by Yasin Sebastian Qureshi, founder & executive director of The NAGA Group AG

When Atari released the legendary „Pong“ some 45 years ago, its major commercial success triggered the beginning of modern video game industry. Soon, gaming would transcend the domain of teenage boys on home consoles and find its way into the wider population on tablets and smartphones as well as across borders, ages and gender. However, games are more than simply a means of sparking joy. Instead, they represent a lifestyle or a challenge in which the desire to win, to be the best, and to get the most from the game, drives the market. According to Newzoo, the global industry is expected to generate almost $140 billlion in revenue in 2018, with digital revenues accounting for 91% of the market.

Dozens of popular game environments enable the production and commercialization of virtual goods created by users. A growing number of gamers log in and play their favorite games to level up and upgrade their unique characters to seek status, identity, membership, reputation, and – of course – money. This has made the gaming industry an entire market with real trade relations which can hardly be distinguished from other markets.

From more than 2.3 billion active gamers in the world in 2018, 1.1 billion (46%) spent money on games. The majority of them spent money on in-game items or virtual goods. Just think of virtual weapons from Counter Strike: Global Offensive, or Fortnite’s Raven skin hype: the array of characters and items traded today is as wide as are the marketplaces on which one can buy, sell, and exchange them. Sometimes, virtual items can command staggering sums such as up to $6 million paid for a virtual planet.

The Current Virtual Goods Economy

However, while gamers like to buy, exchange and sell in-game items, current frameworks for trading can be inefficient, expensive, unfair and open to scams. One of the biggest issues is that gamers do not truly own their acquired amounts of in-game items and virtual goods for which they spent real money, or many hours due to a lack of legal ownership of their acquisitions. Official marketplaces and games developers place strict qualifications on what users can do with these items. EULAs (End User License Agreements) often prohibit, amongst other things, the exchange or transfer ownership of items, with the result that game developers often intervene.

Second, current marketplaces such as Valve’s Community Market limit trading to other games outside of their platform. This represents a major disadvantage to gamers as many of them are not restricted to playing only one game. As the trend shows, players are now looking at items that allow interoperability across multiple platforms and games. In fact, gamers often switch games and platforms when they lose interest in a specific game, but they are often discouraged by the loss of investment they will incur in the process. This creates indirect pressure for gamers to switch or purchase additional virtual goods in the future.

As a result, many gamers resort to third party marketplaces which promise to meet the liquidity demands of gamers. However, due to their lack of transparency and governance these marketplaces have contributed to a “wild west” environment in which people are in danger of getting scammed. In the UK, Action Fraud said it had received 35 reports of Fortnite-related fraud between April 2017 and March 2018 with an average loss of £146 per victim.

Blockchain-based market places: an opportunity for gamers and publishers?

Blockchain technology could eliminate the current pitfalls in the virtual goods economy and realize cross-game and cross-platform interoperability, true ownership for gamers, as well as create safe, regulated and independent marketplaces. A Blockchain-driven platform, on which NAGA is currently working on, could enable gamers to safely conduct and trade their items for monetary value across different games and platforms on one side, while at the same time acting as a virtual store for publishers to sell virtual products.

Game developers could connect their games with their in-game item to blockchain, allowing gamers to evaluate and trade them. Contrary to existing alternatives, blockchain-based marketplaces have the potential to be faster and more affordable due to the potential use of cryptocurrency. Unlike fiat money, which is subject to payment processor fees and cross-border charges, cryptocurrencies allow for purchases to take place across international borders in real time at a fraction of the fiat cost. And since the majority of virtual item buyers and sellers are in different countries, using different fiat currencies, this is a tremendous improvement for all parties.

In terms of security, the blockchain’s highly transparent and decentralized nature makes it more difficult to commit fraud when it comes to trading virtual items. Gamers will benefit from legal platforms which offer a save and easy way to trade with virtual goods based on smart contracts. It will also provide an additional benefit for publishers as they can now revitalize their old games by connecting to blockchain-driven marketplaces and tap into this rapidly growing global economy that’s highly secure and safe.

The Road Ahead

With an estimated $50 billion economy, the global virtual goods industry has seen unprecedented growth in recent years thanks to billions of players who take pride in the in-game wealth they’ve gathered. Blockchain technology will put a stop to fraud and create a economy of true ownership. An ecosystem where gamers can trade directly with other games in a secured platform provides an incentive to purchase more virtual goods in the future. For publishers, partnerships can be established to provide a commission-based incentive in the form of smart contracts. This could change gaming for the better and let gamers to turn their passion into wealth as well as benefit developers.

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