The crypto/blockchain/NFT bubble continues apace. Compared to the dot com bubble that burst in 2000, it seems as if this bubble is inflating faster and bigger, driven not just by the promise of the new technologies, but a macroeconomic climate of low interest rates, huge amounts of investment wealth created during the pandemic and a desperate search for yield.
It seems to me that there are 4 different elements working together to create this perfect storm for shameless promoters. Each of them MAY have long term value (although I am deeply sceptical of pay-to-earn and nearly as sceptical of NFTs), but together, they create a Ponzi opportunity of epic proportions. In this post, I will look at crypto-currencies, the blockchain, NFTs and pay-to-earn, and identify what I think could be the opportunities and risks here. I think the only way to understand this bubble – and to identify whether there is real value to be had here – is to understand the components, and then evaluate each scheme, investment or idea based on whether it benefits from the underlying opportunities from these four concepts, or whether it is simply a confection of ideas with no true substance.
Starting at the basics, there is no innate reason why a cryptocurrency (as opposed to a currency) should be viable. A currency is simply a human agreement that something that is inherently valueless, such as a piece of shiny paper or some zeros and ones on a computer screen, has value. As Yuval Harari writes in Homo Sapiens, our unique ability, the one that separates humans from all other animals, is our ability to weave stories that have real, tangible power, such as the stories of “the corporation” which can own assets and take actions, or “government”, or “money”.
So a cryptocurrency is just a currency. Like all currencies, it has value because we all agree that it does. Most currencies are backed by governments, and that value can fluctuate based on our confidence that the government that stands behind the currency is strong, stable and will continue to protect that currency through economic policy, the rule of law and enforcement actions. This is why the “safest” currency, for more than a century, has been the US Dollar.
Cryptocurrencies have no one standing behind them. The transactions are recorded on the blockchain (more on that later), and that means they are susceptible to our combined belief in the accuracy, reliability and enforceability of the blockchain. The cryptocurrency movement is full of crypto-bros suddenly realising that things they took for granted – such as regulators to prevent mis-selling, enforcers to punish wrong-doers and standard-setters to confirm that things work as promised – do not exist in the “ultimate free market” of the Wild West of cryptocurrencies.
But the biggest problem with cryptocurrencies right now (which may pass) is that their promoters believe that they are three mutually-contradicting things:
- A means of trade
- An appreciating asset
- A store of value
I won’t go through the history of money (you are all smart enough to get the point), but money originally emerged to enable humans to move beyond barter and into an exchange of value, to become a means of trade. “I will pay you 10 stone-age pebbles for your cow, and you can use them to buy whatever you want”. No more waiting for me to have something that you actually want in exchange for your cow.
For that to work, we need a currency to be trusted, stable, of certain value and with no likelihood of surprises. Right now, trying to understand whether you should accept Bitcoin, Ethereum, Dogecoin or Floki Inu means that cryptocurrencies are failing this test. That may pass (British people managed to deal with newfangled pounds and pence once we eliminated the ridiculous imperial system of pounds, shillings and pence), but it is currently an issue for widespread adoption.
So crypto-bros jump on the idea of cryptocurrencies as an appreciating asset. And why wouldn’t you. Early holders of Bitcoin are multimillionaires today. An early esport competition for Starcraft 2 in 2011 awarded a 1st prize of $500 and a prizes for players in positions 5-8 25 Bitcoin, worth about $25 then and roughly $1.4 million today.
Speculation in cryptocurrencies is very rewarding right now. At least until the music stops.
If, and I mean if, cryptocurrencies are like commodities – scarce resources that ebb and flow with supply and demand like pork bellies, copper, oil and even gold – they run into an obvious problem. How can they be both an “appreciating asset” and also “a store of value”?
After all, most people want to know that if they put $100 in the bank, at the end of the year, that money is worth $100. Sure, they would like to earn a return above the rate of inflation. Everyone likes free money. But if the “value” of your $100 is highly variable, this introduces risk into the equation. And risk has a cost.
