Blockchain Game Alliance: NFT games generated $2.32B in Q3

Nonfungible token (NFT) games generated $2.32 billion in revenue in the third quarter, according to data compiled in the annual report by the Blockchain Game Alliance. That was roughly 22% of all NFT trading volume industry-wide in the quarter as blockchain games gathered steam.

The BGA is an advocate for NFTs games, which use the transparency and security of the digital ledger of blockchain to authenticate unique digital items and enable new business models for games such as digital collectibles.

The report is based on a survey of members among the 300 companies from 56 countries that are part of the BGA. Of those 300, 198 joined in 2021, marking a membership growth of 186% from 2020. The BGA was formed in 2018 with just eight members.

The number of wallets relating to gaming activity increased by 2,453%, from 29,563 during the first week of 2021 to 754,000 in Q3 2021. Sky Mavis’ Axie Infinity dominated blockchain gaming NFT trading volume for the first half of the year, reaching a record-high $2.5 billion in trading volume in September and surpassing sales records of NBA Top Shot and CryptoPunks.

A young industry

It’s a young industry. Among the respondents, 34% identify as gaming professionals and 27% identify as blockchain professionals. And 81% have been in their current role for under three years, while 42.5% have been in it for less than a year.

This year, blockchain game companies have also closed huge funding rounds and received great media coverage in 2021. Animoca Brands achieved unicorn status with a capital raise of $88 million in May, then raised $138 million in July and another $65 million in October.

Dapper Labs took the world by storm with NBA Top Shot generating $230 million in gross sales in the first quarter. Meanwhile, Axie Infinity became the first game to surpass $1 billion in NFT sales (now over US$3.6 billion), and the short documentary, Play-to-Earn: NFT Gaming in the Philippines, produced by Emfarsis, Yield Guild Games, and Delphi Digital, received coverage on CNBC, and has since been viewed over 750,000 times on YouTube.

About 60% work at companies with less than 50 employees and 25% work at companies with less than 10 employees.

For the industry, 68% say play-to-earn has been the biggest driver behind industry growth. And 83% value gameplay as the most important aspect when assessing games overall, while 85% say that true ownership of digital goods is the most important aspect of blockchain games.

The road to mass adoption

Moving forward, 86% believe at least some of the traditional gaming industry will leverage blockchain within two years. Fifty-two percent say regulatory uncertainty is their biggest concern and the industry’s most significant challenge. And 43% say education about the core concepts underpinning blockchain gaming is the next biggest pain point.

“With funding flowing, user adoption figures skyrocketing and the world’s leading media publications reporting on our rise, this is the most exciting period in blockchain gaming the world has ever seen, and certainly, in the six years that I have been personally involved,” said Sebastien Borget, president of the BGA, in the report’s introduction. “With the spotlight on blockchain gaming, we have also seen increased scrutiny around issues such as a lack of clear understanding of what blockchain gaming is, the benefits of blockchain gaming for developers and users, the environmental impact of NFTs and the regulatory gray areas surrounding digital assets.”

Borget said that while some of this critique has been balanced and thoughtful in promoting constructive discussion regarding the challenges ahead, other commentary has been poorly researched and has done little other than fuel FUD (fear, uncertainty, and doubt). The latter has surely contributed to some deeply disappointing actions, such as Valve’s recent decision to ban blockchain games from its digital distribution service, Steam, he said.

“It is now more important than ever that we mobilize to fight misinformation and plug the knowledge gaps. And with the alliance having doubled its size this year, we wanted to take a moment to check in with our members and survey their views on how our industry’s narrative is evolving,” Borget said.

The purpose of the survey was to identify the most important themes at this point in the industry’s development and ensure that the BGA’s roadmap for 2022 is in line with member needs.

About 64% of respondents identified themselves as founders or C-suite executives. The perspectives in the report represent a global group of industry leaders and professionals across 51 countries. But women were only one in five survey respondents, which creates a need for better gender representation in the conversation. The BGA had 17 education webinars covering a range of topics.

Piers Kicks, head of crypto at Bitkraft Ventures, said, “As gaming and the metaverse collide, I look forward to engaging with our members to ensure that we tackle some of the major issues ahead of us so that blockchain gaming and crypto adoption continue to empower players and studios alike. Definitely, I am optimistic that there will be more developments coming in the blockchain gaming industry.”

DappRadar, which tracks a lot of blockchain industry activity, said that 2.5 million crypto wallets were connected to blockchain decentralized apps (dapps) on a daily average, making blockchain games responsible for half of all blockchain usage.

