The Reed Smith Guide to the Metaverse - 2nd Edition

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A lot of what the metaverse looks like comes from the world of video games. Second Life, the iconic game from Linden Lab, is arguably one of the oldest metaverses on the Internet. In future, you may enter games through a headset and feel them through a haptic suit, but at their core, the experience of entering a metaverse is likely to bear many resemblances to how players today immerse themselves in Second Life, Roblox, Fortnite, or Minecraft.

On the other hand, web3 adds a far more disruptive element to the picture: the inclusion of decentralized technology, blockchain, and non-fungible tokens (NFTs). The world of crypto games is growing fast and is slowly spanning another sector altogether.

So, what will change?

Web3 games are powered by blockchain technology and decentralized governance regulated by smart contracts, allowing players to collect game-specific assets in the form of NFTs. Play-to-earn allows players to earn rewards in the form of NFTs, which can be exchanged for cryptocurrencies that can be converted into fiat currency. One of the first “play-to-earn” games in the cryptocurrency market to really gain traction was Axie Infinity. Axies are token-based creatures that players can collect, breed, nurture, battle, and trade.

Axie Infinity is a prominent example of how the business model behind video games is being re-invented by web3. Web2 games used to measure their success based on player engagement since the more time someone spends in the game, the more likely they are to purchase in-game assets. Web3 play-to-earn games add a financial incentive to that time. NFT-based games promise to make the labor of fun into compensated labor, and some even claim that they are training the workers of the future ‒ as humanity moves closer to living and working in the metaverse. In a play-to-earn model, the more players play, the more money they earn. In Axie Infinity, the basic cycle of gameplay works like this: completing levels creates stronger Axies to win matches, which provides players with tokens that allow Axies to “breed” and thus create new Axies to be sold or used for play.

The NFT opportunity

Video game makers are all looking at NFTs, and the topic leaves no one indifferent. Large companies like Ubisoft have already taken the first step and are creating their own proprietary line of NFTs to be used in their game properties, while others, like Mojang, the studio behind Minecraft recently decided to ban them from their game, arguing that “NFTs can create models of scarcity and exclusion that conflict with the Guidelines and the spirit of Minecraft.”

For game makers, incorporating NFTs into their business models has potential. NFTs can be sold to players in the same way other downloadable packs can: as a product sold from a store, where the initial sale includes a profit for the developer. But these tokens can be coded. And it has become a feature of NFT smart contracts to allow each resale to automatically trigger a payment to the originator of the token ‒ in this case, the game developer. The model allows game makers to monetize items again and again, using the prospect of future player-to-player sales to generate an ongoing revenue stream.

Play as labor

The lines between play and labor in video games have long been blurred. For example, Eve Online, a massively popular multiplayer online game, is a 19-year-old game that is reliant on player labor to generate new items in the game and to keep the in-game economy flowing. Players of Eve Online lead and work on various spaceships, which can be optimized for either mining in-game resources or building specialized combat vessels. Once enough materials are mined, they can be sold in a marketplace for real-world currency, and the raw materials can be crafted into new spaceships.

In many online games, players have to “do a job” to advance through the game world. But the “grind” of doing repetitive or time-consuming in-game tasks unlocks better characters, new levels, or skins rather than real-world money. “Playbor” is a term that was coined by researchers to describe the behavior of engaging in ordinary play that also generates income, whether virtual or real. Whether players earning money from playing a game count as employees, contractors, or neither has created an unregulated space that will undoubtedly brush up against employment law in a near future.

Protecting and educating players

The incorporation of NFTs into games restricts access to those players feeling savvy and confident using complex, not-easy-to-understand, and volatile financial instruments. Players of web3 games are therefore exposed to financial risks. The safeguards, which may well be needed to protect the most unsophisticated players from being manipulated or hacked (for example, by approving trades they don’t understand), may come from finance regulation, but clearly call for consumer law regulation, too. The Axie hack earlier this year is indicative of the risks built into the evolving nature of video game marketplaces, and it demonstrates the need for regulators to implement better monitoring and consumer protection schemes.

Perhaps in response to these risks, some video game publishers are putting their own restrictions on the ways in which games can incorporate cryptocurrencies. Steam, the largest digital storefront for PC games, made a stand by banning all blockchain games from its platform and updating its policy documents to reflect the change, thus placing a huge barrier to wider adoption of the technology in games. The co-founder of Valve, the company behind Steam, cited the high volume of fraud and scams being perpetrated through crypto-assets like NFTs as the motivation for the ban. In contrast, Epic, the publisher of Fortnite, has said it is open to cryptocurrencies and NFTs in its game stores, but only if they strictly adhere to reporting and tax laws.

Looking into the future

Multiple countries are starting to tax cryptocurrency transactions and have imposed due diligence and know-your-customer rules on crypto exchanges. These regulations are meant to make crypto-assets trade, including NFTs, “safer,” but as ever, implementing national rules to world-wide endeavors continues to cause major headaches to regulators and it may be a few years before we see the effect of these policies.

It remains to be seen whether play-to-earn really does become the future of gaming, and whether NFTs will be at the centre of it. Clearly, some players are attracted to the idea of unlocking “better” property rights for their in-game assets, but for others, including parents of young players, safety and fun are values that may not be compromised. As of today, web3 games seem far more likely to develop into their own new sub-sector than disrupt a flourishing and mainstream games industry.

Key takeaways
  • The experience of entering a metaverse is similar to how players today immerse themselves in Fortnite or Minecraft.
  • Web3 adds a disruptive element: decentralized technology, blockchain, and non-fungible tokens (NFTs).
  • It is unclear whether governments could regulate or moderate the metaverse as they do video games.
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