NFTs & Gaming: a $35 Billion Opportunity
As free-to-play business models have become the standard in gaming, the $175B gaming industry has gradually shifted its main revenue sources from sales of premium games (80% of all revenue in 2010) to sales of in-game goods (now encompassing 75% of all revenue in 2020).
As video games have encompassed the upbringing of the Millennial and GenZ generations, there is emerging evidence that the psychology of what is considered as “socializing” & “luxury” has evolved in these virtual environments. For example, some have had their birthday parties & dates with virtual friends via Animal Crossing, and ownership of in-game items (“skins”) has become a means to signal achievement, status or even wealth. The entire gaming-goods market is estimated at around $50B and is expected to grow to $190B by 2025, representing a 30.6% CAGR.
While such gaming items encompass the main revenue source, gaming studios have a difficult time monetizing the sales in secondary markets. Grey-markets such as G2A, which boasts 20 million users, deprive gaming developers of revenue of gaming-item re-sales. Concurrently, gamers have no means to securely store their in-game goods and are entirely dependent on the benign act by centralized entities. This represents a double-sided market failure for the gaming-goods industry.
In parallel, advancements in distributed ledger technology (DLT) have enabled new methods of representing ownership of digital items via Non-Fungible Tokens. As a result, for the first time in history, NFTs allow for representation of ownership of scarcity, uniqueness, and authenticity that can be transparently managed & verified without the need for centralized entities.
If in-game items where to be tokenized as NFTs, an entire market could be poised to become financialized; shifting the perception of gaming goods from expenses to assets. My research demonstrates that NFTs could unlock an additional $35–$50B of an exchange over 5 years in gaming. In fact, cumulative Q1, 2021, secondary sales of gaming-related NFTs totalled $760 million.
Such a trend, however, is dependent on macro changes through enhanced DLT infrastructure to reduce computing cost, and proliferation of digital wallets; and both trends are advancing. The anticipated Facebook DIEM project is set to award 2 Billion users globally with crypto-compatible digital wallets, allowing for a floodgate of new crypto market participants.
With this nascent industry in its early years, I have identified 4 venture-backable segments within the Gaming-Crypto industry. They are: marketplaces enabling p2p exchange, infrastructure, virtual land, games and gaming studios.
For more insight on this topic, including a more in-depth sectoral analysis, and list of investable start-ups, please click here to request.
