NFTs and the Gaming Skins Market

NFTs have a terrible reputation in the gaming community, and most gamers don’t want them in their games. This is strange because gamers don’t actually own the skins they pay for right now, and minting them as NFTs would let them sell their skins on secondary markets. So what’s the problem?

Agent skins from Valorant.

What’s Wrong With the Gaming Skins Markets Today?

Game developers lock virtual items like skins into closed, private markets that only they control. These markets serve as private monopolies from which the developers profit enormously. But operating these markets comes with a cost: gamers don’t actually truly own their skins and other virtual items.

The ‘Roast Lord’ skin for sale in Epic Games’ ‘Fortnite’.

Instead, skins, games, accounts and even in-game money are only licensed to gamers, even though they bought them with real money. Access to these virtual wares can be revoked at any time, and for any reason, which is grossly unfair on players.

But there’s a growing movement of gamers who want their skins represented as NFTs, which would mean they could actually own and sell them on secondary marketplaces. This would create a much fairer market for gamers who support the industry.

How Big Is the Gaming Industry Today?

The global gaming market was worth $250bn in 2022 – more than double what the global film industry was worth. In-game items like skins account for $50bn of that quarter-trillion dollars. Some of these in-game items have sold for millions of dollars, and cosmetic skins for weapons and characters often sell for six-figure sums.

A unique ‘Dragon Lore’ skin from Counter Strike: Global Offensive, which sold for $61,000.

The developers who create and sell these skins for almost nothing have done exceptionally well out of them. Epic Games, for instance, the studio behind Fortnite, made $50m from just one set of Fortnite skins, and more than twice that from its collaborations with Star Wars and Marvel.

The ‘Star Wars’ skin pack from Epic Games’ ‘Fortnite.’

To those who don’t play videogames, the idea of forking out thousands of dollars for virtual skins might seem far-fetched or even just-plain-silly. But keep in mind, however, that just as fashionistas spend thousands on the latest trends and car-fanatics dig deep for custom rims and alloys, avid gamers will happily splash out for the latest virtual wares.

A case hardened Karambit in CS:GO, whose owner turned down a €1.2m offer for it.

But unlike haute couture and supercars, gamers don’t truly own their purchases. They’re locked into closed markets controlled by the developers, which prevents gamers from reselling them on secondary markets for cash.

This closed-market model, the developers rightly argue, allows them to sell their games at more affordable prices: the wealthier players spend lavishly on skins, so the devs can lower the retail price of the game itself. It’s basically just a different pricing model, where the base-price of the product is low, but players can optionally buy extras (like skins) that aren’t technically necessary to play the game itself, but which help fund the game’s development.

Today, most games offer skins via loot boxes, which are already partially banned in the Netherlands, Austria and a handful of other countries, as they’re functionally identical to slot machines, except the lucky winners receive virtual items rather than nickels and dimes.

How Do Loot Boxes Work?

When you pay to unlock a lootbox, a roulette-like wheel of items spins round and round, and whatever item it lands on is what you get. Most of the items are worth less than what you paid for the loot box, but a small percentage are worth vast sums.

The roulette wheel-style loot box animation from Counter Strike: Global Offensive.

Games often dangle these rare and valuable items in front of your nose to encourage you to buy more loot boxes and ‘get lucky,’ even though the chances of this happening are about the same as with a real slot machine.

It’s easy to see why the UK government, in its investigation into whether loot boxes qualify as a form of gambling, found a “stable and consistent association between loot box use and problem gambling,” which caused a range of “mental health, financial and problem gaming-related harms” that are “higher for children and young people.”

It’s become clear that the only real difference between loot boxes and slot machines is that children are allowed to buy loot boxes, but can’t play on slot machines.

Could Centralized Marketplaces Solve the Problem?

Some platforms like Steam host markets with millions of skins from thousands of different games, which at first glance seems to solve the problem: gamers can buy skins from games they don’t own and trade them with millions of other gamers.

Steam’s Community Market.

But it’s still a closed, centralized marketplace, which is just a bigger version of the same problem. You can’t sell Steam items outside the Steam marketplace, so Valve – which owns Steam - controls the entire market, just like with Fortnite, World of Warcraft and PUBG. You also can’t withdraw cash from Steam, or most other platforms, which means that once you buy a skin, your money’s locked in.

What Are the Problems With Centralized Marketplaces like Steam?

