“We’re trying to enable people who maybe don’t want to use an exchange, don’t want to pay the fees that an exchange has… Using a technology platform like Ethereum to create smart contracts that will bypass the need for an exchange and allow people to conduct a transaction themselves.” — William Quigley, CEO of OPSkins
The video gaming industry is huge, and it’s growing fast.
It was worth $91.5 billion in 2016, and this year it looks set to burst through the $100 billion mark, giving it immense economic importance.
In spite of this, however, there are lots of problems with the gaming economy, and a whole host of missed opportunities for gaming companies to access new and lucrative markets.
One of these largely untapped reservoirs of wealth — which has already been exploited by some game developers with enormous success — is the virtual goods market. More specifically, the secondary virtual goods market, where players trade in-game items with one another, often using real-world currency.
Currently, gamers rely on centralized markets to trade their items. This means the market is controlled by a third party through which all exchanges take place. Sellers send their goods to this entity, where they remain until a buyer comes along and pays for them, after which the proceeds of the sale are transferred to the seller.
This all sounds fairly straightforward, and in many ways it is. OPSkins is just one example of a successful centralized gaming marketplace, with around 150,000 new registrations every month. They provide a space where gamers can trade items with a reasonable level of reassurance that they aren’t going to get scammed.
It’s far from perfect however, and OPSkins CEO William Quigley is the first to say so. He says:
“There are many, many problems with that centralized model. One, it takes millions of dollars to set up a centralized model, because you need things like payment processing and security…Security is always a very serious concern because there is no safety blanket. If somebody steals your items, there’s no FDIC, there’s no insurance company.”
So centralized marketplaces are expensive, and security is a nightmare. Add to that the fact that the market is fractured into some 200 payment processors with their own flaws, and it makes for a messy industry, deterring countless potential customers.
As for decentralized marketplaces, they’re tough to get started. Without an Application Programming Interface (API), there’s no standardized way of trading between games, which makes things confusing and complicated.
What’s more, setting up a trading interface is not a cheap venture, and high costs discourage many would-be entrepreneurs from selling their virtual items independently.
Thanks to these barriers to creating a cohesive decentralized marketplace, it’s proved basically impossible to generate a large enough base of buyers and sellers to ensure the level of supply and demand needed to have a functioning market.
Fortunately, help is at hand — in the form of OPSkins. They’re working on building a new decentralized marketplace which they hope will revolutionize the way gamers trade their virtual items.
It’s called Worldwide Asset eXchange™ (WAX), and it will use blockchain technology to decentralize the OpSkins marketplace and allow peer-to-peer trading between gamers on an unprecedented scale.
So how does it work?
The system will use smart contracts, on a blockchain, to ensure all trades are verified and legitimate. These contracts are created when gamers use WAX tokens, which represent a stored value and can be traded for virtual products. This eliminates the need for a centralized market, enabling gamers to safely trade directly with each other.
Prospective sellers will be able to set up shop quickly and easily, without the prohibitively high start-up costs associated with trading their goods independently. It’s more secure thanks to escrow protected payments and allows players to choose who they trade with.
This means they can confine trading to close friends and trusted parties if they wish, and on the other hand they can trade with anyone in the world, without worrying about currency conversions or borders.
This sounds like good news for gamers, and those interested in making money from trading virtual goods. But what does it mean for the gaming companies themselves? Well, it’s extremely promising for them.
A Completely New Market
Trading virtual goods creates a secondary market for gaming companies. This complements and enhances the primary market (game membership / purchase) in a number of ways.
One textbook example of a game developer enjoying massive success from a secondary market is the case of Counter Strike: Global Offensive.
Five years ago the Counter Strike: Global Offensive series of games was fairly successful with a decent base of players, but it wasn’t exactly dominating its field. In 2013, however, this changed — in a big way.
Counter Strike: Global Offensive, or CS:GO, was released in 2012 to a reasonably warm response. In August 2013, the average number of players was sitting somewhere around 25,000. Just two years later it had exploded to more than 350,000, an increase of 14 times, and today it’s double that.
So what happened? The game developers, Valve, introduced skins to the game and allowed players to trade them on the Steam platform. Skins are ways of modifying weapons and other items, and are functionally useless but look good, which makes them desirable.
Through a number of clever tricks, including giving each item a unique ‘wear’ value indicating its condition and allowing players to vote on new skins, Valve managed to create a buzzing virtual marketplace, where items regularly sell for five- or six-figure sums (real-life money).
While some players just want to buy new skins to improve their in-game appearance, some like to flaunt their cash by purchasing the rarest of goods for astronomical prices. Others choose to use the game as a form of gambling or speculation, investing in virtual goods as they would the stock market.
The extra buzz created around the game and the potential for players to make huge amounts of genuine cash led to the upsurge in membership. If the raw numbers aren’t convincing, a quick trawl through Reddit will uncover plenty of anecdotal evidence from Counter Strike players attesting that trading skins was the main reason they downloaded the game.
Why secondary markets are so good for primary markets
The explosion in popularity of Counter Strike: Global Offensive following the creation of their marketplace is pretty compelling evidence for the benefits of secondary markets. The ability to trade and make money from in-game activity is a huge pull for gamers, and this is one clear way in which a secondary market can boost revenue in the primary one.
There are lots of other ways in which a thriving secondary market is good news for businesses. Primary and secondary markets tend to help each other out — take buying a house for example.
Imagine if it were impossible to ever sell a house after buying it. How many people would shy away from making enormous payments on a property, knowing that they’d be stuck with the same one for life?
All of this points toward great potential benefits for the gaming industry if a healthy decentralized marketplace were allowed to evolve. With many of the barriers of centralized markets (cost, security, trust) removed, it seems likely that more and more gamers would get involved in trading, boosting the market.
Blockchain technology could enable projects like WAX to revolutionize the way virtual trading takes place, bringing in untold numbers of new participants (the market for this is estimated to be around 400 million gamers) and leading to astonishing increases in revenue for gaming companies.