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Crypto Is Coming to Esports: The Games and Economics of Tomorrow

Dan Jeffries - Coindesk
2022-07-26 03:10
Video games are big business. In 2022, they had sales of $200 billion globally. Esports tournaments, with skilled pro gamers battling it out for big prizes, rocketed to $2 billion in total payouts. Even watching games has become a booming business as Twitch said it racked up 770 billion minutes watched in 2022 alone with five months still to go before year's end.
All of that is a hell of a surprise to adult me.
This piece is part of CoinDesk's Sports Week.
I'm old enough to remember when my cousin got an Atari 2600 with blocky little sprites bouncing back and forth on the screen. The only tournaments were my cousin and me throwing down on Tennis, which usually ended with me in a headlock whether I won or lost. Fast forward to college and the biggest tournaments were me and my roommates getting stoned and going to the local Kwik-E Mart to fight it out in notorious quarter-guzzlers like Street Fighter II or X-Men Children of the Atom.
In the early 1990s, Street Fighter II heralded the humble beginning of esports tournaments. The 1980s was the golden age of arcades but by 1991 they were already in decline after home consoles invaded the scene. Who wanted to pay a quarter per game when you could buy a console and play all night after your parents went to bed? But Street Fighter II recharged the industry, driving kids back to the arcade to see who reigned supreme in the area. Those college and high school battles blossomed into something much bigger as the fighting game swiftly created a thriving competitive scene, with local contests. Towns across America and Japan knew their top players by heart. A console perfect port to Super-NES only energized the competition because now you could practice at home for free and then race to the arcade to earn eternal gladiatorial glory as you battered virtual foes to a chorus of cheering kids.
But back in the 1990s the biggest tournaments boasted a top prize of only a few hundred bucks. Fast forward to today and you've got consoles selling 100s of millions of units, mega-tournaments filling stadiums and professional gamers (with adoring groupies) making millions of dollars. The top-five pro players in DOTA 2 all earned more than $5 million in prize money over the course of their careers.
As a futurist I've spotted some big trends coming long before they ever happened, but I totally missed esports going mainstream. It was hard to imagine, back when the only prize was your friend buying drinks that night because you beat his punk ass with a perfectly timed upper cut. I missed it the same way I missed comic book movies becoming the biggest blockbusters of all time, with the Marvel Cinematic Universe commanding $26 billion. As a kid buying comics with my allowance I just couldn't imagine any adult ever green-lighting those superhuman stories for the silver screen. I forgot that kids grow up and become the very adults who hold the purse strings. They end up making all the stuff they loved as kids into something bigger.
That's the key to evolution of technologies and a window into how they might evolve in the future: Kids grow up.
Max Planck said that "science advances one funeral at a time." He meant the young rarely convince the old to change and incorporate new ideas, the old simply retire or die off and the young grow into the people who are in charge. Naturally they turn to the ideas that seemed crazy or even dangerous to the people who came before them.
It's already happening. Mark Zuckerberg grew up a fan of sci-fi, reading Neil Stephenson's “Snow Crash” that pioneered the idea of the metaverse in a more concrete engineering form than earlier works like William Gibson's “Neuromancer.” Zuckerberg’s company, Meta (FB), is betting billions of dollars that we'll all be donning virtual reality (VR) goggles and gaming Ready Player One style. Apple (AAPL) and others are going the other way, betting on Augmented Reality (AR) and readying for release cutting edge specs to get us all hooked.
All of that will take years. The hardware, the interfaces and the games all have to catch up. For AR you need glasses that just look like normal glasses or shades, not bolt-on cameras that make you look like a weirdo in a bar or a stalker at the beach. Apple may get us there, with its legendary power to make impossible form factors work. But people underestimate just how challenging that is with Apple already missing expected announcement windows. It will take some miracles of miniaturization. It may happen sooner than later, with companies like Mojo Vision already moving to human trials of AR contacts ripped straight from the pages of William Gibson's “Mona Lisa Overdrive.”
In other words, we'll get to the metaverse but it won't be tomorrow. After the hardware gets good enough we'll need the apps that drive adoption and we'll need newer generations. It was hard to explain to friends why I bought the iPhone 1 when it basically just had chat, a calculator and maps but not much else. Most people didn't buy until many generations later.
But one dangerous idea is poised to change competitive gaming even faster than new immersive AR/VR hardware: crypto.
It's already happening.
To understand why, you just have to understand a little about why games and crypto have always shared a remarkably similar trajectory.

