behind Axie Infinity, valued the company at $3 billion.
NFTs supposedly create a chain of single ownership of digital assets, but by manipulating consumers and businesses to approve trades they don’t understand, hackers can infiltrate this chain and divert money to themselves, allowing half a billion dollars to disappear from the wallets of the unsuspecting. players. The Axie hack highlights the risks embedded in the evolving nature of the video game market and demonstrates the need for regulators to implement better oversight and consumer protection schemes.
The boundaries between play and work in video games have been blurring for a long time. For the past 19 years, players of Eve Online—a massively multiplayer online game, or MMO—have been able to mine resources and sell them on the market, making the game a pioneer in integrating monetary transactions that blur the distinction between playing and working in video games. Eve Online puts players in command of a variety of spaceships, which can be optimized either to mine in-game resources or to build specialized combat vessels. The game has a unique structure: while other MMOs allow players to “farm” powerful items through combat and quests, Eve only allows the farming of raw resources, known in-game as “mining”. Once enough materials are mined, they can be sold on the market for real-world currency, such as US dollars, and the raw materials can be used to craft items and ships. Because of this, the game relies on player labor to create new in-game items and keep the economy flowing.
In many online games, players work for free to progress through the game world. But the “grind” of doing repetitive or time-consuming tasks results in a better in-game character or more items, not real-world money. Grinding is often a way to use up the time it takes to complete a game and can help players enter a meditative state of mind where they aren’t actively strategizing how to progress. But it would be wrong to say that grinding is popular. Many players resent having too much in the game and, especially when linked to a hyper-monetized business model, liken it to doing work rather than playing. The researchers identified this dynamic as “playbour,” in which players engage in a casual game that also generates income, either virtual or real. In Eve Online, players who focus on mining are known as “industrialists,” and their position as the foundation of the in-game economy is one way to understand how work and play are becoming less distinct. Since there is an in-game currency convertible to dollars, and even an employed economist overseeing the market, it is not clear where the line between player and worker is, if at all.
Despite in-game markets playing a key role in the game, Eve Online players have fiercely resisted attempts by its developer, CCP, to incorporate NFTs into the game and change its monetization systems. CCP’s attempts at reform sparked a massive backlash, leading to protests, the ritual destruction of in-game currency, and thousands of angry messages to the developer. But was it just a reaction from the players or was it more like a labor strike? It could very easily have been both, and the ambiguity around whether players who make money playing a game count as workers, contractors, or nothing at all has created an unregulated space that many game developers can’t wait to enter.
The changing model of gaming
Axie Infinity is a prominent example of how the business models behind video games are changing. Most online games measure their success based on player engagement, since the more time someone spends in the game world, the more likely they are to purchase in-game items. But what if the company could add a financial incentive to that time? The player could spend more time playing the game and thereby engage more in jts revenue generating functions. NFT-based games promise to turn work from fun to paid work. To see also : VGC is partnering with the Italian Video Game Awards next month. This is a play-to-earn model, where players receive financial rewards for playing the game, most often through increasing the value of cryptocurrency and NFTs. So the more players play, the more money they earn. In Axie Infinity, the basic gameplay cycle of the game works like this: completing levels creates stronger axes to win matches, which gives users a token that allows them to “multiply” axes and thus create new axes that are sold or used for the game.
Video game manufacturers are rushing to adopt this technology before regulations limit potential revenue streams. Developers like CCP Games (Crowd Control Productions, developer of EVE Online based in Reykjavik) are looking to incorporate NFTs into their business models to drive steady, passive income. Crypto market FTX is trying to launch its own line of gaming-oriented NFTs. Big companies like Ubisoft are creating their own, proprietary line of NFTs to be used in their gaming properties, although, like CCP, it faces intense opposition from players. Publishing giant EA called NFT games “the future of the industry” in a recent earnings call, though the company quickly reversed course after another player backlash.
This attempt to incorporate NFTs into video games is an evolution of the live services business model, which is a game that features constant updates and items purchased in small transactions. Traditionally, video games were released as a separate item (as a cartridge or CD). As internet connectivity improved, developers were able to fix bugs or expand content via downloads. Game publishers soon learned that creating a steady stream of paid game content could generate much more revenue from the development cycle than a single product shipment, which coalesced into the idea of games as a service, or GaaS. The earning potential of this model is huge. In 2019, for example, the FIFA Ultimate Team live service generated more than $1.6 billion from these small transactions alone. For publishing giant EA, live services now generate more than 70% of the company’s revenue, a stark change from how game publishers previously generated revenue. But as journalist Stephen Totilo explains, live service games require not only tens of millions upfront in development costs, but much more “to keep the content flowing.”
