Welcome to the fourth installment of PYMNTS’ series on non-fungible tokens, or NFTs, the newest craze in crypto.
In these 12 articles, we’ll be looking at every part of the non-fungible token craze sweeping the worlds of art, video games, social media, fashion and sports.
When it’s finished, you’ll have a solid grasp of the basics of NFTs — what they are, how they work, what they are going to be used for, what their drawbacks are, what you need to be aware — and wary — of, and why people are paying so much money for them.
If you’ve ever played an MMO game like Final Fantasy or World of Warcraft (WoW) in which players interact in a virtual word much like a metaverse, you’ll know that after killing monsters, the biggest part of the game is collecting stuff.
This stuff comes in two basic varieties: things you can use, like a magic sword or a rare dragon mount, and things you can sell. In WoW, for example, you can “farm” ore that characters with blacksmithing skill can turn into magic swords — useful stuff that can be sold for gold your character can use to buy other things.
If that sounds like a “so what” use of NFTs, consider this: Nearly $3.4 billion has been spent on in-game NFTs, in more than 16 million transactions, according to industry resource Nonfungible.com. That’s more 20% of the total value of all NFT sales.
And the top on-blockchain game, Axie Infinity, is the top NFT project by sales value, period. $2.86 billion of those sales were Axie items. As for transaction numbers, the No. 2 NFT project, CryptoKitties, has under three million.
Non-fungible tokens, or NFTs, being immutable and portable, are a great way to represent, transport and trade stuff, both in games and the real world, using cryptocurrency.
There’s a potentially bigger — or least more important — use, however. NFTs are not limited to just being stuff. Those characters are avatars — if that term sounds familiar think Bored Apes and CryptoPunks — and they can be built using NFTs. And serious gamers have very strong emotional connections to their avatars. Even when real-world money isn’t involved, players will spend months farming raw materials like ore to make an item with purely aesthetic value.
One potential use of NFT characters and items is making them cross-platform capable. So you could, for example, bring your character with all her useful and aesthetic gear, her name and hairstyle between games. Oh, and her bank account, if the in-game currency is an NFT with real-world value — or even a real-world cryptocurrency.
Or, and this may end up being far more important, you could bring avatars from blockchain-based games into metaverses, so you can interact in social setting in your glowing dragon-skull helmet. Or take it off and return to being a 3D rendering of the CryptoPunk avatar you use as your Twitter portrait.
It’s a way of letting people pour more of their personality into an avatar, which would drive a stronger emotional connection and sense of brand loyalty to both the game and the metaverse.
Show Me the Money
From a payments perspective, making that stuff, that gaming gear, into NFTs means they are salable in the real world, and on any NFT marketplace, not just one controlled by the game developer.
This is already happening on Axie Infinity and other games, and it’s called play-to-earn. It’s what’s powering those Axie Infinity sales with the farming often done in developing nations where play-to-earn can be play-to-earn-a-living.
In Axie Infinity the item tokens don’t just have real-world value. They have a whole decentralized finance economy, in which players created liquidity pools on the DeFi exchange UniSwap.
Then there’s the developers, who can charge a fee for each NFT item purchased; Axie charges 4.25% on in-game purchases.
But because NFTs are smart contracts, a company could add a royalty payment on each sale, so they’d profit even from the sale of items outside the game. Artists are already using this feature to collect royalties on the resale of their work.