📲🚀📈Non-Fungible Tokens: A Convergence of Technology Will Unlock the Next Billion-Dollar Asset Class
|Andrew Steinwold||Jun 11, 2020||3||1|
This article was first published on my medium blog in July of 2019. Although some of the information is outdated, much of the overall thesis remains intact.
The convergence of esports, multimedia platforms, virtual reality (VR) and non-fungible tokens will propel the nascent market of non-fungible tokens into a multi-billion dollar asset class.
With esports, gaming has become an accepted sport, growing wildly and receiving massive inflows of capital.
Gamers are leveraging media platforms, like YouTube and Twitch, to be accessible by all audiences and thus grow viewership by the millions. Gamer audiences have become so large they now rival traditional media networks.
Virtual reality is becoming increasingly lifelike and accessible which leads to people spending more time in virtual worlds.
Non-fungible token (NFT) based virtual assets enable users to truly own their digital goods, which enables real functioning economies while minimizing game platform risk.
Esports, multimedia platforms, virtual reality, and NFTs are converging to create a megatrend in which people will begin to fully live and work in virtual worlds.
NFT-based virtual economies will grow to compete with and perhaps even surpass real-world economies.
We are Becoming Technology
Technology is becoming physically closer to us and is intertwining with our being. The first computers to exist filled up an entire room, but now people carry one every day in their pocket. Large, boxy radios have been replaced with wireless headphones. Today’s watches not only tell us the time, but also track fitness, heart rate, weather, and a plethora of information. During both work and leisure, there is hardly any moment at all that we are not connected. In fact, much of our social interaction is increasingly happening online. Humans, the world’s most social animal, are moving our existing communities online to create entirely new communities in virtual worlds. For example, with the rise of esports, our most tangible display of strength, coordination, and teamwork has moved to the virtual world.
Esports is growing at a frenetic pace throughout the world, with 2018 viewership reaching 400 million and bringing in revenues of $869 million. Goldman Sachs estimates that by 2022 the esports market will more than triple to $2.96 billion: a growth rate of more than 240% from 2018. In fact, esports has grown so quickly that traditional professional sports teams have taken notice and jumped into the action. Below is a list of professional American sports organizations that have invested in esports or have created their own esports teams.
Sacramento Kings — NRG Esports
76ers — Dignitas
Houston Rockets — Clutch Gaming (recently acquired by 76ers)
Golden State Warriors — Golden Guardians
New York Yankees — Echo Fox
Cleveland Cavaliers — 100 Thieves
Milwaukee Bucks — FlyQuest
Online gaming competitions are not the only thing sparking people’s interest; the market for gaming as a whole is experiencing explosive growth and is now estimated at $137 billion. Perhaps the most interesting phenomenon with the ascent of esports is the acceptance and normalcy of purchasing fully virtual goods.
Virtual Goods Market
Within the massive gaming market of $137 billion, there is an entire segment of virtual items that are user purchased. Although the exact market size for virtual items does not have an exact quoted figure, it is estimated it ranges in the billions. Fortnite, the free-to-play game, is a well-known example of a virtual goods market. Fortnite makes money selling in-game currency, “V-bucks”. Purchasable items in Fortnite include dance moves, accessories, and outfits for your character. In 2018, Fortnite made roughly $2.5 billion dollars from its 200 million users. An aggregate number of $2.5 billion dollars is impressive, but note this is spread over a user base of 200 million. It is most impressive when specific virtual goods sell for extremely high prices. Below is a brief list of high-value virtual goods and their sale prices.
$6 million for a virtual planet in the game Entropia Universe
$635,000 for a virtual club in Entropia Universe
$114,000 for a virtual kitty in the game CryptoKitties.
$113,000 for a virtual F1 race car in the game F1 Delta Time.
$50,000 for a virtual version of Amsterdam in the game Second Life.
$38,000 for a virtual war dog in the game DotA 2.
In the game Eve Online, there was a single battle in 2014 that lasted 21 hours, involved 7,548 players, and cost roughly $300,000. The losses were due to players’ virtual spaceships becoming damaged or destroyed.
Skepticism of virtual goods is normal, but the skepticism fades once you understand the reasoning behind spending money on items you can’t touch. Vili Lehdonvirta, an Associate Professor at Oxford University stated:
“People pay real money for virtual items for the same reason they pay real money for any consumer commodity, namely status, identity, membership, class, and performance.”
When framed in this way, the purchase of virtual goods is easy to understand and simply boils down to social capital.
Attention is a currency. Most people live in an era of abundance. Food, clothing, transportation, entertainment, and almost anything is now accessible via the smartphones in our pockets. In this age of abundance, the new form of capital is attention. Attention cannot be bought from smartphones, it requires actual work through posting engaging content to media platforms. The internet has become a tool to create the most effective form of leverage ever experienced. It has created a path for people to become famous and wealthy through creating online content, such as simply posting videos of themselves playing video games. That sentence may have sounded absurd ten years ago, but today it is considered normal for people to make a living, and even become famous, from posting content online. This rapid acquisition of social capital could not have been possible without internet-native digital media platforms.
