A vertical NFT market has a future

As the bear market continued, NFT activity in the market plummeted along with the cryptocurrency industry in general. If there’s any silver lining, it’s that the bear market has pulled back the curtain on which use cases do and don’t create real long-term value, making blockchain-based gaming a compelling use case that’s disrupting the global gaming industry. The gaming sector is playing a growing role in blockchain activity and remains strong in investor sentiment despite a drop in overall market volumes.

While blockchain gaming is still in its earliest stages, in-game NFT utilization and dedicated NFT marketplaces provide unique features and a user-centric experience. In short, NFTs are non-fungible tokens, meaning that one token is not interchangeable with another and is stored on the blockchain.

1) Accessories — Weapons or character skins can be sold by developers as NFTs, rolled out massively or exclusively, and traded between players.

2) Character Development — Reaching new levels and milestones can trigger NFT minting, can be showcased as certificates, drive developer rewards, etc. Additionally, increasing a character’s skill points can be converted into economic rewards.

3) Metaverse Gating — Game NFTs can be used to gain access, gain ownership, and interact in the metaverse environment.

These features not only enhance the in-game experience, but also modify the entire Web2 relationship between players and game developers. The core terms of blockchain technology and decentralization, when applied to games, create:

1) Ownership — Web3 games give ownership of the actual game assets to the player, not the developer. NFTs, whether accessories or characters, are stored in your wallet and proven to be yours through on-chain records.

2) Scarcity — NFTs provide rarity and scarcity, which can be obtained through exclusive releases or ongoing play.

3) Interoperability — One of the biggest flaws of the current game is that player achievements or characters cannot be migrated to newly released versions of the game. In Web3, NFT Development company representing assets can be used in other games or traded across the network, although all games will be interoperable, especially the concept of cross-chain is widely exaggerated.

4) Financialization — NFT marketplaces allow for seamless exchange and trading of assets, which creates new revenue streams for developers and users, as seen in play-to-earn and the game economy emerging in the GameFi ecosystem .

5) Composability — Composability is more than just communication; it’s the possibility for developers to combine protocols and create new applications in a permissionless manner, which could drive massive gaming and credential innovation.

6) Privacy — Data privacy is as important in gaming as it is in every other vertical. This is further complicated in Web3 with ZKP and MPC technologies.

In the constant embrace of blockchain games, the conversation is not anchored in the game itself, but extends to the marketplace for NFT transactions. The marketplace represents a clearinghouse comparable to the usage of the game itself. For developers, they represent a unique opportunity to generate revenue points throughout the customer journey, primarily from two sources.

1) Fees can be set at registration, NFT minting, listing, bidding, trading and private sales. Transaction fees make up the bulk of the total and are usually listed at 2–5% of the sale price.

Example: OpenSea, the leading NFT marketplace, charges 2.5% of the selling price per sale, this fee is only charged to the buyer. In addition, OpenSea charges a fee upon registration and charges a one-time minting fee for NFTs minted for the first time.

2) Tokens are issued by many decentralized marketplaces. They are primarily used as a governance tool to reward user activity, but since founders hold a significant portion of these tokens in the treasury, the price appreciation works in their favor. However, reward structures can influence bad actors and lead to wash trading, a method in which a single user trades back and forth against himself, using multiple wallets to earn more token rewards.

In the current environment, the market faces the same grim reality as DeFi and many cryptocurrency projects, with activity at a 12-month low. The market transaction volume fell from 17 billion in January to 466 million in September, a cliff-like drop of 97%. With inflation getting worse, people are understandably reluctant to pay exorbitant fees for a jpeg that has no practical value.

In the brief time that cryptocurrencies have existed, horizontal markets have enjoyed the most volume and users. At the top of the mountain is OpenSea, which dominates the ecosystem with a 97% market share, making it the de facto horizontal market for collectibles and art of all kinds. Even in a bear market, their position is unparalleled. Other sideways markets (including LooksRare, X2Y2, Solanart, and Rarible, among others) also have large numbers of users, significant trading volumes, and top market rankings.

Over the past few years, developers have seen a huge opportunity to change the horizontal market model. This is especially true for gaming: gaming NFTs and DApps have become leaders in blockchain activity. As a result, the NFT Development Services market is more reliant on gaming assets than ever, as gaming NFT sales represent an increasing share of total NFT sales.