Next stop, the metaverse

Metaverse-related activity exploded during the first half of 2021, fueled by virtual land sales that hit $42.6 million.  Growth has continued with the market cap for virtual world dapps reaching an all-time high, surpassing $4.6 billion at the end of November.

Blockchain metaverses and play-to-earn were two of the most talked-about topics in the Asia region, growing 33% month-over-month while reaching 1.7 million mentions across Asian media outlets. The metaverse trend is dominated by the U.S. However, the Asia presence is becoming more visible with India, Singapore, and Indonesia increasing their audience by 500%.

The migration of Axie Infinity from Ethereum to the Ronin sidechain helped it become the number one blockchain platform in NFT trading volume. In June 2021, Ronin processed $124.2 million in gaming NFT transactions versus Ethereum’s $16 million.

A number of games also migrated from Ethereum to the Polygon second-layer blockchain in 2021, including Decentraland, Ember Sword, F1 Delta Time, and The Sandbox. Like WAX, Polygon’s low transaction fees made it an attractive alternative to Ethereum.

The WAX blockchain experienced the most new user adoption, with the number of active wallets growing 1,082% on a quarter-over-quarter basis. This was led in sales by Alien Worlds, which saw more than two million transactions in the second quarter.

Splinterlands became one of the most played games in the industry, with the trading card game attracting over 245,000 daily Unique Active Wallets in September, up 3,267% from the end of Q2.

From January to November 2021, the top five games with the most Unique Active Wallets are Alien Worlds, Axie Infinity, Splinterlands, CryptoMines, and Bomb Crypto.

“Blockchain gaming has firmly established itself as the industry’s darling. With the consumer growth participating in blockchain games, dapp and gaming trends will come together into something even bigger and potentially all-encompassing: the Metaverse,” said Dragos Dunica, cofounder of the DappRadar, in the report. “We’re headed towards a complete shift in how we form communities, create, play, trade, and socialize. Blockchain gaming is catalyzing the establishment of the virtual hubs that will host this new digital life.”

Adoption of blockchain gaming

Interest in blockchain gaming has been growing steadily through 2021. The graph below shows the global search interest according to Google Trends. Blockchain gaming, NFT games, and play-to-earn keyword searches saw a significant increase around the first week of July 2021.

In addition, DappRadar’s report data shows a 6,566% increase in daily unique active wallets (UAW) interacting with game-related smart contracts, rising from 23,100 in Q3 of 2020 to 1.54 million daily in Q3 of 2021.

Jon Jordan, editor-at-large of BlockchainGamer.biz, said in the report, “What’s been fascinating about 2021 is how quickly complex topics such as NFTs and play-to-earn mechanics have generated excitement (and sometimes anger) across a very wide cross-section of the global gaming community. Obviously, the main drivers of this have been blockchain-first projects such as NBA Top Shot and Axie Infinity. But what I’m looking forward to in early 2022 is when experienced traditional game teams start launching their first wave of products.”

Small companies (less than 10 employees) were 3.5 times more likely to be launching a blockchain product or title in the next year compared to larger companies. That validates my own theory about how small companies are going to win in the blockchain gaming market.

At a regional level, respondents from North and South America were twice as likely to have already been using blockchain for more than 12 months. Regardless of their own plans to adopt blockchain, 86% of the respondents said they believe that at least some of the gaming industry will leverage blockchain tech in the future, while 37% think that most of the gaming industry will leverage blockchain within the next two years if not all of it.

“Give it 10 years and you won’t find a single game not being built on the blockchain,” said Kieran Warwick cofounder of Illuvium.

The report said about 85% of survey respondents agree that asset ownership is the most important advantage of blockchain games as the technology delivers digital property rights and allows players to have true ownership of their in-game assets. This is in contrast to the traditional practices of centralized gaming platforms that strictly prohibit the sale of in-game assets on external markets. An example of this played out in Chinese courts this year when Tencent, the largest video game publisher in the world, sued DD373.com for $6.2 million worth of damages for allowing players of Dungeon Fighter Online to trade in-game assets on their site.

Play-to-earn

Blockchain gaming has introduced the play-to-earn model that empowers gamers to own their in-game assets and earn rewards in return for contributing their time and skill to playing the game. While this has obvious benefits for players, it has also opened up new possibilities for developers and publishers to earn revenue from the sale and open trading of these assets, the report said.

In the case of scholarships, where yield-generating NFT assets (such as the NFT creatures needed to play Axie Infinity) are purchased and then leased to new players under a revenue-sharing model, this can even serve to externalize user acquisition costs for games looking to gain traction without the traditional marketing budgets associated with launching a new product.