Digital Media and the Rise of Video Game Superstars
How did gaming and esports become so popular to the point that professional sports teams are purchasing esports teams? The answer lies within digital media platforms such as YouTube and Twitch. Without these platforms, esports and gaming would not be where it is today. YouTube and Twitch enable anyone to create video gaming content and post it online. These platforms have grown into behemoths; YouTube alone has an incredible 1.9 billion monthly active users while Twitch has swiftly growing 450 million monthly viewers.
YouTube and Twitch have enabled many gamers to become extremely popular simply by posting content of themselves playing games online. These video game superstars have leveraged these platforms to gain massive audiences that now compete with traditional media sources. The largest YouTuber, known as Pewdiepie, has more average views per video than CNN, MSNBC, and Fox News has during primetime; this is incredibly powerful. To further illustrate the reach of these platforms, the largest concert in the world was played within the video game Fortnite. The DJ, Marshmello, performed a show for 10.7 million people all within Fortnite. Since YouTube and Twitch streams shared the concert, viewership was likely tripled or quadrupled with an estimated 30–40 million viewers.
The viewership on these digital media platforms will continue to grow as more people around the world come online. They will evolve as the technology we use to interact with the internet also becomes more advanced.
Gaming Technology Becoming Everyday Technology
The technology behind gaming has been evolving at an extremely rapid pace since the dawn of the Nintendo NES. Many of us remember playing on Nintendo NES consoles. They were mind-blowing at the time, but now the Nintendo NES is considered a vintage collector's item.
Today’s gaming consoles are thousands of times more powerful than the earlier versions; they have graphics and performance that could have only dreamed of in the past. Whether it’s the newest Xbox or computer, the rate of advancement seems to be speeding up every year. We are now entering an era of virtual reality gaming platforms. Although still in its infancy, VR gaming platforms will not only be used for gaming, but will also be used for things like education, sightseeing, therapy, and work. I believe the majority of VR use cases will be non-gaming activities.
The saying that “virtual reality is the next big thing” has existed for over ten years now. However, it’s true that nothing compares to the total immersion that VR headsets provide. Just like other gaming consoles, every year the technology behind VR has improved as more companies enter the industry due to the vast number of use cases. It might take another ten years (I personally estimate sooner) for VR to finally reach mainstream adoption. When it eventually does, the immersion that people will experience inside virtual worlds will make it difficult to differentiate it from the real world. Once people start spending more time in virtual worlds rather than the physical world, profound questions will arise about how people should live their lives. The technology that is enabling complete virtual immersion is still in its early stages, but it may be closer than we think.
Many of the VR headsets we use today are tethered to PCs and require sensors to be placed around a room to track the user. Oculus, the Facebook-owned VR company, recently released the first VR headset (not counting smartphone VR headsets) to not need a computer connection; it has all its sensors located within the device.
While this might seem like a small step, it shows the inevitable march towards lighter, faster, and more advanced technology. Some of the most interesting VR related hardware is not the headset at all, but the associated gear. Multiple companies are pushing forward on suits and gloves that provide the user with better feedback and control while in virtual.
Companies like Teslasuit have created full-body suits that can not only track a litany of user metrics but can also provide haptic feedback. It can even simulate cold and hot weather. The haptic feedback can range from someone gently placing a hand on your shoulder to a much more extreme scenario, such as a kick in the stomach. The suit can monitor the wearer's vitals and stress levels, which is great for training situations. Although this specific suit is only available to corporations to train employees and is not available to gamers, we will absolutely see this technology ported into the gaming world over the coming years.
This video by the YouTuber, Nathie, goes in-depth on the Teslasuit’s features and gives a sense of where this technology is headed.
Products like the Teslasuit are great for a more immersive experience while in virtual reality, but the lack of being able to discern emotions in VR is one aspect that is holding the space back. Most people in VR use avatars, which can be anything ranging from butterflies to an alien lifeform. This is great for creativity but not optimal for ascertaining human emotion. In order for VR to become truly ubiquitous, there needs to be better facial tracking systems so people in VR can use their real faces to effectively display emotions. Below is an example of the facial tracking technology that Oculus has been developing. They claim within the next few years this type of facial tracking will become mainstream.
The left side shows a man speaking and the right side is his VR avatar.
While it may not be necessary to have such precise facial tracking for the gaming world, it will be necessary for applications like social apps or teleconferencing.
While computers and gaming consoles have experienced rapid evolution in their capabilities over time, the mechanisms which we use to interact with our devices have not. Historically we have primarily used video game controllers and computer mice to interact with devices. The largest evolution in human-machine interaction since the mouse was probably the touchscreen, popularized by the Apple iPhone in 2007. Today CTRL Labs, a New York City-based company, is pioneering the newest method of human-machine interaction: neural interface technology. This technology feels like magic. View the video below for a demo.