This trend, coupled with increased capital deployed on Web3 gaming projects, has pushed development from a successful horizontal market model to a narrower market catering to a segment of consumers. these are:

1. Vertical Markets: While overlapping with the collections of the general market, these platforms offer a broader catalog to the gaming industry, or focus solely on being a provider of gaming assets.
2. Game-specific marketplaces: These represent the marketplaces dedicated to blockchain games to facilitate the exchange of exclusive economies, including in-game resources and virtual plots.

For game developers, creating a native marketplace can be a useful tool to increase game visibility, generate greater revenue streams, and take ownership of the experience. This is the case with Axie Infinity, which only offers NFTs through its own marketplace. For Axie, ownership of the NFT exchange provides them with greater control over the fee structure as they receive a 100% yield. This ‘walled garden’ approach could lead to more adoption of the native token and more reinvestment in the community. However, this approach only works if the company or game owns a significant amount of intellectual property and a dedicated consumer base willing to migrate. For other native marketplaces with smaller user bases, such as Decentraland and Aavegotchi, it is more efficient to offer in-game assets on numerous marketplaces to increase liquidity and bypass the startup costs associated with market development. They can be complacent in either mode, which is how Axie got its start.

For projects developing non-native vertical markets, it is not only about being the best game NFT aggregator on a certain blockchain, but also about differentiation and selling a set of services. Marketplace platforms already do this in several ways.

1) AtomicMarket focuses on individuality and flexibility. If a DApp wants to integrate a marketplace with only its game assets, AtomicMarket can provide a front-end experience that appears to be exclusive to the DApp, showing sales and auctions only for that DApp.

2) Magic Eden separates itself through its launchpad feature, which provides a cross-chain solution for Solana and NFT collections on Ethereum. This will be analyzed more carefully in the next few sections, as it is an important function for the future of the NFT market.

3) Immutable X marketplace as a way to attract Web3 game development on Immutable X. With Immutable X’s ability to scale, it serves as a platform to manage the entire gaming stack, including market exchanges.

Advances in niche markets reflect growing interest in building on alternative layer-1s. Choosing the right blockchain to serve as the best foundation for NFT activity and game development is paramount for Web3 projects. Currently, the majority of NFT sales are based on Ethereum, thanks in large part to its first-mover advantage, large developer base, strong network security, and large technical documentation, which is great for streamlining dApps . However, Ethereum’s performance in some of the most critical areas (notably transaction speed and gas fees) is sacrificed for its maximum decentralization. While other aspects, such as developer tools, are also important, these are also tradeoffs rather than imperatives. Processing a large number of transactions at once, and offering the lowest fees to complete transactions, is imperative for scaling projects and improving user experience. It would be unwise to bet on Ethereum’s leadership in this space, but other blockchains have (and will continue to) usher in more scalable NFT solutions for the Ethereum mainnet. The two most notable layer-1 solutions, Flow and WAX, are built with gaming and entertainment at their core, and are home to many of the top-ranked projects in the marketplace and blockchain gaming.

While these alternative layer-1 chains continue to grow their user bases each year, it will be interesting to see how this growth continues as Ethereum scaling on layer-2 continues to become more complex. One of the most popular developments in the cryptocurrency space today is zk-rollups. Rollups bundle transactions into batches and execute them on the main chain, which can save a lot of processing power. Therefore, layer-2 implementing zk technology is designed to be faster and cheaper than Ethereum, while still taking advantage of the security of the Ethereum execution layer. One of the most notable projects leveraging zk-rollups is Immutable X, a layer-2 originally designed to optimize NFT transactions, but has also emerged as a possible candidate for hosting gaming platforms. As blockchain gaming becomes more explicit, it will be interesting to see if developers favor alternative layer-1 or layer-2 under the Ethereum umbrella.

While the scalability of Ethereum is making great strides, other issues related to blockchain gaming adoption remain.

Interoperability — activity outside of Ethereum is important, but also raises the issue of fragmentation across blockchains. The multi-chain nature of the NFT ecosystem means that holders must switch back and forth between different chains and wallets to monitor or trade their holdings, leading to technical confusion, sub-optimal user experience, and liquidity across markets question.