“Blockchain gaming will not be an extension of the current gaming industry; it will be a disruption that redefines gaming,” said Supreet Raju, cofounder of OneRare, in the report. “With play-to-earn models and asset ownership, gamers will become an integral part of the system rather than passive consumers.  Blockchain gaming will be the most powerful tool for bringing the crypto-curious to Web3 and converting interest into participation.”

Decentralized project ownership (56%), which relates to the existence of decentralized autonomous organizations (DAOs), and transparency (50%), were also cited as key advantages to blockchain gaming. With new types of decentralized organizations being enabled by the blockchain, transparency around the way that projects and people work is highly valued by industry professionals, the report said.

“Play-to-earn is entering a new historic chapter with the advent of mainstream metaverse structures,” said Michael Wagner, CEO of Star Atlas, in the report. “This will attract not only the 2.7 billion mainstream gamers but potentially the entire global population, making play-to-earn economies like Star Atlas synonymous with the global economy and GDP.”

Industry challenges

Despite the positive sentiment from the survey, the blockchain gaming industry has big challenges. Ubisoft was the first major game company to unveil NFTs in its Ghost Recon Breakpoint game last week, and it faced a big negative reaction from gamers.

In the survey, respondents cited challenges as regulatory uncertainty, need for education, technology limitations, poor user experience, gameplay quality, lack of technical experts, lack of industry standards, difficult implementation, niche appeal, lack of on/off ramps, lack of interoperability, insufficient market size, resistance from incumbents, limited applicability, and too much decentralization.

“Technology is moving fast, and lawmakers cannot keep up with its pace. That said, a framework or set of rules is needed to help the developers in understanding the boundaries that should not be crossed,” said Gianluigi Guida, partner at Guida & Associates, said in the report. “Having clear rules in place and acting in accordance with them is fundamental in order to gain trust from the general public, and this will eventually lead to the mass adoption of cryptocurrencies.”

About 59% of the respondents said that users who do not understand blockchain gaming assume that it is a Ponzi scheme or scam.

“While it is too early to fully grasp the full impact blockchain will have on traditional gaming, it holds the potential to bring a new dimension for players and developers to play with,” said Nicolas Pouard, vice president of the strategic innovation lab at Ubisoft, in the report. “By positively shifting the balance of power towards players, blockchain can make for a fairer, more player-centric experience. Traditional gaming will never disappear, but it will surely evolve, granting players more control than ever over their experience.”

Despite the challenges cited in the survey, respondents had confidence that the following factors will continue to drive the industry forward: 68% of respondents stated that play-to-earn mechanics and economy will be the main force driving industry forward.

As a new category in gaming where players are rewarded with in-game cryptocurrencies that can be exchanged for fiat money (real dollars), play-to-earn has spurred new demand and fueled growth for young game studios. It has also had a significant impact on emerging economies, such as the Philippines and Latin America, where play-to-earn games such as Axie Infinity have become a source of income for players, particularly amid the COVID-19 pandemic and resulting job losses, the report said.

The play-to-earn phenomenon attracted new users as well as mainstream media attention that put blockchain gaming’s potential in the spotlight.

Better games needed

While play-to-earn was deemed most likely to drive broader industry growth, the professionals surveyed were inclined to focus on gameplay as the most important aspect of the games themselves. About 83% of respondents said that the most important factor in assessing a blockchain-based game is quality of gameplay, demonstrating that the industry is committed to improving this aspect of play-to-earn, the report said.

“There are already good, fun, and very successful games out there, but to achieve true mainstream adoption, quality and accessibility need to be further improved,” said Lenny Peterson, acting managing director of Antler Interactive, in the report. “With that said, I’m very excited  about the level of quality and gameplay in the next generation of blockchain games currently being developed, not least in our very own, My Neighbor Alice.”

Fifty-six percent of respondents believed that continual game improvements, particularly to elements such as gameplay and graphics, would be the next most important effort to advance the blockchain gaming industry, after the introduction of play-to-earn incentivization models.

Adoption of gaming franchises was listed by 51% of respondents as having the potential to influence the growth of the industry.

Climate controversy

A criticism of blockchain technology, particularly by the traditional gaming industry and mainstream media, is its perceived environmental impact. I see this repeated a lot by gamers themselves on social media.

However, only 15% of respondents to the BGA member survey cited environmental concerns as an important aspect when assessing a blockchain game.

A greater number of respondents (25%) were focused on protocol selection. Environmental impact — as well as security, speed, decentralization and transaction costs — are all factors that make protocol selection an important aspect of blockchain game development.