Basic economic theory teaches us that the more risk that we are taking on, the higher the return we demand for accepting it. Stuffing $100 under your mattress involves accepting two main risks: that someone will steal it, and that inflation will devalue it over time. (Inflation of 5% a year will reduce the spending value of your $100 to the equivalent of $57 over 10 years, although the $100 will still be worth $100. It’s just that everything else will have got more expensive around you.)
The current state of cryptocurrencies is not like this. No one can you tell what Bitcoin will be worth in a month’s time, let alone a year. Or ten. If I agreed to accept a monthly salary in Bitcoin from today onwards, I would genuinely have no idea if I could afford to pay my mortgage next year. Cryptocurrencies are not a store of value.
If they are not a store of value, they are not currencies.
Right now, cryptocurrencies are speculative assets, no different to investing in low-liquidity stocks on the public markets, meme-stocks like Gamestop or commodities. Until they stop being seen as investments, they can’t be currencies.
A sidebar on Gold
I put gold in my list of commodities above, and I expect people to argue that gold is indeed both “a speculative asset” and “a store of value”. Here’s why I think gold is different:
- Gold has fundamental value. It not just a currency that only exists because we all agree it has value. It has industrial uses in electronics and manufacturing, and meaningful demand for decorative functions because it does not tarnish. This doesn’t explain the whole value of gold, but it puts a floor on the value of gold that is more than zero. Unlike cryptocurrencies which can genuinely go to zero.
- No one claims that gold is a currency that will replace the modern economy of dollars, pounds, euros and yuan. It is considered to be a commodity that moves like commodities do, not a replacement for fiat currency.
- If all the computers in all the world were suddenly destroyed, many currencies would have real trouble continuing to function. Gold would still work.
The low-tech, tangible nature of gold combined with the clear assumption that gold is NOT a currency in the modern sense makes it a very different proposition to cryptocurrencies.
The blockchain is a core technology that underpins the concepts of cryptocurrencies and NFTs. Essentially, it is an list of all the transactions that have ever been, that cannot be deleted or modified but is endlessly added to and HAS to be distributed widely as part of future transactions, so that you have complete trust in who owns what and when, without needing to trust a government, bank or other institution to confirm this.
But as Bruce Schneier has convincingly argued, this is bollocks. You always need to trust. The question is who do you trust and why.
Blockchain enthusiasts argue that the decentralised blockchain is more trustworthy than other systems for several reasons:
- It is undeletable and unmodifiable, so you have a transparent history
- It is not in the control of any one person or institution, which prevents fraudulent meddling with the data
- It is decentralised, which means there are multiple copies in existence, so it can’t be lost.
Sceptics argue that what is the point of a list that claims you own something if you cannot enforce it (which is one of the roles of a government that backs a fiat currency). And that you always need to trust someone.
“What blockchain does is shift some of the trust in people and institutions to trust in technology. You need to trust the cryptography, the protocols, the software, the computers and the network. And you need to trust them absolutely, because they’re often single points of failure.
When that trust turns out to be misplaced, there is no recourse. If your bitcoin exchange gets hacked, you lose all of your money. If your bitcoin wallet gets hacked, you lose all of your money. If you forget your login credentials, you lose all of your money. If there’s a bug in the code of your smart contract, you lose all of your money. If someone successfully hacks the blockchain security, you lose all of your money. In many ways, trusting technology is harder than trusting people. Would you rather trust a human legal system or the details of some computer code you don’t have the expertise to audit?”
Bruce Schneir, Blockchain and Trust, 12 February, 2019
It feels to me that there is something significant in the blockchain. But I can’t yet see a circumstance where the blockchain is better than a database from a trusted partner. Maybe you can enlighten me in the comments.
NFTs (non-fungible tokens) are the latest technology / product / fad * (delete as you see fit) to emerge built on the blockchain. The basic idea is that instead of owning a cryptocurrency, you own a digital asset – a piece of artwork, a digital Hot Wheels car, a sword in a game – that is registered to you on the blockchain.