Retention becomes an issue when users on WAX want to play Flow-based games, but have to migrate to a different market, using a different token as a means of exchange. Interoperability between blockchains has been discussed in detail as it is critical to almost all cryptocurrency verticals. Solutions for creating a multi-chain world have been tried and implemented on a case-by-case basis. these are:

Over the past few years, developers have seen a huge opportunity to change the horizontal market model. This is especially true for gaming: gaming NFTs and DApps have become leaders in blockchain activity. As a result, the NFT market is more reliant on gaming assets than ever, as gaming NFT sales represent an increasing share of total NFT sales.

This trend, coupled with increased capital deployed on Web3 gaming projects, has pushed development from a successful horizontal market model to a narrower market catering to a segment of consumers. these are:

1) Vertical Markets: While overlapping with the collections of the general market, these platforms offer a broader catalog to the gaming industry, or focus solely on being a provider of gaming assets.

2) Game-specific marketplaces: These represent the marketplaces dedicated to blockchain games to facilitate the exchange of exclusive economies, including in-game resources and virtual plots.

For game developers, creating a native marketplace can be a useful tool to increase game visibility, generate greater revenue streams, and take ownership of the experience. This is the case with Axie Infinity, which only offers NFTs through its own marketplace. For Axie, ownership of the NFT exchange provides them with greater control over the fee structure as they receive a 100% yield. This ‘walled garden’ approach could lead to more adoption of the native token and more reinvestment in the community. However, this approach only works if the company or game owns a significant amount of intellectual property and a dedicated consumer base willing to migrate. For other native marketplaces with smaller user bases, such as Decentraland and Aavegotchi, it is more efficient to offer in-game assets on numerous marketplaces to increase liquidity and bypass the startup costs associated with market development. They can be complacent in either mode, which is how Axie got its start.

For projects developing non-native vertical markets, it is not only about being the best game NFT aggregator on a certain blockchain, but also about differentiation and selling a set of services. Marketplace platforms already do this in several ways.

1) AtomicMarket focuses on individuality and flexibility. If a DApp wants to integrate a marketplace with only its game assets, AtomicMarket can provide a front-end experience that appears to be exclusive to the DApp, showing sales and auctions only for that DApp. This makes AtomicMarket the choice for games looking for some type of native experience.

2) Magic Eden separates itself through its launchpad feature, which provides a cross-chain solution for Solana and NFT collections on Ethereum. This will be analyzed more carefully in the next few sections, as it is an important function for the future of the NFT market.

3) Immutable X marketplace as a way to attract Web3 game development on Immutable X. With Immutable X’s ability to scale, it serves as a platform to manage the entire gaming stack, including market exchanges.

Advances in niche markets reflect growing interest in building on alternative layer-1s. Choosing the right blockchain to serve as the best foundation for NFT activity and game development is paramount for Web3 projects. Currently, the majority of NFT sales are based on Ethereum, thanks in large part to its first-mover advantage, large developer base, strong network security, and large technical documentation, which is great for streamlining dApps . However, Ethereum’s performance in some of the most critical areas (notably transaction speed and gas fees) is sacrificed for its maximum decentralization. While other aspects, such as developer tools, are also important, these are also tradeoffs rather than imperatives. Processing a large number of transactions at once, and offering the lowest fees to complete transactions, is imperative for scaling projects and improving user experience. It would be unwise to bet on Ethereum’s leadership in this space, but other blockchains have (and will continue to) usher in more scalable NFT solutions for the Ethereum mainnet. The two most notable layer-1 solutions, Flow and WAX, are built with gaming and entertainment at their core, and are home to many of the top-ranked projects in the marketplace and blockchain gaming.

While these alternative layer-1 chains continue to grow their user bases each year, it will be interesting to see how this growth continues as Ethereum scaling on layer-2 continues to become more complex. One of the most popular developments in the cryptocurrency space today is zk-rollups. Rollups bundle transactions into batches and execute them on the main chain, which can save a lot of processing power. Therefore, layer-2 implementing zk technology is designed to be faster and cheaper than Ethereum, while still taking advantage of the security of the Ethereum execution layer. One of the most notable projects leveraging zk-rollups is Immutable X, a layer-2 originally designed to optimize NFT transactions, but has also emerged as a possible candidate for hosting gaming platforms. As blockchain gaming becomes more explicit, it will be interesting to see if developers favor alternative layer-1 or layer-2 under the Ethereum umbrella.

While the scalability of Ethereum is making great strides, other issues related to blockchain gaming adoption remain.