Crypto and gaming: an inevitable evolution

Crypto and gaming have a natural affinity. Both were both born as rebellious outsiders from the computer revolution. Both are controversial and have fierce opponents.
While video games have largely shed their controversial image, crypto is still a target of hatred, fear, uncertainty and doubt. The difference between them is mostly time. Crypto is a much younger industry. Its lifetime is short, dating back barely a dozen years with the release of Bitcoin in 2009. Video games go back to the 1970s and early 1980s, with prototypes even going back to the 1950s and 1960s. As the technology matured, it powered up companies like Sony (SNE), which took in over $25 billion in 2020 from its perennial console powerhouse, PlayStation, and the software services that surround it. A 50-plus year timeframe saw the games industry grow into the mega-business that it is today.
But it's easy to forget just how controversial games were at various points in their history. Critics screamed that video games made kids fat and lazy while destroying their social skills. Worst of all they were linked to violence. Like the Satanic Panic of the 1980s revisited in the fourth season of the show “Stranger Things,” politicians of the 1990s and crusading lawyers turned on games with a vengeance. In 1997, now-disbarred attorney Jack Thompson went on the warpath, targeting video game makers with massive lawsuits. The Columbine High School massacre ratcheted up video game panic to new heights when it came out that the shooters were violent video games fans and Columbine families filed lawsuits against 25 game companies for supposedly causing the shooting spree. In 2022 the U.S. Congress proposed legislation that would make it a crime to sell violent video games to anyone under 18.
Over time, the tide turned. Throughout most of the 2000s, an increasing number of leading figures, like the Surgeon General, said there was no link to video games causing violence, instead the main factors were a shift in home life and mental instability. By 2011, the Supreme Court struck down a California law banning violent video games to minors as unconstitutional. By the mid-2000s, as hundreds of millions of people played games and didn't go on killing sprees, it suddenly seemed that everything bad was now good for you.
All of that is a remarkable turnaround. If it sounds familiar, that's because the history of politics is often the history of people in power reacting with fear and loathing to new technology, which happened with everything from telephones to steam engines to the telegraph, radio, TV and VHS videotapes.
Today it's crypto that's in the crosshairs, with Nobel prize winners slamming cryptocurrency, multiple governments banning or attacking and vocal social media reactionaries, and critics writing letters to congress to get it banned. But, with time, crypto will trace the same trajectory from hated outsider to mainstream staple. It will get more mature, faster, safer, smarter.
Its evolution will mirror the jump from 8-bit sprite level technology to photorealistic gaming engines like Unreal 5. Currencies will get built-in password reset capabilities, and stronger protections on wallets and it will get so easy to set up that Grandma could do it. It will get woven into those next-gen AR contacts and glasses so people can zip money around in the blink of an eye. Kids who used it on the Darknet or flipped it on exchanges around the world or to trade with their friends will grow up into the people making the policies of tomorrow and the video games of tomorrow, too. It's not just science that proceeds one funeral at a time; it’s ideas, technologies, cultural evolutions, law and more.
Increasingly, game designers will find crypto a natural fit with video games; the two have a shared history of moving from outsider to insider.
Today, most of the money that powers million-dollar prizes comes from crowdsourcing or small subscription fees that raise money to drive the tournaments. Crypto will make it easier to raise that money, with localized tokens generated by the games themselves or by large pools of games. It will also make paying international players directly a lot easier, as gamers from nations outside the modern financial system loop get paid without having to open a banking account and navigate the convoluted and complex system of today.
It's not hard to imagine rookie and pro gamers making a living, grinding through notorious loot fest games, like Diablo III, hunting for gear that they can flip on an open market or that pays them simply to play. Early players may work their way up or just get some summer spending money by playing games, the way kids worked a paper route in the 1980s to earn extra cash. Some will go on to be the pro players of tomorrow.
Inevitably, that will breed blowback and controversy, with new reactionaries screaming about whether crypto laced games have fair wages or are even a real job but the trend will persist despite them. Rewards are a foundation of game design and crypto can give those rewards real world value. Suddenly earning extra health or more magic potions or the new glowing frost sword of absolute power will translate to real-world wealth.
It would be nearly impossible to do this with fiat money. Bank accounts and money transfer systems can't take constant micro-payments or hold magical items without getting frozen in seconds as anti-money laundering algos and checks kick in. Money just didn't move that fast in the old world and the system can't handle the load. It's like trying to stick mag-level bullet trains on old steam engine railroads. It simply won't work.
We need a much faster and more fluid system with money that can zip as fast as light moves down a fiber optic cable. Small payments, coming fast and furious, hundreds or thousands of transactions hitting someone's account over an hour as they rack up wins and losses. Today, credit cards would cut people off in minutes and you'd be calling the company to unlock it before they just canceled your card a few days later.
Economically, it makes little sense without crypto in video games and pay-as-you go tournaments. A video game company would have to set aside a pool of dollars or euros or yen to pay people, cutting into their profits. That's because they'd first have to raise all that cash only to give it away, a bad economic model if there ever was one. But with a powerful chain or token they create and mint money and reward points and non-fungible tokens (NFT) themselves and that means they can payout continually.
Eventually, several chains that are dedicated to gaming will become dominant, with easy ways for video games companies to pay into the pool while generating a larger swath of rewards to give away in-game, which will move games beyond siloed one-off, single game currencies that nobody wants. Just as nobody wants to buy celery in the grocery store with celery coin and then switch to bread coin to buy a ciabatta roll, nobody will want World of Warcraft coin when you've got a general purpose coin that easily works across DOTA 2, WOWIII, Diablo, Counter Strike and anything else coming down the pike.
And, of course, so much of today's games are built around the ideas of special items. Armor. Magic swords. More powerful guns. Better super powers. Secret door keys. Virtual land deeds. That's also natural territory for NFTs, those much maligned, non-fungible tokens. NFTs are already taking root in games like Spinterlands, Gods Unchained and Axie Infinity. People can earn special NFTs, win them, flip them on built-in markets and more. Games like Axie proved super popular in developing countries like the Philippines where the local currency isn't strong and the banking system isn't trusted at a deep level.
All that is not without its problems, too.
Crypto has the potential to take "grinding" to a depressing new level. Grinding is when you do the same boring, repetitive tasks over and over in a game to level up and get to the good gear and make it easier to face the game's Big Bads. Add in earning NFTs or crypto payouts to grinding and suddenly you've turned gamers into virtual wage slaves. It's already happening.
Axie Infinity, a Pokemon-like game with breedable battle monsters, created a kind of digital serfdom, with rich Axie owners in the Philippines renting out their NFTs to players to grind for them. Then again, breeding digital monsters for fun and profit might beat earning your allowance or weekly paycheck through mowing lawns or getting a part-time summer job stacking boxes at Amazon (AMZN).
Even worse, games with actual money behind them present a brand new and lucrative attack surface to hackers and crackers. In March 2022, Axie Infinity saw hackers take the game for $620 million in crypto in a single, audacious attack. The FBI linked the assault to two North Korean hacking groups, Lazarus and BlueNorOff (aka APT38;. APT stands for Advanced Persistent Threat). Those are nation-state or military-backed hacking groups that have the time and money and tools to keep hitting something they really want until they get it. It makes them incredibly dangerous because computer security is often a patchwork of hard-to-secure platforms. In computer security, defenders have to play perfect defense and hackers just need to succeed once.
The attack itself was ingenious in its diabolical ingenuity. The APTs planted fake job ads and targeted employees at Infinity only, offering lavish comp packages. They even conducted interviews. One senior engineer went through multiple rounds of interviews and showed interest in taking the fake job. The APT sent him a PDF with supposed details of the offer but that PDF contained a Trojan that gave them access to his computer and credentials, allowing them to take control of validators from the chain.
The damage may kill Axie Infinity. They likely won't be the last game to fall until the technology and security improve enough to defend against such sophisticated attacks. But the threats will persist, as long as there is real money to be made.
As Willie Sutton said when asked why he robs banks, that's where the money is.
Powerhouse games with big pools of prize money will make fat and juicy targets for hackers big and small. A single breach could crush a game, putting it out of business almost instantly and burning years of development and marketing in a flash.
Games are expensive to develop. The free-to-play masterpiece, League of Legends, cost $12 million to develop back in 2008. Cyberpunk 2077 cost an estimated 1.2 billion Polish zloty (US$313 million) to develop. That's not even counting on-going hosting costs and ongoing development and support.
A single bad hack could wipe all that out overnight.
But on a long enough timeline, games continue to mature and so does crypto, catching up to its older brother. Security will improve. So will rewards and payouts. And it might be just in time for the Big Tech companies of yesterday to deliver on the AR/VR dream of an infinite and ever expanding metaverse, one where crypto zips around as native currencies in a digital flurry of bits and light and information.

