The State of Crypto in Gaming

Ron Segev, a Partner at Segev LLP and SiGMA Europe 2021 speaker, writes about the value crypto and NFTs can bring to the online gaming industry

Contributions by: Negin Alavi, Lawyers, Segev LLP.

Cryptocurrencies have been grabbing headlines regularly for the last few years. While the price of coins has traditionally held our attention, its NFTs have recently captured the public’s imagination with headline-worthy price tags.

However, there is more to the technology than headline grabbing dollar amounts. Crypto and NFTs have a much greater utility than price speculation. At the heart of their design is some kind of utility. These coins are built for a purpose and this purpose, or utility, is extraordinarily well suited to online gaming.

NFTs – Own a Piece of the Game

Non-fungible tokens (or “NFTs”) are unique, one-of-a-kind digital tokens on a blockchain that represent some kind of real world or digital asset. Like cryptocurrencies, ownership is verifiable on the blockchain and immutable. Where coins of a cryptocurrency are all identical – one BTC is like every other BTC – an NFT is “non-fungible” because it is not a unit that is readily interchangeable with other units. It’s possible for no NFT to be like any other NFT, the same way no original Picasso is like any other original Picasso.

Although images or music, or whatever else on NFTs can be copied, it’s easy to prove which NFT is the only “real” and “original” NFT with rights to the IP in question thanks to blockchain technology. NFTs are often likened to digital paintings where there can never be any doubt who the artist or owner is.

NFTs therefore create an opportunity for unique digital assets on gaming platforms whereby users can collect, trade, and use them. Users can be rewarded increasingly rare NFTs that may be cashed, held, or sold.

True, some NFTs have no inherit utility other than being held. Collectibles are a huge NFT asset class with 10K releases (sets of 10,000 NFTs of a certain theme, think Cyber Punks, Soul Punks, Dinos, etc.) being snapped up by buyers looking to simply enjoy them or speculate on their value increasing due to their rarity and popularity. However, the value and liquidity surrounding these types of NFTs has created a utility in of itself.

For example, GameOn Entertainment Technologies has developed a B2B platform to gamify collectible NFTs that otherwise have no utility other than collecting.

Another mooted use case is utilizing NFTs for skins. Currently, most skins in video games are simply licenses granted by the publisher to the player to use of the particular skin in the game. In traditional video games the player doesn’t own the skin even though the player may have paid for it. However, a publisher may not want to give up ownership rights to the IP associated with skins offered through its game.

NFTs can accommodate a variety of IP ownership and control rights to be enjoyed by the NFT holder such that the publisher can retain its IP and grant some other exclusive right to the NFT holders. The technology underlying NFTs is very flexible in this regard and can serve studios and publishers well. NFTs can, be used to ascribe verifiable immutable ownership of a skin or rights to the skins IP to the player. If a skin is rare and particularly cool it may even increase in value, especially if there is a liquid market for the skin.

OpenSea is one such NFT market creating liquidity for NFTs. It’s estimated to do about US $14 billion in turnover this year.

Some barriers to adoption exist, however. As mentioned, publishers are of course reluctant to part with their valuable IP. Also, while OpenSea and other markets improve liquidity and therefore unlock potential value, lack of interoperability of NFT skins across gaming platforms can reduce utility. Most publishers are running their games within walled gardens or walled metaverses which acts as an inherent barrier to interoperability of various NFTs.

NFT Buyer Beware

Some of this should be taken as a point of caution by NFT minters, sellers and buyers. Buyers of NFTs should pay close attention to what exactly it is they are buying. For example, a review of NBA Top Shot’s terms of sale for its NFTs reveal that an owner of a Top Shot doesn’t actually own the video highlight associated with the holder’s NFT. Instead, the NFT owner holds a license to do a limited number of things with the underlying IP, being the highlight video and other artwork. The owner does not own it outright like a painting hanging on wall.

