The Role of NFTs in Gaming, Avatars, and Metaverse Funding
August 16th, 2022
The Metaverse, as it is known today, is an Internet mutually owned by builders and users made up of peer-to-peer networks. Because it is built on a foundation of trustless transactions and programmability layers, it allows for an open, shared economic system.
Since the inception of cryptocurrencies such as Bitcoin, and the maturity of blockchains like Ethereum, the Metaverse is based on a paradigm where the user is the platform in an open space that is largely unregulated. Digital value is minted, or created, then later stored or transferred across other technologies as a form of wealth in the form of various assets. This creates an entirely new financial system often referred to as decentralized finance, or DeFi. In the Metaverse, this is referred to as MetaFi.
With the success of the growing ecosystem of non-fungible token (NFT) minting platforms and marketplaces, creators are joining the Metaverse en-masse. Many fungible crypto exchanges have also begun launching NFT offerings with the belief that it will become their primary driver of revenue and growth.
The multidimensional growth of the Metaverse has begun with the creation of new virtual worlds, particularly in gaming and other social experiences and spaces. Much of this process is driven by market forces and technical innovation from the bottom up. However, its disruptive expansion has brought it into the interplay of top-down government policy all over the world, particularly around data rights, privacy, antitrust, and financial legislation, especially when it comes to NFTs.
Here is an overview on NFTs and the different roles they play in the Metaverse.
What is an NFT?
As we have previously covered here and here, NFTs are blockchain-based units of value also known as tokens. Each NFT has a unique ID linking it to an underlying asset. An NFT is composed of software code called a “smart contract” containing details of the underlying asset, whether physical or digital, that the NFT relates to. Any rules and rights that attach to the NFT are also contained in this code.
The value attached to an NFT is derived from its “non-fungible” nature. This means that a token cannot be replaced with an identical token, which achieves the effect of inherent scarcity. This is what differentiates it from crypto-currency and government-issued fiat, both of which are fungible (identical in value and interchangeable with each other).
Since an NFT is essentially metadata about an asset, the NFT is not usually the actual asset itself, unless the smart contract provides otherwise. Thus, in general, ownership of an NFT does not equate to ownership of the underlying asset. To compare it to a limited-edition print of an artwork, a collector would own a physical print, but not the proprietary rights to the original artwork.
A common approach to addressing this issue is for an NFT seller and an intellectual property (IP) rights owner to license use of the IP rights in the underlying asset to the NFT purchaser under certain conditions. However, the smart contract must set out these conditions, or the NFT seller and the purchaser can have a separate agreement to the same effect. The rights owner determines how open or restrictive the purchaser’s use of the underlying asset is.
NFTs in gaming
The introduction of blockchain technology into gaming has changed the playing field for gamers. In this new era of digital ownership rights and financial inclusion, NFTs are a means of value exchange in virtual gaming worlds. This plays a vital role in blockchain gaming, and what is now called the “Play-to-Earn” industry.
Through MetaFi, in-game currencies can be traded on crypto marketplaces. Players can also enter transactions using in-game characters or items as NFTs. Thus, the digital assets they earn while gaming are valuable as in-game items, but also as a reliable means of actual income generation. Many games are built on a protocol of transparency and security. This ensures authenticity of in-game assets traded and decentralizes the ownership of the platform to the actual players.
NFTs create a potential new revenue stream for asset owners. Smart contracts make it possible for a royalty payment to be made automatically to the original NFT seller with each sale of the NFT. This, in turn, opens up the possibility of infinite revenue streams with every sale. Many digital creators get into NFTs for this reason. In the gaming industry in particular, financial benefits to creators incentivize game developers to record their ownership of in-game items, which fuels the economy in-game.
Despite the promise that NFT holds for gamers, there has been backlash from both gaming and player communities, notably Steam, Epic, Ubisoft, and Discord, to name a few. However, other NFT-infused publishers and marketplaces such as Ex Populus are rapidly growing in popularity in the gaming industry.
NFTs in avatars and virtual identities
Identity is what distinguishes one entity from another. At its very essence, it is what makes someone unique. As the Metaverse evolves, so must the digital identities that inhabit it. Self-sovereign identities are a cornerstone of the decentralization in the Metaverse. This allows users control of their digital identities, which plays a crucial role in creating a reliable, scalable ecosystem across virtual worlds.
In the Metaverse, identity markers such as wearables or avatars are essential. Traditionally, NFT avatars are restricted to the platform they are built on because of technical limitations and closed gaming environments, to name a few reasons. However, the recent growth of the NFT avatar industry has surpassed all expectations, evolving out of video games and into mainstream culture with celebrities such as Cardi B and Karl-Anthony Towns joining the NFT game. Future evolutions of the NFT avatar industry lie in designing open-world avatars compatible with a range of different platforms and virtual worlds.
How NFTs are funding the Metaverse
The unprecedented disruption of the Metaverse in the digital space has brought with it incredible amounts of funding. According to CV Insights, the first nine months of 2021 saw $15B in blockchain and crypto funding, an incredible 384% increase compared to 2020 in its entirety. Today, major players in Silicon Valley have already signaled their commitment to growing the blockchain industry.
More than $2B has gone into NFT project investments within the first three quarters of 2021 alone, an unbelievable 6,523% spike compared to 2020. Metaverse-specific venture companies are also growing in prominence, further blurring the lines between gaming, art, sports, and digital collectibles.
In addition to the increase in traditional investments, a large uptick in corporate venture capital comes from some of the larger players in the industry who have shifted from raising capital to deploying it.