XRP and the Digital Cosmetics Marketplace

Six months ago, Brett Seyler published a three-part article series called Free-to-play Isn’t Free Enough (or How I Learned to Stop Worrying and Love Blockchain). I found his articles endlessly fascinating, and they sent me down the rabbit hole of possibilities for gaming and crypto. In his article, Seyler talks about the potential of the blockchain for running a digital goods marketplace for gaming developers. In a second article, Brett Seyler outlines how Forte, the company developing the new blockchain gaming tech, will be using Codius and the Interledger Protocol. In part 2 of the first set of articles, Seyler states:

What can value mean in a game? It can manifest itself in a few ways depending on the game. Free-to-play PC games typically monetize by selling the player additional characters, player and gun cosmetics, or in-game currency that can be used to buy in-game items, skins or characters. Mobile games have some of the same features, but they are typically more aggressively monetized than PC games. Mobile players can purchase items or currency that translate directly into an advantage over other players. Games that depend on these monetization techniques are typically free to play, though some games include an up-front cost and nevertheless run a skins store. Some of these collectibles, particularly the rarer ones, are worth a lot:

The above screenshot is from the steam marketplace, which is a centralized marketplace run by Valve. The primary disadvantage of this storefront for players is that they cannot take their cash out of the steam marketplace. If they sell one of the StatTrak knives pictured above, the money can only be spent on Steam. With a decentralized marketplace, a player would be able to sell his cosmetic for a cryptocurrency like XRP, which he can then sell for his local currency. This whole transaction could happen seamlessly using ILP and Codius. There are third-party storefronts like OPSkins, but Valve has cracked down on these in the past. In one prominent case, they banned the trading bots of the OPSkins storefront, which destroyed 1 million dollars of game cosmetics.

For developers, Steam takes a rather high cut of everything. Every skin and collectible card that is sold on the marketplace earns Valve a cut of the profits. A decentralized marketplace would not have such costs absent transaction fees to keep the system running. I’m not sure if the Forte marketplace would have licensing or development costs for their storefront, but I don’t see them demanding a cut of every item sale, and if they did, I would assume it wouldn’t be as high as Steam’s otherwise what would be the point? As Seyer indicates, the cost for developing and maintaining a marketplace is prohibitive, so development studios can save money by using a decentralized alternative that transacts on the blockchain. The steam marketplace provides developers with tremendous player-to-player sales utility, but if a decentralized marketplace were to offer them higher profit margins, developers would be no longer be locked into a centralized digital marketplace like Steam for PC gaming.

How big is the game cosmetics industry?

According to Juniper Research, video-game loot boxes and game-skins gambling alone will generate an industry slated to be worth 50 billion by 2022.

I couldn't find any authoritative data on how much money Valve makes off of the steam community market, but they sell the aforementioned loot boxes, as well as the keys to open them. Valve lets players sell both and takes a cut. Combined with the percentage they make from cosmetics sales, card sales, and sticker sales, it must be pretty high.

The digital marketplace was so lucrative that their most recent game, the collectible card game Artifact, was intimately plugged into the steam community marketplace in a way none of their other games had been before.

From this window, a player would be able to buy or sell cards from the community marketplace. Whole decks could be planned out and bought seamlessly from player card listings. All of the work of browsing the community marketplace for listings and purchasing them was done in-game with minimal player intervention other than confirming the transaction. Before this, none of Valve's other games had integrated community market features of the same kind. Artifact flopped spectacularly, but it was an indication that Valve thought there was profit potential for running a collectible card game on an open player-to-player marketplace. Collectible card games similar to Artifact, Magic: The Gathering, or Gwent seem perfect for a blockchain powered marketplace.

Potential Downsides to an open cosmetics marketplace

There is a downside to games implementing a digital cosmetics marketplace, at least from a player perspective. Most of these problems are not as bad on closed systems like consoles, but for PC games they can negatively impact player enjoyment. In my experience, open marketplaces like the Steam cosmetics marketplace are significant drivers towards cheating and exploitation for financial gain. It’s not clear to me whether the increase of cheaters is a consequence of the digital marketplace or of some other development decision, but my gut tells me that a financially opportunistic cheater is going to be drawn to games with an open cosmetics store. A game like Playerunkown’s Battlegrounds (PUBG) has a far more lucrative player-to-player cosmetic marketplace, both in the storefront run by Valve and the third party skins sites than a game like Fortenite, and I don’t think it’s a coincidence that PUBG has a far worse cheater problem than Fortnite does. Even in games that seem cheater resistant like Dota 2, there were problems with people selling high-mmr (match-making rating) accounts, at least until Valve started cracking down on them, even going so far as demanding a phone number for ranked matchmaking accounts. I don’t think Valve would have taken that step unless they measured a drop in the player participation for Dota 2 ranked games.

Unscrupulous players make money in Dota 2 with the cosmetics they get by boosting a new account which they then sell on Valve's marketplace or a third-party skin site. Once they hit the account level that opens matchmaking for the account, they sell it or boost it even farther to increase the value. If the booster wins a game, he levels faster and unlocks cosmetics and cosmetic crates at a higher rate. Unscrupulous players took to using macros for complex but powerful heroes or putting a bot on the opposite team to throw the game to guarantee the win for the player that was boosting an account. My point isn't that account sellers won't exist in absence of a player-to-player marketplace, but that these marketplaces exacerbate cheating problems in games when the financial incentives line up and enable them to do so. This thread on Reddit suggests the motivation for cheating worked in a similar way in PUBG. The cheater gets more battle points with a better performance, which he trades for cosmetics that are sold on the marketplace. And there’s no better way of guaranteeing a high score than using hacks.

It’s a bit of a trap for developers, and I’m not sure how you disincentivize this behaviour while still maintaining an open marketplace. If you don’t allow players to earn in-game loot or currency, you will seem greedy, but when you enable them to do to that, they’re getting game currency and cosmetics they can sell on the marketplace for money which drives cheating. Hopefully, the developers at Forte have a solution to this, but it’s not evident to me at first glance, and I’ve lost interest in many games I love because of cheating and account boosters. That being said, it might make sense financially despite all of my complaining about cheaters. If it’s making the company more money, what do they care about the downsides for the player? Every game has a natural lifecycle of popularity, and it’s hard to measure whether player engagement is falling off because of cheaters or because they've found something new. But I do think that the problem needs to be addressed. If players start associating games that use marketplaces, either decentralized or not, with cheating and other negative experiences, it throws the whole monetization technique into jeopardy.

Epic has opted to lock trading down in Fortnite. Players can't trade or receive in-game currency. Account selling and trading are against the EULA and will get an account banned. Items can't be traded. Switching game regions will result in a ban, which prevents players from farming gold or items in one region and selling them to another. This all sounds incredibly restrictive, but the cheating problem in Fortnite is nowhere near as bad as it is with their major competitors like PUBG. It could be that Epic is better at tackling cheating, but I suspect limiting the economic incentive to cheat has driven a large portion of these kinds of cheaters away.