It acts – or could act – in many ways like a copyright, where the owner of the copyright has the right to prevent unauthorised copying of an asset – provided that they are operating in a domain where there is a legal framework to support enforcement, regulatory agencies to do the enforcing and enough money to pursue the issue. There is a reason that big corporations own lots of copyrights and smaller artists find it harder: it is expensive to protect copyright from infringement.
NFTs don’t change any of this. In theory, you have a right to a thing. In practice, what is the enforcement? What regulatory system enforces it? Why is better than the existing copyright or intellectual ownership system?
My main answer so far is that it isn’t, but NFT fans THINK that it gives them automatic, enforceable rights to prevent anyone else from using their NFTs. This is not what it does.
In fact, I confess to being really rather unsure what “ownership of an NFT” means. Normally, the legal framework exists so you know what ownership means: if you own land, you can stand on it, and prevent other people from trespassing on it; you can build on it (subject to a panoply of regulations, permits and scrutiny); you can exploit the mineral resources in it if you are lucky enough to find any. With physical goods, you can use them, destroy them or sell them. Over the past 30 years, software has been on a journey from “something you own” to “something you licence but the big corporation can take it away from you whenever it likes for whatever reason.”
What is an NFT? As far as I can tell, it is confirmation that you, the buyer, own (as recorded in the blockchain) a specific digital representation of an idea. That’s it.
What can you do with it? Well, basically nothing.
In the world of video games, proponents of NFTs argue, “Imagine that you own a purple lightsaber as an NFT. You could take that weapon with you from a Lego Star Wars game into World of Warcraft, into Minecraft and Destiny and Overwatch and into Clash Royale and use it wherever you like.”
Well, you certainly can’t right now. But looking into the future, I am REALLY struggling why you ever would.
I make games for a living. I even make licensed games for a living. Getting any item into any game is a huge endeavour, and really hard. You need to make the asset in the style of the game. It needs to have animations. It must have purpose in the game, and stats which are balanced with other items in the game. It needs to be FUN, not just for the person who owns the asset, but for other people who might come into contact with the asset.
So I can’t see a world where it is easy, or cheap, or simple to get an NFT into a variety of games. Essentially, dozens of commercial organisations would need to feel a strong commercial incentive to implement an incredibly difficult technical issue for, as far as I can see, zero financial benefit.
So let’s imagine that you CAN implement this technology and your purple NFT lightsaber can appear seamlessly and logically in the kid-friendly Lego Star Wars, in voxel Minecraft, in FPS Overwatch and futuristic Destiny. Why would they?
Current service-based games are mini-monopolies. The games market is fiercely competitive, but once you have players in your game, YOU are the only person who can sell them anything. You have created a place where you control the value. If you are giving value to your players, they will stay (if they are free players) and pay (if you can offer enough value to justify this) and you have a business. The NFT promise is one that is MUCH harder to implement and a MUCH worse business model. So I am unclear why anyone would do it.
But what about the PLAYERS. Surely players will want this system where they can take their purple lightsaber from game to game, and make it their own. Again, I am unconvinced.
We play different games at different times for different reasons. To be immersed, for mastery and progression and social status and just to hang out with our friends. I am not yet convinced that persistence of assets – from game to game – is a meaningful consumer demand.
You could argue that the benefit of being able to sell something once you have finished with it has value. It worked in the boxed era of video games, where you could essentially “rent” a game by buying it and then selling it second hand at Gamestop when you were done. This practiced largely ended as software distribution when fully digital (and it doesn’t work with free-to-play), so would this be a good thing for consumers.
Maybe, is my answer. More likely is that players will use the fact that they COULD, in theory, sell the NFT to justify spending more money on them than they otherwise would, convincing themselves that it is an investment, or an appreciating asset, or at least will have resale value. Much like Magic the Gathering players convinced themselves that buying more cards was a sensible idea, but in the end the cards moulder in the attic, unsold and unvalued.