CTRL Labs is building a small device that wraps around a wrist to allow computers to be controlled with intention. For example, if you are playing a game and intend on moving right, your character will actually move right.
Scientists have recently performed incredible experiments on flies to trigger them into thinking their bland tasting food was actually delicious through activating certain neurons in their brain. This type of neuro-stimulation may only work on flies now but it will inevitably be developed for human use and will be especially applicable for virtual reality use cases. Imagine being in your home eating bread, but through neuron stimulation, you are told you are eating mouth-watering steak. If your brain can be tricked into experiencing certain tastes, then I am certain there is almost no limit to other types of sensations that can be triggered. The implications for this type of technology are massive.
Brain to Brain Communication
The previous technologies mentioned are only exceeded by BrainNet. BrainNet is an incredible set of sensors that are non-invasively placed on your head to allow direct communication with other brains. In BrainNet testing, scientists had subjects in separate rooms wear the devices and work together, using only their brains, to solve a Tetris-like game. The scientists call BrainNet a “social network of connected brains”. This technology is so revolutionary that users may only need BrainNet sensors to communicate, move, and perform actions within VR.
Where does this rapidly advancing technology get us? It gets us to a world where people spend the majority of their time in VR.
Working in VR
Internet-enabled companies tend to have employees work remotely: a trend that is on the rise. According to CNBC, roughly 70% of professionals globally work from home at least one day per week. Many would choose the option to wake up and simply wear a VR device to be “at work”, rather than sit in traffic and endure stressful commutes. In order for it to truly feel like you are working with coworkers, VR technology needs to evolve to a much greater level than where it is today. Nonetheless, working in VR seems like a natural step since people are already working remotely and using communication tools such as messaging apps and video-conferencing.
Living in VR
At some point, a large portion of the population will spend more time in virtual reality than in the physical world. People usually respond to this statement with hesitation, but why wouldn’t someone want to live in a world where their wildest dreams can come true? In a virtual world, the possibilities are endless: people can fly, live in a castle, have magical powers, drive the nicest sports car, and more. People are likely to prefer a world in which they are able to experience realities that feel real and have no limitations.
NFT Based Assets
How do esports, digital media platforms, and virtual reality technology converge to create a billion-dollar asset class? The final, and most essential, piece to this puzzle is the use of non-fungible token (NFT) based assets.
NFTs are unique digital assets. Most cryptocurrencies are fungible, meaning one bitcoin is exactly the same as another bitcoin, but NFT’s are totally unique. For example, a digital painting can be created as an NFT. Print 01 and Print 02 of a painting can look exactly the same, but they are each unique digital items that can be purchased, sold, or traded. Their owners truly own them and can do with them as they’d like.
Based on OpenSea market cap data, I roughly calculated NFT market size to be around 484,769 ETH, which as of June 2019 equals a $151 million. This number is likely highly inflated and I would estimate the actual size to be roughly 75% less, or roughly a $30–40 million market cap. Although the current market size for NFTs is exceptionally small compared to other markets, it’s growth has been meteoric for an industry that is less than two years old.
Having unique digital assets is important, but NFTs being on public blockchains is equally as important. Having a unique digital good on a blockchain eliminates platform risk for games. For example, a player who invests time and money in World of Warcraft and has a large number of high-value items would lose everything if game developers decide to shut down the game. Alternatively, if the items were NFTs the player would remain in full control over their items even if the game stops working. Of course, the value of the NFTs will likely suffer from the game shutting down, but the point stands that the digital goods truly belong to the owner and are not controlled by the game developers.
Very importantly, the open and auditable nature of blockchains enables anyone to verify the scarcity of digital items. For example, if game developers claimed they created 100 “legendary sword” NFTs, anyone can audit the code to verify this is true. This ability to verify the scarcity of items gives players power and certainty that developers won’t create 10,000 legendary swords and ruin the item’s value. Scarcity plays a massive role in determining value and NFTs allow for scarcity to confidently exist in the virtual world.
As NFT use continues to grow, I predict it will become a ubiquitous feature of all games, including mainstream platforms.
The Next Billion-Dollar Asset Class?
When you combine the societal trend of gaming becoming mainstream, with the technological trend of advancing gaming technology with NFTs, you have the recipe for a billion-dollar asset class.
Thanks to broad exposure through YouTube and Twitch, people are gaming more than ever before. This exposure led to the acceptance of esports as a legitimate sport and ultimately created a massive industry. The esports and gaming industry has received a large amount of revenue from the virtual goods market, which is currently seeing frenzied growth.
Gaming platforms and the devices people use to interact with machines are advancing at an increasing pace. There is also a massive societal trend towards working remotely, which will only increase as the technology that people use for remote work improves: this is a potential avenue for VR technology to shine.
NFTs allow for confidence in acquiring virtual items and goods that are truly owned, and thus enables a stable and “real” economy. This stable and real economy will allow people to work and live full-time in virtual worlds. With the convergence of these technologies, the asset class will explode and the market will grow to billions, perhaps even trillions, of dollars.
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