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How hot are nonfungible tokens (NFTs), a blockchain tech that makes it possible to sell one-of-a-kind collectibles in games? Well, our four panelists (three of them unicorns) on NFTs and games at GamesBeat Summit Next have raised a collective $606 million in the past few months at a total valuation of more than $5.5 billion.
James Zhang, CEO of Concept Art House, moderated our session on “The Future of NFTs and Games.” His company recently raised $25 million on the promise of doing crypto art for both games and collectible art. John Linden, CEO of Mythical Games, raised $75 million four months ago and raised another $150 million at a $1.25 billion valuation in a round last week led by Andreessen Horowitz. Yat Siu, chairman of Animoca Brands, raised money three times this year totaling $203.8 million at a $1.2 billion valuation. And Jeff Zirlin, cofounder of Sky Mavis, recently announced the company raised $153 million at a $3 billion valuation.
They’re all at the epicenter of NFTs and games. The NFT market exploded this year, first with NFT artwork that used the transparent and secure digital ledger of blockchain to uniquely authenticate one-of-a-kind items. This establishes digital ownership for gamers, and it allows them to sell their game characters at a profit, enabling a new business model for games dubbed play-to-earn, where players earn rewards. Each of the companies in the session is capitalizing on that trend. And they all expect mass adoption and disruption for gaming’s status quo.
If you look at Google Trends, you’ll see that NFTs started picking up in February and skyrocketed after related NFT sales like digital art and NBA Top Shot took off. Dapper Labs has now seen sales and resales of those NFTs top $780 million. In March, an NFT digital collage by the artist Beeple sold at Christie’s for $69.3 million. It sounds so dumb. The popularity of NFTs have exposed some serious drawbacks too in numerous scams where people steal art and sell it as their own NFTs. NFT sales hit $1.2 billion in the first quarter, $1.3 billion in the second quarter, and a whopping $10.7 billion in the third quarter as games such as Axie Infinity took off.
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Zhang’s company has been around for 13 years making concept art for a thousand games, but it was able to raise money because it has cashsed in on the NFT art boom. As an example, it helped Frank Miller sell NFT art for Sin City, and one of the pieces sold for more than $840,000.
“Blockchain gaming is disruptive,” Zhang said. “And for me, we’ve never seen such a demand for art and artists. I’m super excited.”
Linden, an Activision veteran, started his company in 2018 when nobody was talking much about NFTs. His company created a game, Blankos Block Party, based on cute vinyl characters and rare collectibles based on NFTs. Lately, the company has seen its usage soar, raised money, and cut deals with brands like Burberry. But Linden said the real opportunity coming is that his Mythical platform can be an economic engine for a lot of blockchain games, including those coming from triple-A game companies.
“We really want to explore all of these levers to pull in the play-to-earn (economy),” Linden said on the panel. We’ll be introducing a whole series of new games very soon from other studios and other great gaming companies on both PC console and mobile.”
Siu said his company has carved out a role for itself as a “metaverse builder.” It has done more than 100 investments the NFT gaming space. It owns The Sandbox and other products like F1 Delta Time, and others.
“We’re super bullish about the space and we see this really as a sort of a great time of reinvention for the web,” Siu said.
Play-to-earn with Axie Infinity
Zirlin’s company created Axie Infinity, a blockchain game with two million daily active users. It has pioneered the way for play-to-earn and NFT collectibles in gaming, and it has seen most of its success in emerging countries such as the Philippines. About 50% of its players have never used cryptocurrency before, and many don’t have bank accounts.
“We’re really getting blockchain and crypto to the people that need it the most,” Zirlin said. “We’re have pioneered play-to-earn and scaled it. We’ve done $2.4 billion in NFT marketplace volume. We have big plans ahead and continuing to upgrade our gameplay. Eventually, we want Sky Mavis to be one of only many entities that are building within the Axie universe.”
Sky Mavis has a tested sidechain for Ethereum that it hopes other game companies will use as well.
Zhang asked how much longer this ride will continue. Siu said that in the beginning, the early crypto bull run was a driving engine. It inspired investments in decentralized finance and NFTs became a framework for establishing property rights.
“You ended up having a banking system first. Wall Street was built first. And then suddenly the real estate developers and the merchants and all those started coming in. And that role basically first started a little bit with the artists and the collectors that we saw with Dapper Labs’ NBA Top Shot, and, of course, with crypto art,” Siu said. “But we always believed that gaming was going to be the big driver because most of the people in the world who are gamers already have a relationship with assets, though they don’t really own them.”
In other words, gamers love collecting things. Crypto was hard to use at first, but companies are learning on to onboard players to crypto games even though they don’t know anything about wallets or the technical details. Now the game economies are going strong and they aren’t necessarily tied to the ups and downs of Bitcoin prices.
“This grand decoupling will continue,” Siu said.
Linden agreed it’s been an amazing year.
“We just hit a half million installs with our PC client for Blankos, which is exciting,” he said. “There’s three billion gamers in the world. We are just getting started. I think there are going to be a lot of challenges I think ahead of us. There’s a group that is adopting this very quickly. It’s a remarkable feat. But I think we have to be a little careful in how we bring these concepts up.”
For instance, he said, if you lose your password in a game, you can just reset it. But if you lose your private keys for blockchain assets that are tied to cryptocurrency wallets, then you could lose those assets forever. That’s going to be tough for consumers who often forget passwords multiple times a day.
