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Cryptocurrency and Online Multiplayer Games

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Key Takeaways

  • The era of cryptocurrency opens new possibilities for game publishers and developers. However, it is not yet a fully-developed market, and there are many things that should be taken into account before entering it.
  • Among the "cons" are law problems (including anti-gambling laws), the "human factor" (i.e. the gamers who do not behave in accordance with rules), the safety problem, and the volatility of cryptocurrency rates.
  • Among the "pros" are the independence of cryptocurrencies from any country's economy, the great potential of the market, and the high level of control that can be provided by blockchain technologies.
  • In general, the situation is such that cons can be turned into pros if a professional approach is applied in key areas like:
    1. finding the right business-model that will be legal, provide profits, and be interesting for gamers;
    2. finding the right technical solution that will provide safety and enable the control of the game economy;
    3. organizing an efficient system of game rules that will persuade the players to contribute to legal game economy.

When Bitcoin was first issued in 2009, it wasn't perceived as harbinger to a global change to the world's economic system. But, although a revolution didn't happen with the appearing of Bitcoin and other cryptocurrencies, it did become a part of the evolution process of the world currency market. During some 8 years, cryptocurrencies have taken 0,1% of all the world money operations, which is actually a quite significant part: even the ubiquitous and growing yuan has only 1,78% in world payments. There are many reasons for this: cryptocurrencies are an innovative way of payment, their conversions are decentralized and are completed inside a virtual network, making it safer than many other means of payments, and more independent than any currency.

Today, total capitalization (in its classic meaning) of cryptocurrencies is also growing rapidly. In 2017 the total capitalization of cryptocurrencies hit a historical maximum, reaching a sum equal to more than 200 Billion dollars – in the same ballpark as some countries' economies or GDP's. And, although there are still a lot of technical questions (mostly connected with the blockchain protocol, on which cryptocurrencies are based), it is already clear that virtual currencies are already changing the market and that, most probably, there is no way back. World's leading banks have already organized workgroups focused on utilizing blockchain technologies. Developed countries like Switzerland and Japan have already legalized cryptocurrencies both as a form of property and means of payment. Also investors worldwide have noticed the uprising of the new segment. For example, in October 2017, there were about 300 ICOs (Initial Coin Offerings) running simultaneously. Experts say it is just the start: “I believe that there will be one or more digital currencies competing with fiat currencies for transactions, sooner rather than later" - says Aswath Damordan, NYU Stern Professor of Finance in his blog. And there are reasons for this, such as the growing number of international transactions, that can be the driver to the further development of the cryptocurrency segment:  “To transact, you can’t just hand over a dollar bill,” says Balaji Srinivasan, CEO and cofounder of - “You need an international currency for that. It might take a while but there’s going to be more of a need to transact across borders than there is today".

This makes the cryptocurrency market quite attractive for investments – especially in the technology sphere.

One of the directions, where the era of cryptocurrency and blockchain has opened new possibilities is the gaming industry. The gaming industry is a very stable segment, with a loyal audience of technically literate users. And the segment is growing, along with the evolution of mobile technologies and the spread of Internet – this is why this segment is attractive for investors. For online game developers and publishers, the development of blockchain and cryptocurrencies made feasible the idea of integrating cryptocurrency into a game's economy.

The intertwining of real and virtual economy did not start all at once. The first efforts were made in the Entropia Universe game and Second Life, where players were given the option to trade virtual in-game currency back for real (fiat) money.

Today there are already several examples of businesses which show that online games are becoming a part of the crypto-economy. For example, a Swiss company, EverDream Soft, has started three MMO (Massively Multiplayer Online) games, where deals are protected by blockchain and a cryptocurrency can be used as intermediary for trading. One of them, the ORB Project, enables players to transfer their in-game money into other assets, including cryptocurrency, and then exchange it for fiat money. In the other two games, Spell of Genesis and Force of Will, players can use special Counterparty tokens stored in one wallet for deals inside both of the games.

Another recently launched project – Lordmancer II by ActiveGames, a company I have been working for as CEO from the beginning of the project – has gone even further and allows gamers to earn cryptocurrency through acquiring game assets and trading them on the in-game market.

Special attention is paid to the mobile gaming segment, which shows very good growth during the recent years: "The growth in downloads and usage proves that apps are becoming increasingly central to people's lives, and this value is translating to rising revenue for the industry." - says Matt Miller, expert from data firm App Annie commenting his "The Q3 2017 Recap" report on in-app consumer spending. The figures in the report also look convincing:  they say that combined spending on iOS and Google Play was $17 billion for the period, and amounted to a 28% year-on-year growth.