Incorporating NFTs into this business model has the potential to create new opportunities for game developers to increase revenue. NFTs can be sold to players in the same way as other downloadable content: as a product sold from a store, where the initial sale includes a profit for the developer. But these tokens can be coded with what’s known as a “smart contract,” a piece of code embedded in an NFT that sends a royalty payment to the token’s originator—in this case, the game company. Such a model allows game creators to monetize items over and over again, using the possibility of future player-to-player sales to generate a steady stream of revenue.
Such a model bears a superficial resemblance to already existing markets for in-game items. In the early 2000s, World of Warcraft built a famously rich ecosystem for players to resell in-game items. And Steam, the largest PC gaming marketplace operating today, runs a limited marketplace for items, mods, and other forms of game content. In contrast, for a game like Axie Infinity, the sale of axies or other in-game items can take place anywhere, allowing for more interaction between players that does not need to be overseen by the game publisher. In theory, this should drive trade between players and increase revenues via royalties built into the NFT smart contract. This approach to in-game items is a twist on the microtransaction model. Many players complain that games that accept microtransactions—especially from big publishers like EA and Ubisoft—end up exploiting players through opaque designs that hide how much money has been spent (I’ve called this dynamic “hypermonetization” to emphasize that it’s an extreme practice). The inclusion of NFTs in games only further conditions participation by using a complex, difficult-to-understand financial instrument.
NFT-based games promise to turn work from fun to paid work, but the tension between play and work may never go away, as companies experiment with play-and-earn models and encounter player backlash. When Valve, the game publisher that owns Steam, tried to release a card game that functions almost exactly like an NFT game in 2019, it failed spectacularly. Blizzard tried to start a marketplace based on in-game items when it released Diablo 3. The Real Money Auction House (RMAH) allowed players to auction in-game items, but it undermined a key element of the game: the need to play. Instead, some players would simply buy and sell items on RMAH like commodity speculators, driving the prices of some items sky high. It sucked the fun out of the game, and after a year of operation, Blizzard discontinued the game.
NFTs deserve serious scrutiny
As video game publishers rush to incorporate NFTs into games, players are exposed to ever-increasing financial risk. Many proponents of NFTs focus on the supposedly decentralized nature of assets: The ledger that determines ownership is distributed, not centralized. But NFTs aren’t really decentralized — they rely on central marketplaces to collect lists of NFTs and facilitate sales, charging a percentage in transaction fees to support their operations (again, similar to Axie Infinity). These markets have security weaknesses, especially when they are not regulated by know-your-customer laws and similar protections built into securities trading. The contracts they hold are irreversible due to the distributed nature of the blockchain, making losses irreparable when stolen. The Securities and Exchange Commission has begun identifying places where NFTs are legally considered securities, which could subject NFT-based games to invasive regulatory oversight. But it could also impose heavy compliance requirements on players as they would have to treat their in-game items as financial instruments that must be reported to central tax agencies.
The incorporation of NFTs into video games also exposes players to the boom and bust cycles of cryptocurrencies. The industry is in the midst of a massive meltdown, as a growing wave of companies limit or outright ban withdrawals from their systems. Such stifling of transactions essentially traps buyers’ money, denying the liquidity needed for the broader market to function. NFT games are not immune to this cycle: Before the hack, Axie Infinity players in the Philippines (Axie’s largest market) were so successful in making money trading NFTs during the economic crisis caused by the COVID-19 pandemic that some earned several times the minimum wage without paying taxes. This may interest you : Five Things Presented Children Mercy Sports Medicine Center: Sports open busy July at home against the New York Red Bulls | July 3, 2022. This was one of the reasons why the buy-in price for the game became so expensive. In response, Sky Mavis attempted to stabilize the market for Axie Infinity NFTs by adjusting valuations in the game’s economy, adjusting the value of the SLP tokens that allow axies to breed. But that adjustment wiped out the income of many players even before the latest losses in the valuation of the cryptocurrencies that back the NFT games. What this and the current liquidity crisis have shown is that companies that rely on cryptocurrencies will act much like a central bank does for a government, arbitrarily changing the “cost” of trading NFTs or coins in a way that they hope will stabilize prices . But, just like when central banks irresponsibly adjust currencies, Sky Mavis’s intervention ended up destroying the game’s appeal in its core market (and, not coincidentally, reflecting the central complaint many blockchain promoters have with traditional fiat currencies: central, arbitrary control).