These centralized skins markets are hurting gamers as well as the gaming industry itself, because: (1) developers can block people from accessing their accounts for arbitrary reasons, preventing them from accessing their skins, which is unfair on gamers; (2) people can only buy skins from games they own, which limits the skins market’s growth; (3) if gamers decide they don’t want their skins anymore, they can’t resell them for cash, because doing so would bring loot boxes under gambling regulation; and (4) developers often shut down a game’s servers when they release a new game (EA’s FIFA does this every year), rendering players’ in-game purchases both useless and worthless, which is incredibly unfair on gamers who put money in the developer’s pocket by buying loot boxes and skins.

Steam’s FAQ section provides a clear example of (1) in action: “Steam accounts cannot be bought or sold,” the policy states. “An account is for the personal use of its creator only.” This policy means that nobody really owns their Steam account; if they did, it would be legally theirs to sell.

Steam’s policy on selling accounts.

That same Steam policy also states that if a person buys or sells their account, they will permanently lose access to “purchases or activated games” and “inventory items purchased or acquired through gameplay,” a.k.a. their games and skins.

Steam’s subscriber agreement, which gamers have to sign if they want to use the platform, explains exactly how (3) works: “Wallet funds cannot be moved or withdrawn to a bank account,” it states.

It also states, “Steam Wallet funds do not constitute a personal property right, have no value outside Steam and can only be used to order Subscriptions and related content via Steam.” This essentially means that if you use real money to buy a skin, there’s no straightforward way to get your money out again.

Of course, Steam isn’t the only platform that uses policies like these or that operates in this way. Other games and platforms, like Activision’s World of Warcraft, work the same way. In fact, almost every other game and platform works just like Steam and Activision, which means that, across the entire gaming industry, most gamers who buy skins are not able to trade them for value.

Activision’s ‘World of Warcraft.’

Could NFTs Help Create a Fairer Skins Market?

By using NFTs, or non-fungible tokens, developers might be able to make the skins markets much fairer than they are today, without losing much profit.

NFTs have been around since 2014. The technology enjoyed a brief heyday in 2021 thanks to digital artwork sales like Beeple’s Everydays, which sold for $69m. Since then, prices for digital art have fallen dramatically. But even so, gamers are starting to get interested in using NFTs to support the skins market.

Beeple’s ‘Everydays,’ a collage of 5,000 images, sold through Christie’s auction house.

What Are NFTs?

In case you missed the NFT summer of 2021, NFTs exist on a blockchain, which is a kind of public ledger. Each NFT is unique and one-of-a-kind: it cannot be replicated or copied. It can link to, or represent, any virtual or tangible item: an artwork, an identity document, or even a land deed, for instance, and you can store NFTs in a digital wallet, just like with crypto.

NFTs are probably most useful for verifying ownership over a digital item, like an in-game skin or a digital artwork. But there are thousands of use cases for NFTs: supply chain, event ticketing and art, to name a few.

How Do NFTs Improve on the Tech We Already Have?

Creators can embed rules and conditions which activate every time an NFT is bought or sold, which gives them much more control over their products than they have now.

For instance, a musician could sell copies of her latest track as NFTs, which listeners could resell on secondary markets on the condition that they sell them for less than the list price, and that 10% of any resale profit goes into the musician’s wallet. These kinds of conditions apply everywhere, and would of course apply to NFT-skins as well.

Here’s where people often get confused with NFTs. Owning an NFT that represents something like a music track or digital artwork doesn’t literally stop someone copying and profiting from it, in the same way that owning the copyright to a song doesn’t literally prevent someone using its melody in their music. It does however help you prove you own something, and, most importantly, it can be easily transferred or sold to another person legitimately, unlike iTunes tracks or gaming skins today.

Could Developers Create NFT Gaming Skins?

Given their unique and useful characteristics, NFTs could flourish in the gaming industry.

Age of Rust, a blockchain-based game, which was removed from the Steam platform for incorporating NFTs into its mechanics.

Developers could incorporate the technology into their games so that every time a player unboxes a new skin, it’s automatically minted as an NFT and ready for sale. In order to use the skin in-game, players could keep it in an in-game wallet; equally, they could send their new skin to an external wallet to sell on a virtual marketplace.

From the front end, this could function identically to how today’s skins markets work. All the changes would happen on the back end, and would allow gamers to actually own their skins and sell them wherever, and to whomever they want.