The games and economics of tomorrow

The way technologies and industries can grow out of nothing into masters of the universe can take even the closest industry observers by surprise. Turn your back on a tiny niche industry and suddenly it's worth billions. That's what happened to games and game tournaments and it will happen to crypto, too.
I've got a long history of watching technology, and it follows that familiar pattern of hated outsider to boring mainstream mainstay. There are always people in society who fear what's coming. How will it change things? Will it make things worse? Will it destroy our way of life?
The answer is always yes. Technology changes things in both good and bad ways, always, no matter what it is. Some people may hate earning their salary playing a virtual game. Politicians will certainly turn on that kind of way to make a living. Social media pundits will scream that it's not “real work” and that society has now reached a depressing new low. And, of course, it will mean exploitation in some places, a kind of digital serfdom as people grind for money to rich overlords.
But at the same time, not everyone's experience will be the same. For some it will be a path out of poverty. In the developing world, where good jobs might be few and far between, jumping on line to grind for magic swords might just lift some kids out of starvation and struggling to keep the lights on. It may help them find their way to becoming doctors and lawyers and coders and other coveted jobs of the future we can't imagine yet.
Tournaments will get bigger and prizes will get bigger too as the pools of money increase rapidly with the rise of crypto payouts. More and more people will make a living in the virtual world and live a very good life in the real world too. It will likely be a life that's location independent and the envy of many other people who'd rather do that than hawk t-shirts or stack boxes in a soulless warehouse to make ends meet.
Technology is neither good nor evil, it's both and everything in between. Technology is not outside of us, it's a part of us, a part of who we are and what we want. What we do with that technology is what makes it good or bad.
The marriage of video games and crypto will straddle both ends of the spectrum. It will offer brand new opportunities and livelihoods to some, exploit others and make still others fabulously wealthy. If that sounds like the way things are today, morphed into a new mold, that's because that's exactly what it is. Video games intertwined with crypto will follow the same well-worn paths of the past but do it with a new twist, as it has with all technologies since the dawn of time.
In the end, the more things change, the more they stay the same.
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