Lawful Neutral: How is an NFT MMO even supposed to work?


Recently, MassivelyOP hit a milestone: We received our quadrabajillionth email announcing that Scammy-scammers-now-with-NFTs-and-also-metaverse-because-reasons Inc. was a proven market leader with a new scamming game and… blah blah blah. Literally everyone sends us these mostly bogus, fluffed-up press releases. Fam, it’s exhausting.

But when I received the quadrabajillionth-and-oneth email, I actually wondered how they all thought this was going to work. At the 100,000th-foot view, I understood, but I wondered in practice how the cryptobros thought this was actually going to change the world. So I thought, “why not turn my exploration into a Lawful Neutral?” and here we are.

What are all of these words and acronyms?

Let’s start with just some definitions. I’m going to take some liberties here with how I describe these things to get the gist across to the general reader at the cost of some technical precision. So pre-emptively to everyone out there taking a deep inhale to “well actually” me with an irrelevant technicality, I do see you. I just don’t care.

The blockchain

So we start with highest-level concept of the “blockchain.” Blockchain is a protocol used to store information in “blocks” that are then chained together. Each block in the chain is “hashed,” which is a cryptographic function that can take a record of any length and turn into unique series of characters – like a fingerprint for the block. Hashing functions have no “collisions,” which is the term used whenever two blocks create the same fingerprint. Then, when a new block is created, the blockchain generates a unique fingerprint for the new block and uses the fingerprint of the previous block as an input.

The result is then that if someone changes the information in a block in a chain, it would change that block’s unique fingerprint – and every subsequent block in the chain’s fingerprint as well. This makes it very simple (programmatically) to see if someone has tampered with the blockchain.

Fungible vs. non-fungible

Next we need to define fungible vs. non-fungible, and this is important as it relates to the definitions token used frequently in the Cryptobrotopia. I’m going to talk about these in the terms of “Ethereum” because it’s the standard that’s most commonly used in gaming NFT schemes, though there are certainly others. “Fungible” just means that every item is the same, like a coin. Every quarter in existence is the same value and one quarter can be exchanged for another quarter. It would be madness if my US dollar were worth a different amount than your US dollar, right?

In the Ethereum protocol, the fungible token is ETH, and it’s built off the Ethereum standard ERC-20. So when you look at the ETH market-price, you are looking at the ETH-coins built on the ERC-20 standard.

Now, let’s compare that with non-fungible tokens. Non-fungible tokens are unique and distinct, and no two tokens are alike in value, more or less. If we were to put it in IRL terms, a non-fungible token would be like taking your limited edition Luke Skywalker Dressed In A Wookiee Costume collectible and trying to compare that to your limited edition Charmander Pokemon Trading Card Game card. Both have value, but they aren’t the same. NFTs that use the Ethereum protocol for a basis use the ERC-721 standard.

Because these things can never be clear, there’s also a standard developed especially for blockchain based gaming called the semi-fungible token, or ERC-1155 standard. The nuance here isn’t that important to dig into; just know that this standard tries to solve a few problems with scaling of the ERC-20 and ERC-721 standards in gaming. The long and short of it is that both previous 20 and 721 standards handle each “token” individually – like if you were go to the grocery story and buy 100 things and had to check out and pay for each item individually. It’s expensive and resource-intensive to do. ERC-1155 allows you to “batch” many items into a single transaction, like checking out with all your items in the grocery store at once.

But Andy, I hear you asking, why do these standards matter? In short, these standards are what allow the NFT to be traded on any Ethereum marketplace – basically, what allows you to buy and sell the token. This is important because if you hear of a game that developed its own protocol and uses a less prominent one, that immediately limits the value of that particular NFT because it’s not plugging into the broader ecosystem.

So how is this relevant to gaming?

Depending on the game itself, a developer could implement ERC-20 for fungible tokens, ERC-721 for non-fungible tokens, or ERC-1155 for the semi-fungible, or any combination of all three. For example, if a developer wanted each gold coin to be unique in the game, he could implement it as ERC-20 because it’s a fungible token and each gold coin in the game is equal to another gold coin in the game. In theory, this would allow you to track how each piece of gold moved through the world, if you cared about that kind of thing. More realistically, though, it would allow players to buy and sell gold securely, entirely within the construct of the game. Theoretically, it could prevent things like gold dupes, hacks, and all manner of shenanigans that disreputable players get into today, but it’s also subject to all-new problems, such as increasingly slow transaction speed (significantly slower than credit card processing), high transaction fees that really add up in a video game built entirely upon such transactions, and the potential for developers to just dispute blockchain alterations and “fork” the blockchain, invalidating player activities.

Meanwhile, a developer could also use the ERC-721 to develop unique items. This could be something a straightforward as “+5 Helm of Disintegrating Moral Compass” that’s unique to the player who created it because the original creator’s name and the current owner would both be part of the unique fingerprint. Cool in concept, but kind of pointless in a game where you might craft 50 of the same thing to level it up (plus some MMOs already offer this functionality without blockchain integration). What’d actually be a slightly better implementation is if your BlizzCon bundle came with an NFT. It’s a limited item unique to the person who attended, but she could then sell it. Still not great, but better.