And all of this presupposes a fundamental shift in value. From game makers making items that make the game more fun and that they can sell to third-parties making NFTs and game makers having to design games that will incorporate these NFTs while working out how to commercialise this business with complete fungibility for other games. (Ha, non-fungible tokens will have to be fungible to work in games. Who’d’ve thunk it?)
So for me, for NFTs to make sense, we need to understand:
- How they differ from copyright?
- How they are enforceable?
- What actual benefits you gain from owning a NFT?
- How a games company can integrate an NFT into their own game in a way that benefits the NFT-owner, the other gamers and the company itself?
- How fungible NFTs (!) can work in multiple games?
Perhaps all of these issues can be overcome. My purpose in separating them out is to give me the opportunity to look at each strand of value and disentangle it, so that I can evaluate if we are on a path to making this a viable business. I can’t see it yet. I see it – perhaps – as technological solution to how to track, implement and enforce the existing copyright system. But that is not “decentralised” and “free market” and “end of big government”. Quite the opposite. It would argue that NFTs are just a way to tokenise and make easier to track an existing regulatory system. Which is not as disruptive as people think it is.
The last theme in this series is Play To Earn.
Many commentators are identifying this theme as the big emerging idea from Web 3.0. That we are entering a creator economy where the people who toil away to add value to the games, economies and ecosystems they love online, they should earn money for it.
In effect, this is like the Etsy-fication of digital content, where people who make stuff have a way of turning their hobby into a business.
There is nothing wrong with that idea. Earning extra money, or even converting your hobby into a job, is one of the huge benefits that the Internet enabled, by allowing a producer of a specialist item to discover her potential customers anywhere in the world through the easy communications that the Web enabled.
The “Play to earn” idea suggests that by “using the blockchain” – whatever that means in this context – we can give people the long term right to benefit financially from their actions and activities.
Again, I support this idea. In the endless battle between capital and labour, giving “labour” a long-term piece of the fruits of their labour, particularly in a knowledge economy, sounds like a bit of a rebalance away from capital. (Although it still only benefits those people who work in the knowledge economy, not those in the caring, or manufacturing, or maintenance, or delivery economies).
But it has many problems. Some quick examples:
- The Open Source movement has demonstrated how much better software that people “build because they care” can be software created by people who are just paid to do it.
- The Overjustification effect, that when you start pay someone to do something they enjoy, they stop enjoying it.
- Isn’t it just gold-farming, but gone legit?
I think where I really struggle is in the concept for “play” to earn.
The Misconception: There is nothing better in the world than getting paid to do what you love.
The Truth: Getting paid for doing what you already enjoy will sometimes cause your love for the task to wane because you attribute your motivation as coming from the reward, not your internal feelings.
There is some evidence that people are ALREADY chosing playing video games over poor-paying jobs. Economist Eric Hurst studied declining participation in the labour force amongst young men and concluded that because the alternative to not working, i.e. playing games, was fulfilling and gave them a sense of progress, achievement and autonomy, “these technological innovations have made leisure time more enjoyable. This acts like an increase in an individual’s reservation wage. For lower-skilled workers, with low market wages, it is now more attractive to take leisure.” (Quoted on page 37 of my book, The Pyramid of Game Design)
I can see that “Play to earn” could be a better system than goldfarming in sweat shops (although there is no reason to believe that it won’t still be in sweatshops for the capitalists). But I don’t yet see why it changes the fundamental paradigm.
In the end, we play for fun. Turning into a job makes it, well, a job. Is that what we really want for games?
Oh what a tangled web we weave
There is more to Web 3.0 than these four themes, but untangling them is key to understanding where we are going. I remain profoundly sceptical about the promises of the promoters. Pay to earn is the one I believe in least, and I have yet to see what blockchain will enable that will not still require large organisations (probably governments) to provide the regulatory and enforcement functions that societies need.
I feel I’ve made progress in advancing my understanding by untangling at least some of the threads that weave through Web 3.0. I hope that you feel the same.
And of course, I reserve the right to realise that these thoughts were profoundly wrong as I continue my journey.