Many blockchain protocols are prioritizing sustainability as a feature. Ultra is carbon negative and is CarbonNeutral energy usage certified. Layer 1 protocols such as Tezos, Algorand, Avalanche, Enjin, Near, and Wax have also outlined their roadmap to be carbon-neutral. Australian-based Layer 2 solution, Immutable X, builds on technical concepts such as ZK-rollups (SNARKS/STARKS) and consumes less than 1% of the energy required for an Ethereum trade. Immutable X, along with Polygon is also investing in carbon offsets, the report said.

These efforts show the industry is addressing environmental concerns, but many gamers don’t realize this. Legitimate debate can still be had here, but I consider the paper-based traditional banking industry, with its giant buildings and branches everywhere, to be extremely wasteful. And yet I don’t think these concerns, however misplaced, are going to die down anytime soon.

Investment boom

According to BGA member BlockchainGamer.biz, an estimated $4 billion has been invested in blockchain gaming in the year 2021. The top five companies that raised the most money were Forte ($900 million), Sorare ($783 million), Dapper Labs ($607 million), Mythical Games ($270 million), and Animoca Brands ($221 million).

“Blockchain technology has now set the stage for one of the most impactful and disruptive changes in the gaming industry,” said Jens Hilgers, founding general partner at Bitkraft, in the report.

The potential of blockchain and NFTs in the gaming world has attracted major investors including Andreessen Horowitz (a16z), Arca, Bitkraft Ventures, Coinbase, Galaxy Interactive, and Softbank among others. Bitkraft has over six years of experience in traditional gaming venture capital. In October 2021, Bitkraft launched a US$75 million token fund for blockchain games.

Another emerging form of fundraising is coming from decentralized autonomous organizations (DAOs). Some prominent examples include 3D Gamers Guild, AngelDAO, Avocado Guild, BlackPool,  BlockchainSpace, Good Games Guild, Merit Circle, Ready Player DAO, UniX Gaming, and Yield Guild Games. Blockchain gaming-focused incubators and launchpads are also a way for projects to fundraise, such as Seedify.fund, Enjinstarter, Solanium, Polkastarter, and Moonstarter.

Regulatory uncertainty

More than half (52%) of survey respondents said that regulatory uncertainty was their biggest concern and the most pressing challenge for the blockchain gaming industry.

Regulation will be an issue for crypto assets, particularly as various jurisdictions determine how they will deal with NFTs in the years to come. In-game assets, if not structured properly, can be treated as securities under some laws.

In particular, NFTs have also introduced a new conundrum for many jurisdictions when it comes to intellectual property (IP) rights and ownership of non-fungible assets. Confusion surrounding the patentability of blockchain games and collectibles needs further education within the industry.

James Gatto, head of Sheppard Mullin’s blockchain technology and digital currency team, said in the report that the technology faces a variety of regulatory risks, as summarized below.

Some currencies, NFTs, and other tokens may be securities depending on how they are structured and offered. The test is whether they are an “investment contract,” which includes an investment of money in a common enterprise and an expectation of profits derived from the efforts of others (e.g., presale of tokens with proceeds used to build the platform).

On top of that, token marketplaces could be considered security exchanges. If a token marketplace or the platform offers trading of digital assets considered as securities, the law requires compliance with securities exchange rules.

The risk of gambling exists if players stake or risk something of value on some chance-based activity to win a prize or something of value. Digital assets traded on secondary markets may cause the items to be deemed things of value. This is why Valve, based in the state of Washington which has strict gambling law, decided to ban all NFT games on its Steam platform.

And when a crypto game company engages in certain financial activities involving virtual assets deemed to be a convertible virtual currency, they may be a money transmitter subject to stringent AML/KYC requirements. These rules are aimed at stopping money laundering and financial fraud.

Enforcements are increasing. Blockchain-based virtual worlds are thriving and offer a variety of business models. In some, users can purchase parcels of land and other digital assets and create, experience, and monetize these assets and other content. Over time, we have seen a number of legal issues with “traditional” virtual worlds. All of these issues should be considered with blockchain-based virtual worlds, plus the issues addressed above.

And many misconceptions surround the patentability of blockchain technology and games. If the criteria for patentability are met, no prohibition should prevent the patenting of any software, including blockchain technology, game mechanics, and game technology. It is harder to get some of these patents, but this should not stop developers from seeking patent protection where appropriate. It is important to work with a patent attorney who specializes in these areas to understand what aspects of blockchain and game technology can be patented and to draft applications in a way that maximizes the likelihood that it will be granted and be enforceable.