Author: Lorenzo P. Martin
Disclaimer: This is not financial advice.
The article looks at how earning through playing a video game has been around since the late 1990’s through informal trade external to the game. Value is generated within these digital economies and opportunity costs help facilitate the value trade between two agents. Blockchain gaming has revolutionised how gamers see their digital assets and this revolution has helped formalise what was once an informal way to exchange value from the virtual to the real world.
2021 saw the rise of Non Fungible Tokens (NFTs) and Play-To-Earn blockchain games where users earn cryptocurrency by playing a game that they got access to from owning a digital asset. Spearheading the revolution for this new blockchain industry is popular blockchain game, Axie Infinity, a videogame that grew over 200 times over the course of the same year (Weisenthal and Alloway, 2021).
Axie Infinity is a game where players own, play, and breed digital assets. Each Axie has a unique skill set that can be used to battle with other teams of Axies, where the winning player is rewarded with an in-game currency that has actual monetary value because it is a cryptocurrency. People who lost their jobs due to the COVID-19 pandemic, particularly in developing countries like the Philippines, Brazil, and Venezuela, have turned to playing the blockchain game as a means of income (Weisenthal and Alloway, 2021).
Earning a living through playing video games is generally seen to be a path accessible to only a select few individuals, usually those who are exceptionally good at the game, like ESports players, or at creating content by playing the game. Though blockchain games like Axie Infinity gave access to the average gamer to earn money by playing the game, the concept of Play-To-Earn, and other aspects of blockchain gaming were already present in the traditional gaming or the Web2 gaming space since the late 1990’s.
How Web2 Gamers Earn
Traditional gamers looking to monetize on the time spent playing a game typically earn by selling rare in-game items or high level accounts through third-party websites or peer-to-peer deals. These players grind their way into getting high-level items or characters that other players might want to purchase in order to get a head start (PlayerAuctions, 2022).
A study published in 2001 highlighted how online games, especially MMORPGs, have their own virtual economy because assets have value. The digital currency in a game called Everquest, an MMORPG released in 1999, even had a higher USD exchange rate than the Japanese Yen, proving that digital assets can be a store of value for certain players (Castranova, 2001). Because these assets have value, some players will look to convert that value into a fiat currency. These players do so through the use of third-party exchanges, like G2G, PlayerAuctions, and EpicNPC, that allow the trade of video game assets, accounts, or services for real world currencies.
The currencies and assets used in the ecosystem are also meaningful in the sense that they can be exchanged for real life currencies. (Yamaguchi, 2004) These digital assets have value because the players within these gaming ecosystems give them value. It takes hours of grinding in order to level up characters to a point where it can farm valuable loot, or be strong enough to perform in the competitive PvP scene. Time that not all players have.
Opportunity Cost and Value Creation
The opportunity cost of playing a game can be seen through two angles, time and income. From the time perspective, a player’s utility from playing a game can be likened to a budget constraint scenario where each person has to allocate 24 hours a day to different activities. A gamer’s utility is considered to be U-shaped because after a certain point, the players’ marginal utility from playing the game becomes negative as the player starts to neglect earthly responsibilities like eating and sleeping in order to play the game. From an income perspective, players tend to spend more time playing the game if they’re not sacrificing a large income when opting to allocate their time to play rather than work (Castranova, 2002).
Castranova’s 2001 study included an economic profile of players within the game through a survey called the Norrath Economic Survey (NES). The survey acted pretty much like most economic surveys that most countries’ economic departments use to get a feel of the economy. The NES was posted on a forum, where players that were heavily invested in the game had access to participate in the survey. Based on the survey results, those who considered themselves to be residents of the virtual world tended to have lower education, fewer work hours, lower wages, and less earthly responsibilities (Castranova, 2001). This means that these players’ opportunity cost to play the game is not that high. Adding the fact that it is easier for these players to hone their skills in the virtual world rather than the real world given the same time spent would influence them to just play the game rather than improve a skill that can help them get a better job (Yamaguchi, 2004).
Players with varying opportunity costs create the market that gives value to these digital in-game assets. Those with a low opportunity cost of playing typically tend to play more of the game and are able to grind until their characters are considered high level. This creates a supply of digital assets that satisfy the demand coming from players with a high opportunity cost to play the game, but also have a high motivation to gain access for high tier loot or a competitive character. These second set of players usually have better compensated earthly responsibilities, making it a tougher decision to play the game.
Web3 Opportunity Costs
Opportunity costs are easier to calculate for Web3 crypto games because assets and tokens have a direct monetary value in fiat. Unlike traditional games where the value comes from grinding and levelling game accounts to sell on the secondary market, most Web3 gamers earn tokens from playing and serve as a minimum wage from playing the game. Earnings from playing the Web3 game can directly be compared to actual earnings a person would make should they opt to use that time to work in real life instead, creating an opportunity cost scenario.
Taking the example of Axie Infinity, players from developing countries like the Philippines have adopted the game faster because at one point, players were earning more from playing the game than from working in real life. The opportunity cost of not playing the game was greater than the revenue players would receive from working. However, once revenue from playing decreases, especially due to the decrease in value of the tokens being farmed due to the volatile nature of cryptocurrencies, one can expect players, especially those who are mainly driven by financial goals, to start leaving the market as opportunity cost of not playing the game is now less than if that person chose to work instead.
