Dylan, a story writer for an NFT-based video game, asks what kind of economic future NFTs are ushering in.
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A few months ago, my knowledge about crypto was somewhere between superficial and non-existent, so when I was approached to become a writer for a videogame, words like “DeFi”, “blockchain”, “NFTs” or “smart contracts” were new to me. Eager to know more about this new world I was getting into, I dived headfirst into the crypto rabbit hole… Though it’s been over 10 years since Bitcoin laid the foundations for this new digital economy, the emergence of phenomena associated with blockchain technology continues to open up new opportunities for its application. Recently, the most notable case is that of NFTs, which have already taken two major industries – art and gaming – by storm. But what are the repercussions for the global economy?
I dived headfirst into the crypto rabbit hole.
NFT stands for “non-fungible token”, which in economic jargon means that they are unique or non-interchangeable. By contrast, Bitcoin and the thousands of alt-coins that followed are fungible, that is, all tokens of their kind are indistinguishable from each other, like real-life money. This characteristic “uniqueness” of NFTs is embedded in their metadata, and to mint them one must use a different Ethereum protocol (program) to the one used to create other tokens. Therefore, NFTs are a new type of digital asset and are already changing the concept of digital ownership.
NFTs have already made huge strides in the world of art. They have proved effective at mitigating the problems of an industry marred by uncertainty, forgery and theft. Artists can receive the money for their sales instantly, without the need to pay intermediaries, customs fees, auction fees, etc. All transactions are regulated by smart contracts – self-executable computer programs that manage everything to do with NFTs, from their minting and their sale to the transfer of ownership and the royalties accrued by the artists through consecutive sales (every time the NFT is sold to a new buyer, the artist will receive royalties from the sale). The consumer is guaranteed an authentic product, and the artist, greater power and rights over their work – something not previously possible in the art world.
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Another sector that is undergoing an NFT revolution is gaming. In 2007, the sale of a World of Warcraft character for $9500 gave the internet a lot to talk about. When Blizzard, claiming a violation of its terms of service, froze the recently purchased account and all the assets it encompassed, the question arose, who owns in-game assets? Since the appearance of NFTs, dozens of NFT-based games have already been released, many of them focused on collecting, like pioneering CryptoKitties or the new sensation AxieInfinity. The next step, it seems, is the introduction of upgradable NFTs. Projects like ChainGuardians, now in its beta phase, or TryHards, set to release in 2022, are already using this concept to change how we see gaming. Instead of buying a copy of a game, a player can purchase a character in NFT form. By playing, the “quality” of the NFT can be upgraded, making it rarer, or scarcer, thus driving its price up. The NFTs can later be traded with or auctioned to other players, giving players the chance to monetise their gaming time. Many of these play-to-earn projects focus their marketing in emerging economies in South-East Asia or South America, attracting players who could earn more by playing than by working a day job.
The art and gaming industries, because of their nature and structure, lend themselves well to the use of NFTs, but they are not the only mainstream industries that could be disrupted by this new technology. Another one, perhaps the one most protected by its traditional actors, is finance. Decentralised finance, or “DeFi”, is an alternative to traditional finance based on cryptocurrencies. Entirely peer-to-peer, with DeFi anyone with some Ethereum and internet access can lend, borrow, earn interest and invest. The rise of NFTs has also opened up a new opportunity in this area. In the near future, it will likely be possible to use NFTs as collateral for DeFi loans. Once the loan is paid, the smart contract will automatically execute the return of the NFT’s ownership to the borrower. Thus, this technology has the potential to eliminate the need for financial intermediaries like banks or investment funds, making the process significantly less bureaucratic.
“The artist Grimes” has called NFT gaming a tool for radical wealth redistribution, but just how likely is it that NFTs will actually disrupt existing economic global hierarchies? Although the technology lends itself to more direct transactions of capital, potentially depriving traditional financial institutions of their power as mediators, NFT economies are not as groundbreaking as they might appear. The reality is that much of their structures are modelled on existing economies. Take the suggestion that individuals in South East Asia or Latin America might be able to replace work in the traditional labor market with the playing of NFT games. A recent analysis of AxieInfinity players in the Philippines (which accounts for 40% of all Axie players) revealed that only the most prolific and proficient players were making more than the national average wage of $41.49 per day. In fact, as of August 2021, most earned only a little over $7.03 a day.
How likely is it that NFTs will actually disrupt existing economic global hierarchies?
In addition, many of these players play for a “scholarship manager”, an asset-rich player who can outsource the workload to other gamers. These gamers will then receive a cut of the scholarship manager’s earnings in return for their labour. This cut can go towards purchasing the three “axies” players need to be able to bypass the scholarship system and play for themselves – the game’s means of production, if you like. However, as the game grows in popularity, the developers have made it increasingly difficult to accrue the capital required to purchase these “axies” in order to protect the value of the currency. Pre-August, earning $1,500 a month was not uncommon, but by September the average had dropped to $180 a month. This coincides with increasing “axie” prices so that opportunities for asset control appear to be diminishing; NFT gaming provides a world of economic potential yet this is becoming increasingly difficult to actually attain.
The similarities between a traditional capitalist labour market and AxieInfinity’s fast-emerging one might disappoint those who wish to see NFT technology disrupt existing economic hierarchies, but for potential backers, this is part of the appeal. As a venture capitalist and early backer of AxieInfinity, Yat Siu, explained, he was initially persuaded to invest due to the “relationship between […] capital and labour” such that players who were “time-poor but capital-rich” can form a transactional relationship with those who are “time-rich and capital-poor”. That this could occur legally in AxieInfinity, rather than through illicit transactions as has previously been the norm for games like World of Warcraft, was an attractive prospect to him. However, it also reveals that NFT-venture backers respond positively to the replication of familiar (and arguably exploitative) labour market structures within these unfamiliar digital economies.
Hoping for fairness does not get you very far in today’s global economy.
NFTs are still in a nascent stage, and many of their possible applications remain to be discovered, as do many of their risks. Automation through smart contracts and the practical impossibility of theft or falsification present great advantages, as does the possibility of upgrading NFTs in the case of gaming. However, while they present innovative and secure fiscal applications, to say that they will be revolutionary is an overstatement. NFTs may be a driving force for the consolidation of digital economies, but these economies are fast consolidating into replicas of existing markets. As one Play-to-Earn Gaming consultant put it, “My hope for people who have Axiescholars and teams is that they’re super humane about it and thoughtful about creating a business arrangement in a way that’s non-exploitative and fair.” Unfortunately, hoping for fairness does not get you very far in today’s global economy.