Games involving NFTs borrow the computational complexity of cryptocurrencies and the blockchain’s ledger features to create a unique asset that should, in theory, consistently appreciate in value, but this requires constant player growth to ensure payouts. This need to sustain growth creates a perverse incentive to prioritize the acquisition of new players over good in-game experiences. It works like a pyramid scheme: the value of assets only increases if more players enter the market or if existing players buy more. This presents players with risks they may not fully understand.
This is the central dilemma of NFT-based gaming. Victims who lost money in the Axie hack are not entitled to a refund – Sky Mavis also lost millions of dollars – and there is no insurance guaranteeing that the losses can be reversed. The way Axie Infinity’s payouts are linked to NFT value is certainly new, but as Sky Mavis’ attempt to reduce market volatility shows, even without a big drop in the cryptocurrency, players will be vulnerable to unpredictable prices if there are too many players or the game is abandoned .
Perhaps in response to these risks, some video game manufacturers are placing their own restrictions on the ways in which games can include cryptocurrencies. Steam, the largest digital store for computer games, recently banned all cryptocurrency-based games, putting a major barrier to the wider adoption of the technology in games. The co-founder of Valve, the company behind Steam, cited the large number of frauds perpetrated through crypto-assets such as NFTs as the reason for the ban. In contrast, Epic, the publisher of Fortnite, has said it is open to crypto and NFTs in its in-game stores, but only if they strictly adhere to reporting and tax laws.
The need for policy solutions
While NFT games pose risks to users, they also suffer from a lack of transparency about how security and valuation work. On the same subject : Video games don’t always need live-action adaptations. By blurring the line between player and worker, NFT games raise difficult questions about the form of an appropriate regulatory response.
First, regulators at the Federal Trade Commission, the Commodity Futures Commission, and the Securities and Exchange Commission must take this technology seriously and identify the aspects of the technology that pose the greatest risk of harm to consumers. These weak points are continuously targeted by malicious actors for theft and fraud, and while traditional financial organizations must meet strict security and privacy standards, NFT vendors do not for now. Adopting a consumer mindset narrows this challenge down to the bottom line, rather than getting lost in the weeds of certain types of technology. Ultimately, the appeal of NFT games is the revenue they generate for both the company and the player, but that revenue should not be beyond the reach of liability or consumer protection systems. The recent meltdown in the NFT and blockchain markets—which saw investors lose millions of dollars with no real return—shows how an unregulated market can impose serious losses on consumers.
The difficulties faced by other games in incorporating in-game markets illustrate the scale of the challenge. EVE Online has struggled for more than a decade to manage its in-game economy so that players don’t run afoul of real-world laws of wealth collection and taxation. They even have an economist on staff to help them manage the growing market where spaceships can be worth thousands of dollars while also curbing illicit activities. This requires a level of oversight and regulation that is anathema to the ethos of NFTs and crypto, but provides the means for legal and financial enforcement to monitor transactions and ensure compliance with laws—even, potentially, labor laws.
A recent US infrastructure bill classified NFTs as securities, requiring them to be reported to the government and taxed when the value of a trade exceeds $10,000. In the EU, more countries are starting to tax cryptocurrency transactions and have imposed know-your-customer rules on crypto exchanges. These regulations will likely make NFTs “safer” for the average consumer, but they reduce the appeal and design of the technology and could stifle it before people can figure out socially constructive uses for it. Balancing the need to develop new innovations while limiting harm is a never-ending challenge for regulators, but they must take NFT gaming and changes in the gaming economy seriously. This means devoting resources to understanding the myriad ways in which NFTs and cryptocurrencies can change the nature and behavior of digital markets.
It remains to be seen if NFT gaming will really become the future of gaming or if it’s just another hyper-monetized fad. As the novelty wears off, it is just as likely that players will not tolerate the uncertainty and risks of NFT games. As an industry, video games are known for eagerly embracing new technology in hopes of making the game better. While the play-to-earn model is a promising source of revenue, it’s unclear how much NFTs are needed to improve the way we play games, especially given their rather significant drawbacks. You can still make a game for money without NFTs, it just won’t be as attractive.
Joshua Foust is a doctoral student studying strategic communication at the University of Colorado Boulder’s School of Media, Communication and Information. His website is joshuafoust.com.