Perhaps most important of all, the developers could keep earning money every time a skin was bought and resold by embedding rules in each of their NFT-skins. They wouldn’t lose any profits, and their customers would be much better off.

Why Some Gamers Do Not Want NFTs in Their Games?

Most gamers fiercely argue against using NFTs in games, and developers don’t care for them either.

Steam, for instance, has even banned all blockchain-based games from its platform. Explaining the move, Valve President Gabe Newell said that people in the NFT space are “not usually good actors,” and that there was “some illegal shit that was going on behind the scenes.” Newell neglected to offer any evidence or data to back these claims.

Gabe Newell (source: Wikipedia).

According to Eurogamer, Steam’s decision was ‘well-received’ by the wider gaming community. Indeed, across Reddit and various gaming forums, gamers consistently make the same arguments against using NFT-skins.

One of the most common is that they’re a scam or some kind of pyramid scheme. This criticism usually stems from a belief that all NFTs are digital art, and that the problems with the digital art markets (scams and pyramid schemes) have bled into all NFT-related projects – even those completely unrelated to digital art. But this isn’t the case at all.

NFTs are a technology, one with thousands of different use cases - only one of which is for buying and selling digital art. Even if all digital art were to suddenly become worthless, it wouldn’t change the fact that NFTs are a fundamentally useful and valuable technology.

Another common criticism of NFTs is that minting and trading them uses excessive computing power and energy, which releases lots of carbon into the atmosphere.

This was true, until Ethereum – the network on which most NFTs are traded – moved to a Proof-of-Stake system, which lowered the entire network’s emissions by 99.99%. For context, it now uses a tenth of the energy used by AirBnb, and a hundredth of the energy used by PayPal. Consequently, minting and trading NFTs only negligibly affects the environment – probably less so than gaming itself.

The Ethereum network’s energy consumption after ‘the merge.’

The energy consumption of post-merge Ethereum compared with pre-merge Ethereum and bitcoin.

Another worry is that if developers incorporated NFTs into their games, the producers and studios would become even more financially driven than they are today, and the quality of games would suffer.

Now while it’s undeniable that some studios would do exactly that, there’s no reason to think all studios would, or that those studios would be successful. Most of the joyless, cash-grabbing P2E games we’ve seen so far have already flopped, and their player numbers have never come close to free games like Dota 2, or those without any P2E element like CS: GO, Fortnite, or Minecraft.

In all likelihood, gamers will keep on playing the games they want to play regardless of how many P2E games offer them a few extra bucks. As such, many of the fears gamers have about incorporating NFTs into games are unfounded. But even so, the wider gaming community – and especially developers - remain staunchly opposed to NFTs.

In order for this to change, the big developers like Activision and Valve will want to see that the technology behind NFTS can actually work with skins, and that their profits are protected.

Because if NFTs make skins annoying to trade or the studios lose money from implementing them, then the proliferation of NFT gaming skins will likely not happen.

Major Developers Using NFT for Gaming Skins Currently

Epic Games is so far the only major developer trying to get ahead of this curve.

Its new zombie/ battle royale game - Last Remains - will include NFT-skins that players can optionally purchase.

Last Remains.

NFT characters act as a battle pass, which lets the holder mint all their looted rewards, including weapon skins, animations, taunts, equipment, and characters, as NFTs, which are tradeable on OpenSea.

Last Remains battlepass/ character NFT available for sale on OpenSea.

If a player doesn’t have an NFT character, or they don’t want to buy one, their loot remains ‘soul bound to the Epic Games account,’ just like in most other games now.

The game is currently in beta testing; players who bought the first round of NFT characters can test out the game, while open access is due to launch in December this year.

Conclusion

Regardless of how well NFT skins work out for Epic Games and other developers, some companies like Valve will fight tooth and nail to keep their skins in a closed market. After all, why would any company voluntarily give up a highly profitable monopoly?

In the end though, if gamers got behind NFT-skins and migrated en masse to games which support them, Valve and others wouldn’t have much choice but to adopt NFTs or risk being left behind.

There’s a long way to go to convince the major developers of the value NFTs could bring to their customers. And it could take even longer for gamers to reconsider their position on NFT-skins.

But if the next generation of games includes NFT-skins, the global gaming industry – especially gamers – could be much better off for it.

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