Could NFTs be the gaming industry’s next big revenue stream?

In the last couple of years, non-fungible tokens (NFTs) have opened up a whole new industry centred around the sale and purchase of digital assets – often digital artworks. But is one of the core applications for NFTs being overlooked?

S&P Global Market Intelligence says that video game publishers currently make more than US$3.6bn a year in revenue from in-game NFTs, and he expects this figure to skyrocket to $15bn by 2027 as their popularity rises.

How are NFTs being used in gaming?

Tom Whittaker, who is a Senior Associate in the technology team at independent UK law firm Burges Salmon, explains: “NFTs will play a central part in gaming and the metaverse because they can enable consumers to monetise their digital assets (for example renting and re-sale), allow brands to monetise secondary-sales (which they traditionally haven’t been able to do effectively), and allow a new relationship between brand and consumer. All of this depends on the terms of the smart contract.”

James Rodd is Head of Marketing at Gamesta, which develops games where lending, trading and buying gaming NFTs from blockchains is baked into the gaming environment. He tells FinTech Magazine: “NFTs, or non-fungible tokens, are being used in the gaming industry in various ways. One of the most common use cases is for in-game items and assets – such as skins, weapons, and characters. By using NFTs, game developers can create unique and rare items that players can collect, trade and sell on blockchain marketplaces.

“Another way NFTs are being used in gaming is to provide proof of ownership and authenticity for virtual items. With traditional gaming, players do not own the items they purchase; instead, they are licensed to use them within the game. However, with NFTs, players can own their items and even transfer them between games or platforms, giving them more control over their gaming experience.”

This obviously improves the gaming experience for players – but NFTs can prove to be a valuable new business opportunity for the makers of games as well. Rodd explains that developers can sell virtual real-estate as NFTs, allowing players to buy and sell virtual land within a game, or they can use NFTs to crowdfund game development and steer player behaviour – such as encouraging players to participate in certain in-game modes or features, or rewarding loyal players for reaching in-game milestones.

Legal implications of NFTs in gaming

Despite the obvious enthusiasm that exists around the growing use of NFTs in gaming, the technology’s nascency gives rise to some legal and compliance concerns.

“A range of potentially legal issues need to be navigated,” Burges Salmon’s Tom Whittaker continues. “These include gambling, advertising, privacy, and IP, to name a few. If financial services brands want to use NFTs, they will also need to navigate financial regulations about what digital assets they can sell, how, and where.”

The legal implications are not reserved to regulatory considerations for brands, though. There are risks to players who purchase in-game NFTs as well.

In March 2022, a hack on the NFT-based online video game Axie Infinity saw $600mn stolen from the game’s digital economy – something that S&P sees as being “the key factor behind the market's decline in 2022”. There’s a saying in the world of digital assets: “not your keys, not your money”, and the question of custody is twice as tricky when it comes to in-game purchases.

“NFT owners face multiple risks including cyber-attacks, theft, and IP infringement,” Whittaker says. “English law has evolved quickly, for example, to allow asset tracing of NFTs and legal documents to be served via NFTs. In New York, an artist who created NFTs was successfully sued by Hermes for their infringement of Hermes’ trademarks.

“However, IP holders and NFT owners still need to have the understanding and finances available to pursue legal action. The starting point is that prevention is better than cure; IP holders and NFT owners need to understand the risks specific to their property and what practical steps they can take to safeguard, monitor, and then enforce their rights.”

“It is possible that we will see greater scrutiny and regulation of NFTs in gaming in the future,” Gamesta’s James Rodd acknowledges. “This could come from both industry groups and government regulators, who may be concerned about consumer protection and the potential for NFTs to be used for illicit purposes, such as money laundering. However, regulation can also provide clarity and legitimacy to the use of NFTs in gaming, and can help to build trust among consumers and investors.”

Opportunities for broader adoption of NFTs in gaming

By James Rodd, Head of Marketing for Gamesta

Increasing the interoperability of NFTs: Currently, NFTs are largely tied to specific games or platforms. But, as more gaming platforms adopt blockchain technology and standards for NFTs, there could be greater interoperability between different games and platforms, allowing players to use their NFTs across multiple games.

Enhancing gameplay experiences: NFTs can be used to create unique in-game items and assets that provide players with new gameplay experiences. For example, NFTs could be used to create rare, powerful weapons or vehicles that can only be obtained through gameplay or trading.

Enabling decentralised gaming: NFTs can be used to create decentralised gaming platforms, where players can interact with each other directly without the need for intermediaries. This could lead to more innovative and creative gaming experiences, as well as greater player control over their in-game assets.

Monetising user-generated content: NFTs can be used to monetise user-generated content, such as mods or custom skins. Players could create and sell their own NFTs based on their own creations, allowing them to earn money from their work and adding more diversity to the gaming ecosystem.

Creating new business models: NFTs can enable new business models for game developers, such as pay-to-play or subscription-based models. Additionally, NFTs can be used for crowdfunding game development, allowing developers to raise funds from players and investors.

Lessons for NFTs to learn from controversial ‘loot boxes’?

One particular concern around the emergence of NFTs in gaming has to do with an existing in-game mechanic called ‘loot boxes’, which have been popular as developers’ revenue stream for years. They are separate from the digital asset space, but they involve a mystery assortment of collectables or in-game items that a player can choose to purchase. Players rarely know exactly what they’re getting, beyond perhaps a loose description or a quantity – the thrill, after all, is in the unboxing. But the lack of transparency around the contents of loot boxes has understandably drawn comparisons with gambling products, especially in games that are popular with children.

James Rodd explains the delicateness of the situation with NFTs and why it’s important to ensure digital assets aren’t drawn down the same path as loot boxes: “The combination of in-game mechanics like loot boxes with NFTs can raise concerns around consumer protection and the potential for gambling-like behaviour.

“It's important for game developers to approach this type of offer with caution and implement safeguards to ensure that players understand the risks involved.

“One potential safeguard is to provide clear and transparent information about the NFTs being offered and the odds of obtaining them. This can help players make informed decisions about whether to participate in the offer. Another safeguard could be to limit the frequency or cost of purchasing NFTs, to prevent players from spending more than they can afford or becoming addicted to the thrill of obtaining rare items.

“Game developers can also consider implementing age verification systems to ensure that minors are not participating in NFT offers or using blockchain marketplaces to trade virtual assets. Finally, regulators may need to be involved in setting standards and guidelines around the use of NFTs in gaming to ensure that consumers are protected from fraudulent or deceptive practices.”

What should we expect to see in future?

Despite the regulatory issues that need to be carefully navigated, Rodd is still positive about the ability of in-game NFTs to add an exciting new dimension to video games.

“The use of NFTs in gaming is still in its early stages, so we can expect to see significant changes in how they are used in the future,” he says. “One trend we can expect is greater integration of NFTs into gameplay mechanics, with game developers leveraging the unique properties of NFTs to create innovative new gaming experiences.

“We can also expect to see more partnerships between game developers and blockchain companies, as game developers look to leverage the technology and expertise of blockchain companies to create new gaming experiences.

“Overall, the use of NFTs in gaming is likely to continue to evolve and grow in the coming years, as game developers seek new ways to engage with their audiences and monetise their intellectual property. As with any new technology, though, there are risks and challenges that will need to be addressed – including issues around consumer protection and regulation.”