Meanwhile, this phenomenon has not yet become massive: the cryptocurrency gaming segment is very young and there are several pros and cons to entering this new and volatile field. Let's have a look at the main "pro" and "con" points.

The "Cons"

One of the strongest points against using cryptocurrency in an MMO is potential legal issues. There are still not enough laws around cryptocurrencies that will ensure your business model will work, or that it will provide enough safety. Attitude to the cryptocurrency differs from country to country. Russia`s government is preparing additional taxation regulations for the cryptocurrencies, EU Parlament went further with developing  a proposal for crypto-currency regulations, that will require cryptocurrency exchanges and cryptocurrency wallets to identify suspicious activity. In Germany Bitcoin can legally be used as unit of account, and in Switzerland cryptocurrencies are equal to any foreign currency and can be exchanged at a given rate. But in China, banks are not allowed to operate with virtual money, despite this country is one of the main contributors to the crypto-economy. The other large contributor, South Korea, has not yet given a final legal status to cryptocurrencies, but the state structures pay special attention to all organizations that operate with it.

So, if anything happens – should you plan a new business model, start a new project, etc., it is not easy to predict the country's legal reaction. For example, a game developer/publisher can get into a tricky situation if the company decides to allow to trade in-game rare items for real money or “fiat” – it can get banned for violating South Korean anti-gambling laws. The same law actually forbids any form of gambling, auctions and roulettes inside a game, where real money or cryptocurrencies can be involved. So things like roulettes in Counter Strike will not work in South Korea and countries with similar regulation for gambling.

Apart from ambiguous law regulation, there are some other problems. For example, the "human factor" - the players are yet not used to such gaming economy models and are not familiar with cryptocurrency, so it is hard to predict how people will behave inside a new game economy that involves this kind of virtual assets. Today, not many games have found a successful model for monetizing the game process where cryptocurrency operations are involved. Blizzard Entertainment already once tried to enable the trade of in-game items and gold for fiat money, but did not find this profitable enough. Valve has included the option of purchasing rare items through Steam officially, but this does not seem to make a significant income for the company.

They are also still pessimistic about working with cryptocurrency: "There are two related issues: one is treating a cryptocurrency as another currency type that we support and the broader issue is monetary behaviors of game economies. The first issue is more about cryptocurrencies stabilizing as mediums of account." - says Gabe Newell from Valve in his comments on this topic on Reddit.

There are several reasons why cryptocurrency has not become a full-fledged part of the online-gaming industry, and the players' reaction is playing an important role there. The best way to both enable the game owner to get profit from virtual transactions and provide interesting, balanced gameplay is yet to be found. Apart from this, most of today's business models that include monetizing through virtual currencies are inspired by the "black market": most of the "new" services offered to buy with virtual currencies were traditionally available from the "black market". And most probably, the black market "professionals" will find a way to enter the new economy as well. If players would be allowed to profit from playing a game or even to mine currency there – possibly there is a danger that it will attract lots of bot breeders, but not stay interesting for "unprofessional players", who just want to enjoy the game process. This will de-stabilize the game economy and make the idea of monetization quite doubtful. In other words, because the market is relatively new, there are no well-tried business models that would surely work in the cryptocurrency market.

Another argument against using cryptocurrency in MMO's is connected with the immaturity of the crypto-economy. Cryptocurrency rates may change dramatically in a day, and the reasons are not always very clear. Ethereum and Bitcoin rates can leap up to 20% in one day.

A large emission to the market may also bring down the rate unpredictably. Moreover, despite of all the safety provided by blockchain, cryptocurrency owners are still very vulnerable to fraud. Speculations like in the Silk Road case can not only make lots of participants lost money, but also significantly affect the currency rates. Things like rumors and news may affect these currencies' rates with greater consequences than the fiat ones. One of the reasons is lower volume of capitalization which makes cryptocurrencies more volatile and more sensible to speculations. For example, ICO ban in China caused Bitcoin rate drop by 1000 USD so that in one day its price fell from more than 5000 USD to less than 4000 USD. So, before getting involved into any financial matters involving cryptocurrency, you should think more than twice, and analyze all possible risks that will enable your game's economy to be stable regardless of the currency rate leaps and prevent abuses like fraud. In general, any game that includes cryptocurrency should have a very strong control over its economy.