Again, because these are all based on the Ethereum protocol, that’s what allows people to buy and sell the items for ETH, which can then be turned back in a legal currency. It’s also this common protocol that allows crypto proponents to perpetuate the myth of “take the item to other games!” and “your items persist if the game dies and keeps value!” It’s not exactly accurate, but that’s effectively what they mean.

A real-world example

So lets look at this stuff in action. If you set aside the accusations of exploitation and massive hacks, Axie Infinity is considered to be a “successful” implementation of NFT gaming and has existed for almost four years. It’s not a brand-new game proposal claiming to change the world with a design doc and some marketing speak; it’s actually been a product in market for a decent amount of time.

The game is a bit like Pokemon but swarmed with NFTs. Registering for the game is a hassle and requires that you have ETH and blockchain wallets. You use that ETH to purchase Axies, which start around $17 USD – they’re the blob-like monsters that you use to fight. You need three axies just to start the game, so it’s about $60 upfront investment to play the game, roughly the box cost of a AAA title, though in practice, the true amount is closer to double that as the cheapest Axies are functionally worthless. As you play through the game by battling, breeding your Axies, and building up your land (housing), you earn currencies called $AXS and $SLP, both implemented under the ERC-20 standard.

You can also purchase $AXS and $SLP for real currency on crypto exchanges like Binance in an openly pay-to-win scenario. $AXS is a currency used for “staking,” which allows currency holders to lock their assets into a decentralized finance platform (the game, in this instance) and earn more $AXS. The benefit is that you get “rewards” in the game and “voting rights and a say over the use of community funds in the future.” The $SLP, or “Smooth Love Potion” (side-eye over this name) currency is used to breed your Axies in-game. This is where we get the term “play-to-earn”: You can play the game to earn actual money in the form $AXS and $SLP. You could turn those back into real cash money by selling them on a market like Binance.

The Axies, land, housing, and all the items in the game are NFTs, implemented under the ERC-721 standard. These are all unique items and can be traded for $AXS and then be turned back in real money on an exchange. Since they all use the ERC-721 standard, they could conceivably be transferred to other games. In fact, Sky Mavis, the developer behind Axie Infinity, uses that as a selling point, or it would if it had any other games right now.

Does it work?

Yes and no. The game currency is trading at around $48 at the time of this writing, with a market cap of nearly $3B. There are “gaming guilds” (using this term lightly) that issue loans on $AXS currency as “scholarships” superficially to help players in low-income countries like the Philippines and Indonesia pay the start-up fees to work in the game to earn money to support their families. This is precisely why critics consider the game so exploitative, as players in rich countries can effectively pay pennies for drudge work from third-world gamers to boost and subsidize their own play experience. It’s hard to see this as anything less than legalized goldfarming for the benefit of privileged gamers, and it has all the same problems as it has in legitimate MMORPGs for the last 25 years.

Axie Infinity was also recently hacked; according to the FBI, North Korean hackers stole $620M from the game earlier this year, the biggest crypto hack to date. The hackers were able to steal private keys of crypto owners and transfer all the funds to themselves, and apparently they’re still in the process of laundering all that money through anonymizing mixers. Clearly, this is not an invulnerable system. There are definitely still weak points in the armor.

What’s unclear to me from a “does it work” perspective is how much effort and consistent investment is required to play the game. Long-term sustainability is an open question as well. The crypto-market is incredibly volatile, and gamers are notoriously fickle. What happens to those “play-to-earn” $AXS and $SLP, which are key to the game’s success and solvency, when their crypto value collapses – something that’s already threatened Axie?

In fact, just the week the game has seen social upheaval over the developers’ attempts to shore up the game’s SLP value, as “workers” in the game are quitting over their depressed incomes, angering the “landlords” who were dependent on their cheap in-game labor. In other words, trying to balance the game around propping up a cryptocurrency and keeping two tiers of players happy is harder, not easier, than building any other MMORPG with a broad playerbase.

At best, proponents can argue that it works only in isolation, but those proponents and their endless press releases largely ignore or elide those challenges – security being chief among them, as we saw with the Sky Mavis hack. Interoperability will continue to grow as an issue as the industry develops more and more currencies that mostly don’t relate to each other and can’t be exchanged without a medium of a regulated currency of USD. What happens when Ethereum comes up with next iteration of its standards too – what happens to interoperability then? Does that mean that my NFTs that once worked in one game no longer work there because the NFT issuer upgraded the standard but the consumer did not?

NFTs are also ripe for criminal exploitation as well. Money laundering is almost laughably easy in NFT games, as we’re currently witnessing in Axie. Gambling regulation is also based around the concept of “legal tender,” and cryptocurrencies and NFT live in a weird space such that they’re not quite legal tender but also not quite not legal tender. What happens when more governments start regulating cryptocurrencies and NFTs? What happens to the games that depend on them?

This is just the tip of the iceberg when it comes to problems with NFT gaming, and as the market expands – and barring more governmental regulation, it likely will – the dynamic of how this all works will change. One or two games being “successful” in isolation is very different than what success will look like in a larger market.

Every other week, Andy McAdams braves the swarms of buzzwords and esoteric legalese of the genre to bring you Massively OP’s Lawful Neutral column, an in-depth analysis of the legal and business issues facing MMOs. Have a topic you want to see covered? Shoot him an email!
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