Minimum wage in the Philippine capital sits just at a little under $10 an hour, a far cry from the near $40 an hour revenue Filipinos could get from playing the game (Mislos, 2021). Axie Infinity nearly reached 3,000,000 active daily users towards the end of 2021 (Axie Infinity, 2021). However, data from activeuser.io shows a declining trend at the start of 2022, in parallel with the declining price of $SLP, the main token that is farmed in the game.
However, the decrease in playerbase is at a rate of only 1.8% for the months of February and March of 2022, around a 50,000 headcount in absolute value. This is despite a huge reduction in earnings due to the price of the game’s utility token crashing to a little bit over 1 cent, and the developers drastically lowering the gameplay emission of the token. Despite the decreased earnings, some players still chose to stay in the ecosystem.
These players still find value in staying in the economy that is not tied to the financial earnings from playing. This value is intrinsic to the game and adds to the opportunity cost players consider before they consider leaving the economy. This intrinsic value is subjective in nature and can revolve around future perceptions of the protocol, entertainment value of the game, or the social aspect of managing a guild within the ecosystem. The intrinsic value can also be in terms of governance capabilities of the team or safety of assets within the protocol. It is basically what the community puts a premium on that is added on top of the market value of the project.
Risks of Informal Trading
Earlier it was mentioned that the transfer of these valuable digital assets happens external to the game, usually through third-party exchanges that are not affiliated with the project in any way. Because these exchanges are not connected to the game in any way, the legitimacy of the transactions will always be in question when dealing with strangers online.
In Poland, someone was caught selling the same video game account to multiple players from 2014 to 2018 and faced over 9000 criminal charges because of it. Game accounts usually cannot be shared between multiple players at a given time, therefore victims complained of getting locked out of their accounts they purchased. (Taormina, 2020)
A study in 2019 has linked money laundering to online games. Criminals funnel dirty money by purchasing in-game assets, trade these assets internally inside the game, before using third party exchanges to convert the assets into fiat currencies. Online games do not have a clear operational responsibility to identify criminal activity, making it hard for authorities to trace dirty money through online games. (Moiseienko and Izenman, 2019)
Yamaguchi also notes that currencies in virtual worlds do not have a central bank or agency that controls the money supply of digital currencies, or interest rates that could promote saving and investments within the virtual economy. (Yamaguchi, 2004)
How Web3 Formalises Trade
The integration of blockchain technology into gaming has allowed for the formalisation of trade of actual fiat currency within the gaming ecosystem, while mitigating some of the risks previously mentioned. Blockchain technology allows for data to be stored in an online network where users will be able to clearly identify who owns which asset and see each transaction that is happening within that network. Each trade is done using cryptocurrencies that have actual monetary values and can quickly be converted into fiat.
Web3 allows for trade of individual digital assets instead of having to sell the whole account. Each onchain asset in a crypto game is a Non-Fungible Token (NFT), a type of crypto token that has its own unique set of code that distinguishes it from other NFTs. This allows for a complete transfer of ownership once an NFT is sold and mitigates the risk of scammers being able to sell the same asset more than once. These NFTs are also usually traded on a marketplace that is either owned by or officially affiliated with the gaming project, making transactions on these platforms have more legitimacy.
Each transaction is also recorded on the blockchain. Though a lot more can be done in terms of KYC procedures and wallet identification, the transparency that the technology enables is a way to identify the flow of value from one account to another, making it easier to track where funds are going and prevent the conversion of dirty funds into fiat. In April 2022, Binance was able to recover $5.8M in stolen funds from a network hack after identifying that the hacker was trying to use their networks to cash out.
The protocols themselves function as the virtual world’s central bank. Since Web3 games have cryptocurrency integrated in its economy, the development teams of these protocols have an incentive to make sure the economy is balanced and will keep it from crashing. This can be in the form of fiscal or monetary policy equivalents in their game, like the introduction of staking mechanisms that help promote investment and savings within the economy.
What does this mean for Protocols?
Now there is a clearer way to measure the value of a protocol, or at least the value that their community and investors perceive them to have. Adopting blockchain technology to these games makes it easier to measure the market value of the games as cryptocurrencies have a direct exchange rate to fiat currencies. This is the value that is being generated within the virtual economy as a result of opportunity costs associated with playing the game.
But market value is not the only indicator that economic agents within the virtual world consider. Users also take into account a subjective intrinsic value that is added on top of the market value of these projects, creating a higher opportunity cost even if market prices associated with the protocol are below their earnings from the real world.
This means that web3 games must deliver on what they promise and ensure that they protect their community faith in the team and what they’re building. Blockchain technology has already formalised certain aspects of web2 gaming that agents in the economy have put a premium on, resulting in them entering the web3 gaming ecosystem. It will be up to the project team to make sure that the economy is balanced while delivering on the promises they have set, from a gameplay perspective or from a community perspective.