How can this be the case? It’s important to remember that the underlying IP for NFTs is also located “off-chain”, meaning the original IP resides somewhere other than the blockchain on which the NFT associated with that IP is minted. So, a copy of that IP resides somewhere else. If a copy of it resides somewhere else, there needs to be some rules with respect to the copy. In the case of NBA Top Shot, the NFT owner is holding the copy, and the original is held by the NBA.

Typically, what’s purchased is a display right and perhaps nothing more, unless or as set out in the contract of sale between the entity that has minted the NFT and the buyer. It’s important that people read the terms of sale carefully, so they know what they’re getting into. Its no less important that NFT minters understand the IP rights they have negotiated for their NFT project and that NFT sellers prepare proper terms of sale setting out accurately what IP rights are being transferred in connection with the NFT.

DeFi and Smart Contracts

Decentralized finance (known as “DeFi”) is a decentralized blockchain network system through which financial products are offered. DeFi is an alternative to financial products offered by banking institutions. Financial products offered by banks are centralized offerings as the bank controls many if not all aspects of the terms of the offering. The decentralization in DeFi is possible because the transactions are handled by smart contracts. A smart contract is an event-driven software program that automatically performs terms of a contract as a neutral, automatic middleman. Parties to a transaction don’t interact with each other – rather, they interact with the software. The system is “trustless” because the system facilitates the transaction, so you don’t have to “trust” the other party to hold their end of the bargain.

One use of DeFi is to provide a return on player deposits. DeFi concepts can also be utilized in game design. An example is lossless lotteries, where interest earned on all the money paid into the lottery is paid to the winner but then all entrants get their initial deposits back, merely losing out on the interest.

A game like this would be difficult to launch and administer with out DeFi technology. And DeFi brings an element of trust that would be wanting if the game was provided by a centralised platform or entity. Smart Contract Words of Caution Users of smart contracts should be cautious before entering into them. It may be challenging for courts to render the smart contract void or for a party to a smart contract to claim and obtain legal remedies under the contract. This is especially true if neither party knows the identity of, and has never interacted with, the other.

How would the court establish that a “meeting of the minds” took place when attempting to enforce a contract? Other issues abound including the legal capacity of minors to enter into binding contracts without a parent or guardian acting on that person’s behalf. Contracts are not enforceable against minors in many jurisdictions and often times smart contracts utilized by tokens are entered into by minors. If issuing a tokenized smart contract, we recommend companies work with a lawyer to review the smart contract and the entire user journey and transaction process to mitigate the risk of legal issues arising.

Paying in Coin

When people think about cryptocurrency, the emphasis has traditionally been on coins as a “currency”. Of course, crypto is an excellent means of exchange, but some coins are better than others, especially for online gaming companies.

Important to a crypto’s usefulness as a payment coin are the following factors: transaction costs, transaction speed, transaction volumes, price volatility, and liquidity or adoption rate.

If a coin falls short on all factors, it’s likely a poor choice for a payment solution. A coin that is expensive and slow to transfer on a blockchain that can only transfer a small number of coins per minute is not a good payment coin. A coin that few people hold is also not a good solution. The situation worsens if the value of the coin as against fiat currency or a stable coin such as Tether is very volatile.

Coins for Paying, Coins for Keeping

Monero (XMR) has commonly been pointed to as a good payment coin. It is an open-source cryptocurrency known for robust privacy features. Transaction details and the addresses used by transaction participants on the blockchain remain anonymous.

This is in contrast to Bitcoin, or BTC, where everyone can see users’ public addresses and how much each transaction is worth. However, accepting Monero as a means of payment could present gaming operators with additional KYC and AML compliance challenges that would have to be overcome by operators.

Solana token (SOL) is another coin touted as a good payment coin. Solana is a decentralized blockchain built for scalability using SOL. It is the fastest blockchain in the world, as well as the fastest growing crypto ecosystem. Unlike BTC, Solana states it will remain low-cost and fast despite high volumes of simultaneous transactions. It maintains speed without the security problems of sharding (the act of partitioning blockchain networks into smaller “shards”, which increases speed but decreases security).

