Blockchain Games Buck the Bear Market
How to avoid getting played
The Luna collapse exposed a key problem for crypto investors: in a sea of hazily-differentiated coins with few tangible fundamentals, the value of many assets is hostage to group sentiment and short-seller attacks. Yet one crypto niche seems to have weathered the current bull market – gaming, estimated to be worth over USD 300 billion.
Last week the investment group Andreessen Horowitz announced a USD 600 million fund dedicated solely to online games, many of which use blockchain technology and have entered the metaverse. On its face, such a move might feel surprising at a time when Bitcoin and Ethereum continue to hurtle to new depths.
But what makes online gaming different is that is it one of the few industries in which blockchain technology has proven to add tangible value. That’s because the introduction of Ethereum-based tokens to timeless game formats has revolutionised both user experience and the ability of games developers to control revenue streams. Players can seamlessly swap weapons and traits like skins, and even move retained ownership across different platforms. Meanwhile, developers reap commissions across the transaction lifespan.
Blockchain technology has also enabled the lucrative proliferation of gambling elements into games. For example, players who win or steal treasure can then trade it, stake it to earn yield, or risk it in games of chance. The rewards accrue in the form of in-game tokens or NFTs. The addictive combination of traditional gameplaying with the added ability to take risks and earn tangible rewards has led to massive popularity – and profits – for a handful of tiny start-ups. It’s no surprise that traditional finance should want a piece of the action.
Yet, caveat emptor: these high rewards come with significant risks. In the freewheeling world of blockchain gaming, there are ample opportunities to get burnt. Here are three important red flags to watch for before investing.
1.Anonymous developers.
In keeping with crypto’s anarchical ethos, many successful games have been run by anonymous (also known as “undoxxed”) developers, who often incorporate offshore or in privacy jurisdictions like Delaware. Yet such anonymity can also be used to disguise nefarious intent or cover the tracks of previous frauds.
2. Conflicted influencers.
The crypto gaming market is turbocharged by roving gangs of influencers. They operate from behind jokey pseudonymous Twitter and Discord accounts with thousands of followers. These influencers frequently promote new games by encouraging their fans to buy tokens and in-game NFTs, sometimes before the game itself has even been released. Inevitably, many of these influencers are later unmasked as the actual developers of the games in question. Such banal conflicts of interest can quickly become classic rug-pulls when the influencers run off with fans’ money and the game never materialises.
3. Wash trading.
Games developers love to boast to investors about their sky-rocketing user numbers. But as ever, money talks and the ultimate bragging rights go to those with the highest sales volumes. To achieve impressive figures, games makers and their associates have been found to manipulate prices and trading by buying and reselling game NFTs to each other in a practice known as wash trading. Due to the lax or nonexistent KYC controls by games platforms, tokens and NFTs can also be acquired by criminals seeking to launder crypto acquired through scams, hacks and ransomware. They can then play and cash out crypto as legitimate winnings.
Despite these and other pitfalls, the good news is that there are many ways to mitigate the risks of investing in blockchain games. Verifying the identities of developers and scrutinising the ownership records of their corporate entities can help ensure that those behind a successful new game have not left a trail of financial carnage in their wake. Checking whether the influencers promoting the game are free from taint can also provide assurance. And analysing a game’s blockchain sales transactions can flag up obvious signs of wash trading or other manipulation.
With the right precautions, blockchain games can bring big rewards for investors, as long as they are not the ones getting played.