“We’ve got a lot of learning to do. But I think it’s gonna be a really, really exciting next few years as we onboard the massive number of players into this new economy,” Linden said.
Coinbase recently mentioned that it had a million people sign up for crypto wallets in a day, Zhang said.
Zirlin said that early blockchain game design is unique in that you start building in public from the first day. In February 2018, Sky Mavis was selling tokens that were just metadata and didn’t even have any artwork. The players were pioneers and missionaries and crypto hobbyists, he said.
“They were interested in seeing a different type of game. It wasn’t all about money and financial speculation,” Zirlin said.
In fact, a lot of crypto games had no financial return at the time. Zirlin said a lot of developers were excited about having a community-driven game. He and his teammates didn’t have opportunities to work for the big game studios. What mattered was the community driving the game, he said.
“It gave us a stone to use against the Goliaths,” Zirlin said. “When you’re a startup, you’re always trying to figure out what is your advantage? What is your secret sauce that you can use to create a niche for yourself in this market? For us, that was really this idea of community ownership, empowering gamers using this technology to create a new dynamic between gamers and developers.”
Siu noted it was interesting for Animoca Brands to invest in Sky Mavis a few years ago — when the going was really though — was that empathy the team in Vietnam had for the community and their belief in an equitable structure of ownership.
“They really understood the community part,” Siu said. “It was a different kind of thinking, and it is not compatible with traditional game design.”
Siu said this empathy differed from game designers creating free-to-play games, where the business model was dependent on monetizing the 2% of players who would spend money in a game. Over time, free-to-play became more exploitative as developers constantly had to make more money from a game, often when its user base was declining.
“Not all game designers necessarily like that idea, but they were forced to do the kind of work to continuously find ways to sort of dig deeper into psychological methods and how to make more money and drive more average revenue per user (ARPU).”
Siu said that his own teams are happier to do their work because nothing is more rewarding than to make a game and have it deliver rewards to gamers that could make a difference in their lives.
Zhang said he was amazed at the results in the Philippines and the wealth being created. But he asked if more regulation is coming.
Linden said it was good question.
“We have to be very careful with some of this,” he said. “What is the concept of work? I think that’s going to be the big equation here. In terms of, if you just have a fractional ownership of something, and you’re getting some type of passive income on it, I think in the U.S. and probably in the European Union, you have significant security risks.”
That is, the game companies have to be careful if they tout their games and game assets as investments. Because the regulators often require that anyone selling a security has to make sure that the potential investor is knowledgeable enough about securities. You can’t just sell securities to anyone — as that violates regulations meant to protect investors.
“There’s a lot of a lot of money starting to flow, there’s a lot of money being raised,” Linden said. “We will be on the radar (of regulators) at some point. I think that that will take some time. And I think it’s really up to us now to kind of self-police that to some degree, and abecome our own regulators to make sure that we’re always putting gamers first, we’re always protecting consumers, and making sure that we’re bringing out models that make sense.”
Siu agreed that regulation of NFT games as securities will be something to look out for. He believes that educating government officials, regulators, and politicians is going to have to happen because a lot of people are starting to make a living from play-to-earn games.
“It’s becoming critical to their survival. It no longer can be something that is excluded from the political agenda,” Siu said. “We as an industry have to come together and educate the space as to what it means.”
Zhang asked about what happens next for the fidelity of NFT games.
“We could say with nearly 100% certainty, we will see at least one of the top three or four publishers in games to enter the space within the year,” Linden said. “It’s definitely happening. actually have to give my wife credit for this analogy, so I can’t steal the credit here. Collectively, we have been building like Netflix, with its new streaming model for content. They see this is where we make money. That’s what we are building towards. There will be this massive transition. Big studios are taking notice of this in an amazingly fast way. We’ll see definitely a bunch of the bigger groups stepping into the space.”
Siu said his company recently announced Phantom Galaxies, which has much more of a triple-A look than many previous blockchain games. It is being built by Blowfish Studios, a veteran game studio that Animoca Brands bought for at least $9 million.
He noted the billions of dollars coming into the space now dwarfs what went into mobile in the early days of iPhone gaming. The funding is there, and the tech is better with things like Unity and Unreal, Siu said.
“We think we will see this space have hundreds of millions of gamers, if not billions, at a fairly rapid space,” Siu said. “I think it will happen much much faster than we think.”
Linden said that we are seeing a paradigm shift in games, with new models and new player archetypes as players shift from renters to owners.
“People are curious who will get disrupted by this paradigm shift,” Zirlin said.
Zirlin thinks that publishers and app stores — the parties that take 50% to 70% of revenues — are going to be the ones that move slowly and will be the losers in this shift.
“They’re the middlemen getting played out,” Zirlin said. “We’re taking the 50% to 70% that used to go to the publishers and app stores.”
And they’re sharing that with the players, he said.
Linden noted that Andrew Wilson, CEO of Electronic Arts, said in his company’s last earnings call that NFTs and blockchain would be important to the future of gaming.
“That’s kind of a wake-up call,” Linden said. “They don’t want to be the last to move anymore.”
Siu said that big companies have usually been good at acquisitions. But he thinks that we’ll see some “very frantic M&A activity happening sooner than we think.”