What about Bitcoin? BTC is in fact a poor payment coin. BTC is more like gold than fiat currency because the BTC blockchain is too slow and expensive for small transactions on a day-to-day basis.

Bitcoin Cash is like BTC but meant for everyday transactions. It has lower fees and faster transaction times than BTC because of the larger size of blocks in the blockchain, meaning that more transactions can be processed before a buildup occurs. However, the average size of blocks on Bitcoin Cash’s blockchain is still much smaller than those on BTC’s. This means that the promise of faster transactions through larger blocks has yet to actually be tested.

For online operators looking to accept more cryptocurrencies more easily, atomic swaps are an interesting development. They are another way smart contracts are being used. Atomic swaps trade one type of cryptocurrency for a different type without the need for an exchange or a common currency. As exchanging coins becomes easier, cross-chain liquidity will continue to gain importance. The more this technology grows, the more it could feel like there is just “one” cryptocurrency across all blockchains.

Custom Casino Coins and Casinos Custom Built for Coins

There are a number of tokens that have been developed as the house currency for online gaming platforms. These are essentially tokenized chips or credits on the blockchain. Examples include the FUN token by Funfair.io, VPP by Virtue.Poker, EDG by Edgeless.io, and BET by EarnBet.io.

While some platforms have decided to mint a token as their proprietary platform currency, others gaming and betting companies have built their platforms around a specific crypto. In this way they have either tailored their offerings to blockchains underlying the crypto, or they have created a platform that accepts a crypto that otherwise has few, if any, other compelling places to be spent. EarnBet.io for examples accepts alt-coins as a wagering currency providing holders of those a place to spend them where spend opportunities might be limited. .These crypto-centric casinos are different from regular casinos because they accept specific cryptocurrencies that otherwise have poor liquidity or use cases. Therefore, holders can more freely part with the cryptocurrency on that platform. A platform that offers players these cryptocurrencies may even get away with offering lower RTP (“return-to-player”) ratios to holders. The analogy is similar to that of air miles, if the only place to spend them is with one airline program and you have no choice but to follow along when redemption rates increase.

EOS.IO is a blockchain-based, decentralized system that allows for the development and use of apps on its platform. These decentralized apps are known as dApps. In addition to the option of spending EOS tokens, developers who hold EOS tokens can use network bandwidth to build and run dApps or rent their bandwidth out to others. EOSBet is a good example of a decentralized smart casino built on the EOS.IO blockchain.

Unlocking a Rush of Innovation and Opportunity… with Careful Planning

While presenting some risk to the uninitiated, blockchain technologies are unlocking a rush of innovation and opportunity for gaming companies.

Operators however need to be careful when planning crypto strategies for their platforms. As mentioned above, there are issues inherent to smart contracts use: the parties not knowing each other, dispute resolution procedures and processes not always being clear, and underage player issues.

There may be future barriers against the widespread use of NFTs, DeFi, and payment coins as a result of gaming regulators lacking confidence that an operator will be able to meet its KYC or AML obligations if accepting crypto, working with NFTs, or running its platform or elements of its game on a blockchain.

Lastly, there is an increasingly blurred line between a game and an investment contract, which may risk triggering securities laws. Some games may actually be investment contracts under securities legislation. For example, a smart contract enabled game that promises to pay out under circumstances that are contingent on external work or outcomes may be deemed an investment contract or security. These types of games may attract the negative attention of a securities commission.

Internet 3.0

The industry has described blockchain technology enabled coins, tokens, smart contracts, DeFi, NFTs (and who knows what else a future in the metaverse brings) as the Internet 3.0. We have moved from static brochure websites to ecommerce to social networks and mobile internet. Early entrants to any of those phases of the web’s evolution have made fortunes and changed the way we live our online lives. The Internet 3.0 is sure to do the same and its already started. Smart gaming companies have already entered the fray. This is a space that should not be ignored.

Malta Week runs from the 16th to the 18th at the MFCC? for SiGMA, AGS and AIBC and from the 18th – 19th at the Hilton Malta for Med-Tech World.