Apart from that, there are still technical problems connected with using cryptocurrencies. Some of the problems were connected with the loss of transactions on Eth20, a visible problem for the Ethereum infrastructure, where it is a possibility in the protocol to use a wrong function and irretrievably lose tokens. However, they are likely being fixed during the Byzantium update. Bitcoin also has some security problems, experts say: “Your private key must be secure because if someone can get your private key, they can hack into your bitcoin account,” says Jacqueline Shinfield, a Partner in the Financial Services group at Blake, Cassels & Graydon LLP, but, by their words, they are too, fixable:  “A lot of the services that exchanges provide include storing your private key for you,” continues Jacqueline. “Most have really secure procedures.”

Regarding all the cryptocurrencies, many specialists are still sceptic on whether this part of economy will ever fully develop. In fact, cryptocurrency platforms are still a clumsy market instrument. First, the transaction price is very high – for example the price per transaction in Bitcoin is now near 1USD, and is not likely to become smaller in the coming time. Second – the decentralized blockchain systems work very slowly in comparison with other platforms. This is why it is not always possible to integrate blockchain elements into performance-critical systems.

The "Pros"

Nevertheless, many cons can be turned into pros by elaborating an efficient approach to the development of the business and monetization models, and making accurate analysis that will shield from possible pitfalls. All the nuances of modern crypto-reality can be used for the good of the business.

As already stated earlier in this article, the market is still not strongly regulated, and this can be also an opportunity. Some experts even compare the modern market of cryptocurrency with the Wild West, especially talking about the ICO boom. "One could say that the lack of regulation, relatively short timeframes and significant amount of capital being raised through token offerings could create a "Wild West" scenario when compared to a traditional route of an initial public offering. - says Bob Graham, partner and head of the digital currency services practice at Friedman LLP. Yet, the expert states, the dangers that may be encountered in the cryptocurrency environment, are not very specific: "Keep in mind that no matter how sound an environment is, there will always be a possibility of theft or other targeted attacks, but that isn't something unique to the digital currency industry as it occurs often in other industries as well", says Bob Graham.

Because cryptocurrency is not accepted as a form of property or an asset in many countries, it is not subject to any taxes, so this reduces the taxes to pay for both businesses and players. Also, many anti-gambling regulations can be avoided by inserting a third currency into the game's economical processes. For example, Lordmancer II has actually three kinds of "currencies" that power the game's economy: the Lord Coins (LCs) that could be both traded on the external cryptocurrency exchanges and used inside the game for trading different in-game assets; game gold that is used to purchase basic commodities and support gamers’ interest on every level of gaming and diamonds that could be purchased directly for fiat money.

This system seems bulky and overcomplicated, but every element is needed to keep the game economy balance and gamers’ interest. This scheme also meets publishers` rules and includes no randomizing or betting.

The fact that cryptocurrencies are not tied to any country also eases the process of turning it into fiat money. The exchange can be made in any country where such an exchange is allowed, and it does not have to be the country where the user is physically located. Another attractive feature is the privacy provided by blockchain schemes – all the deals are absolutely anonymous, so no third party can track your activities, and no one can find out how much a user earns or steal his private data.

The "human factor" is also a two-sided phenomenon. All the "black market" activities that plague the modern MMO games can be actually turned into official activities and bring profit to the developer or the game publisher – the key is finding the right business model for their monetization. If there is a demand for rare items or high-level characters, all this can be sold officially by the game's owner or partnering companies, or anyone who wants to invest in this. The main question here is how to keep all deals under control so the game owner gets his commission from all these transactions. In the abovementioned Lordmancer II game project, the payment medium is the Lord Coin (LC), using which all deals should be made. The LCs are stored in a special Ethereum wallet tied to the player's account, so all the deals and currency exchanges are tracked and economically controlled. If a player decides to exchange his LCs for another currency – he can do it outside the game using any cryptocurrency exchange available. This can be an effective model for protecting the player's trade process and making extra profit from trade commissions.

