Harry Lawrence

Harry Lawrence

Games Industry Analyst

To say that the gaming industry is large has become an understatement. For some perspective, the forecast for the number of cars sold worldwide in 2017 is 79.6 million, which brings the current estimate for the total number of cars on the road up to around 1.5 billion. Compare that with the current estimate for the total number of people who play video games: 2.2 billion.

According to Newzoo’s latest Global Games Market Report, the global games market will have generated $108.9 billion of revenue in 2017. This is a 7.8% increase from the previous year, and is expected to rise to $128.5 billion in 2020. As we move into 2018, gaming is becoming less comparable with that of the film industry, and more with that of professional sports.

However, regardless of size, bourgeoning industries come with obstacles, and gaming is no exception. Developers frequently cite budget constraints, fraud is widespread, third-company companies such as Steam have interfered with the supply chain, and some countries present issues with censorship. However, while these problems are very real, there is an emerging technology that could become an equally real solution to some – or, potentially all – of them: blockchain.

'It is certainly not an exaggeration to claim that Blockchain will revolutionise the gaming industry in the coming years.' @PunEnjoyable explains all in this handy primer about the emergent technology. Click To Tweet

What is Blockchain?

Blockchain technology originates in 1991 from a group of researchers working on a new technique to timestamp documents. For the next 18 years, it remained largely unused, but in 2009, Satoshi Nakamoto used this research to develop Bitcoin, the world’s first decentralised digital currency.

At its most fundamental level, a blockchain records information, usually a transaction. Once information has been recorded, it is virtually impossible to change it. In any given chain, each block contains data (e.g. transactional), the hash of that block (a unique reference) and the hash of the previous block. Changing data inside a block will cause its hash to change, and will thus make all following blocks invalid.

Due to the computational power of modern computers, it would technically be possible to tamper with data in a block and then calculate the subsequent hashes needed to validate the rest of the chain. To get around this, blockchain technology uses a computationally-intensive mechanism to slow down the creation of new blocks (for example, it takes 10 minutes to add a new block for Bitcoin). This means that tampering with data would require an extremely large amount of time to execute successfully.

Cryptocurrencies like Bitcoin are already taking advantage of Blockchaining, but when will games?

Blockchains take the form of a distributed ledger – a public record of financial transactions – and are managed via a peer-to-peer network rather than a central entity. When someone adds a new block to a chain, it is synchronised with everyone in the network, and can be validated by consensus. Blocks that have been tampered with will be automatically rejected by other users.

How Could It Affect Gaming?

Some have argued that blockchain technology could be the biggest thing to happen to gaming since the invention of the internet. While this is certainly a bold claim, it is definitely not an exaggeration to claim that the technology will revolutionise the gaming industry in the coming years. This is because blockchain technology lends itself to gaming in two important ways – market efficiency, and security.

The concept of a digital marketplace is already well-established in the gaming world. Steam is a good example of this, a centralised system in which Visa, developers and the platform itself each take a cut every time a trade is made. This means that between 10% and 15% of the value of trades in lost in fees. This is especially true in the domain of free-to-play games (particularly MMORPGs), in which there is a lot of itemisation and customisation. The Auction House in Diablo III is a good example of the size to which these marketplaces can grow.

With blockchain, trades can become decentralised, which means that those fees disappear. In addition, items can be stored in a way that allows them to be traded not only within a particular game, but between games, a feature for which there is much demand. Blockchain is the perfect way to enable this, owing to how it tracks items. In effect, players can increase the value of their resources by being able to take the items they have collected over time (potentially years) and invent new uses for them.

As blockchain technology is relatively young, and our understanding of it is so far limited, there is a good case for as many attempts to be made as possible of using it to expand itemisation in a way that could lead to monetisation. However, companies must balance monetisation with creating a product that is fun. This is difficult, and doesn’t always happen as intended; you only need to look at the controversy over the microtransactions in Battlefront II last year to see exactly how this can go wrong so quickly.

Do or do not do, there is no “buy”.

Itemisation itself has taken a long time to get to a point where many can consider it as fun and fair, and for some this is still debatable. Even though players react negatively if they sense that one player has an unfair advantage over another, this is notoriously difficult to developers to avoid when imbuing items with value within a game system.

If this so far seems like an unrealistic ideal, there are companies that are attempting to be the first to solve the problem by converting virtual items into real-world commodities, removing the need for a middle man. Dmarket is developing a framework of smart contracts that can execute themselves based upon certain conditions. GameCredits is a cryptocurrency on the rise, attempting to become the universal standard within the world of gaming. Enjin Coin are targeting private servers, which brings monetisation to the server providers and provides a small-scale safety net in case of failure.

But, these companies face serious challenges. There is a limit to the amount and the type of games that decentralised currencies apply to, and they will be competing with companies like Steam, which represents a huge barrier to entry, not least because developers value its support highly. Perhaps the most difficult challenge will be convincing developers to forego revenue gained via non-tradable content (such as skins in Overwatch).

Trading And Fraud Prevention

In addition to the effect that blockchain will have on marketplaces, the trading that happens within them – for which there is heavy demand – can be said to be 100% secure due to the virtual impossibility of data tampering.

Theft and fraud have dogged the gaming industry for years. Historically, disputes over transactions in which customers claim to have been hacked have been met by credit card companies with no form of compensation, due to the lack of any physical item having been shipped. At the end of the day, virtual goods have no real protection.

Don’t worry loves, cavalry’s here – in the form of skins and emotes. So many emotes.

Fraud, in particular, becomes extremely difficult to execute because of the transparency of the public ledger central to blockchain technology. Any kind of competitive record or benchmark claim would be immediately verifiable by anyone in the world. The origin of anyone’s in-game items would also be traceable at any time, creating an environment that can be objectively fair.

One particular company in China is taking advantage of another advantage that blockchain technology would introduce. Game Chain System (GCS) is connecting developers and gamers on a platform that uses the decentralised nature of the technology to create games that are beyond the scope of the country’s relatively harsh censorship laws.

Currently, the gaming industry is on a precipice. In 2020, it is expected to generate $128.5bn of revenue. With such a rate of growth, it seems inevitable that breakthroughs will come, and blockchain technology offers innovative solutions to problems with long histories. In the coming years, players could convert a five-year collection of in-game purchases to new items in new games, increasing the value of their time and money. Or, maybe they could simply cash out and benefit from the new liquidity of the gaming marketplace. All the while, they could do this with the utmost confidence that this is all financially secure.

'With Blockchain, players could convert their collection of in-game purchases to new items in new games, or they could simply cash out and benefit from the new liquidity of the gaming marketplace.' Click To Tweet

Is The Games Industry Ready For Blockchain?

The major downside cited to all of this, however, is that developers simply do not like taking risks, and what else is blockchain technology to companies but a financial and existential risk? Game makers know that entering the space will inevitably lead them to face a lot of competition, not only with each other, but with key long-term players in the industry. This is important, as without support from developers, there is no way to trade those goods.

While there have been successful test cases, not enough has been tested and proven for the largest and most influential players to make the leap of faith required to push blockchain technology from having potential to becoming a new standard. We are still at a point where the progress that has been made so far could lead nowhere. The right game publishers at the right time need to get on board to bring decentralised currencies to the world.

The finish line is still years away, but the advantages of blockchain are clear, and the atmosphere in the industry is largely positive. Gameflip is an example of one of the companies that could become a central figure in this movement. It has built a community of over two million users that are listing over $3.5m in over 175 countries. With its investors proudly listed on its website, it is a potential glimpse of the future of the gaming industry.

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Harry Lawrence

Harry Lawrence

Games Industry Analyst

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