Talking of business models, an important point is the in-game economy. Special attention should be paid to retaining balance inside the game. EverDream Soft's the ORB Project enables other developers to create objects for the game and sell them through the Gaming Center. A complex system has also been developed by Active Games in Lordmancer II. To keep the in-game currency rates stable and prevent oversaturation of the game's market with LCs, 90% of them are burned when spent inside the game, and the remaining 10% go to the Game Funds to finance ongoing game operations. Another source of profit for the developer in Lordmancer II is the 20% commission from player-to-player deals, half of which also goes to the Game Funds and the other 50% are burned. All rare items will be created inside the game and their distribution will be moderated manually to protect the users from fraud and prevent game imbalance.

Apart from economy rules, precautions also should be taken to prevent abuses from bot breeders, because they are still an economic and social threat in the game: bots produce cheap in-game currency and interrupt the gaming process for live users by invading "bountiful" game locations. Bots and alternative accounts should still be found out and banned. Another effective way to deal with bots is putting restrictions on how many accounts can be registered for one person, and, as many businesses prefer to do, enforce a monthly payment model.

And, at last, the technical part. Yes, blockchain is not a very comfortable technology to integrate into a game, but this doesn't mean that it has to be inside the game itself. Blockchain wallets can be tied to the gamer's account (like in Spells of Genesis, Lordmancer II et c.) to control the most important parts of the money processes.

Before investing into any cryptocurrency involving project, the investor must make sure he knows everything about the platform the game is going to work on, its resources and capabilities. For example, Etherium-based platforms are not very capable of carrying large traffic, but they are good for securing transactions.

One of the big advantages of blockchain is also the impossibility of cashback operations, which is a very important feature in preventing fraud.

On top of all, there is a point that the cryptocurrency market is in the stage of rapid growth. And, although some experts say it is a bubble that will burst during the next few years, others say that the world is changing and cryptocurrencies will soon become an inseparable part of the global economy. Figures are also optimistic: all cryptocurrencies have shown growth in 2017, and the market of virtual economy grows faster than all the world's economy together. And gaming industry, which is very sensitive to innovations, has all the reasons to ride this wave. Large publishers like Blizzard, Nintendo and Valve have already started to sell in-game currencies for real money: Blizzard officially sells in-game silver from Destiny 2 through shop, Valve sells rare items from Dota 2 through Steam, and sells items through Steam for Nintendo as a partner. Smaller developers try to catch up: for example, Norwegian Funcom re-launches The Secret World in 2017 as a free-to-play game, but with the option of buying in-game currency for real money.

All this is just one step from adding cryptocurrencies into the chain.  As soon as gamers get familiar with cryptocurrencies, it will be just a matter of time. In fact, some companies already have done this, and are feeling optimistic: such strong market players as Big Fish, Microsoft, Green Man Gaming and Jagex already started to accept Bitcoin as a payment for purchasing games and other items in the online shops. "An advantage of bitcoin is that it is still new and shiny enough to generate interest in the payment experience simply through the fact that it exists," said David Parrott, payment services director at Jagex, commenting the news about the company starting to accept Bitcoin.

So, in general, all the cons may be turned into pros, and the market is more worth entering than not. Cryptocurrency is a relatively new sphere, with all the classic benefits and drawbacks: volatile but rapidly growing, weakly regulated, but borderless and free to enter. Unlike the cryptocurrency market, the gaming industry is stable, much more predictable and mostly operates with well-proven and tested technologies. But the gaming industry has pitfalls to avoid too – such as the "black market" problem, the bot breeders, and the fragile game balance. So before crossing a gaming business with the world of crypto, several points have to be taken into account and deeply analyzed. It is vital to find the right business and technical models, which will allow the game to be economically profitable for the businesses, and interesting and comfortable to play for the gamers. Taking into account the current state of technology's development – operations inside of it are slow and take a lot of resources -  blockchain will have to be outside the game itself. Also, to eliminate possible legal problems, it is better to avoid gambling elements inside the game. And, beyond "black market" opportunities being accepted in the new model, it is still important to avoid abuses from players, so strict rules should be elaborated to prevent the game from being invaded by cheaters: bots and other suspicious accounts should still be tracked down and banned, ongoing in-game operations (especially financial deals) should be moderated and technically supported.

With the right approach and efficient support, a game involving cryptocurrencies will become a profitable business, with numerous sources of income: profit can be made from deals inside the game, from the exchange commission, and from payments from partners who decide to contribute to the game.

About the Author:

Anton Telitsyn

Anton has 8-year experience as a software developer. He has a strong technical and management background paired with deep knowledge of the technologies behind end-user software development. Anton is an MBA graduate in Management and a serial tech team leader in a number of software startups.

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