Interoperability — activity outside of Ethereum is important, but also raises the issue of fragmentation across blockchains. The multi-chain nature of the NFT ecosystem means that holders must switch back and forth between different chains and wallets to monitor or trade their holdings, leading to technical confusion, sub-optimal user experience, and liquidity across markets question. Retention becomes an issue when users on WAX want to play Flow-based games, but have to migrate to a different market, using a different token as a means of exchange. Interoperability between blockchains has been discussed in detail as it is critical to almost all cryptocurrency verticals. Solutions for creating a multi-chain world have been tried and implemented on a case-by-case basis. these are:

1) Cross-chain bridge — An NFT cross-chain bridge is a two-way transaction channel that connects two separate blockchains by ‘wrapping’ cryptocurrencies, converting one type of token into another. This is the basis for the recent WAX/Ethereum collaboration, which makes Blockchain Race NFTs compatible across different wallets. However, cross-chain bridges have become a weak point in blockchain security: since cross-chain bridges are run by a centralized third-party service, hackers are able to steal funds frequently. Developments around cross-chain bridges will have to become more secure in order to be a viable long-term solution for blockchain communications.

2) Layer-0 — Solutions like Cosmos and Polkadot have set their sights on addressing interoperability, creating a base layer for interconnected blockchains upon which NFTs and other ecosystems can be developed. Additionally, projects like Rainmaker Games, a recently launched cross-chain marketplace for blockchain games, have set their sights on addressing interoperability issues specific to games.

As the industry grows, these interoperable solutions will have to become more mature, otherwise the siloed nature of blockchain interactions will cause developers to be more cautious about where to build.

Data Storage — For most NFT smart contracts, the code is stored on-chain, but the content related to the contract is stored off-chain, which is a huge flaw. When it comes to games, large amounts of data, such as 3D models, are too expensive and complex to keep on-chain. Typically, the actual images or videos are stored on centralized hosting providers, including Amazon Web Services and Google Drive. This makes the interaction of smart contracts extremely antithetical to the ‘decentralized’ nature of cryptocurrencies, as centralized servers are vulnerable to malicious attacks. However, this problem is being solved by decentralized storage options such as Arweave and Filecoin, which provide permanent data storage options in P2P networks, while IPFS provides another layer of decentralized data access through content addressing. Filecoin runs on top of IPFS, making it nearly impossible to access every node running these protocols and deterring bad actors.

With the growth in transaction volume and user base associated with Axie Infinity, Decentraland, and many other blockchain games, it is clear that the NFT narrative is shifting from being a horizontal market to being the primary means of exchange. Game studios and large blockchain projects will continue to create aggregated marketplaces to underpin their various game collections. Additionally, successful games will find more value in creating their own native marketplace. Investment in these areas has been positive over the past year and shows no signs of slowing down. Fractal, a gaming-related NFT platform founded by Twitch co-founder Justin Khan, has raised $35 million in a seed round led by Paradigm and Multicoin Capital. Additionally, Magic Eden, the largest NFT marketplace on Solana, recently closed a $130 million Series B and launched Magic Ventures, a game-focused investment arm that will be used to provide end-to-end solutions for game developers Scheme, including a ‘launch platform for NFT minting’.

The money pouring in at huge valuations isn’t just coming from the pockets of cryptocurrency natives. Web2 companies are becoming more enthusiastic about the idea of ​​cryptocurrency integration; at the forefront of this trend are games and NFTs. In a 2021 survey of 197 video game developers in the US and UK, 58% of respondents are starting to use blockchain technology, and 47% have already started incorporating NFTs into their games. This sentiment has led to real investments from serious Web2 players (eg GameStop’s foray into the NFT market) and Steven Cohen’s Digital’s $10 million investment in AQUA, a ‘player-focused Web3 gamer community marketplace’. As Web2 gaming companies such as Activision open up their IP to NFT integration and blockchain gaming opportunities, the market dedicated to this space will undoubtedly reach new heights.

Taking a step back, it is interesting to look at the NFT market through the lens of Web2. The arrival of the internet shares many similarities with the arrival of cryptocurrencies and smart contracts. In the early 2000s, e-commerce became an exciting medium for third parties to list and sell items. This space is dominated by Craigslist and Ebay, two sites with overwhelming growth, operating horizontally; they cover just about every product line imaginable. However, managing an all-encompassing platform has become more difficult as niche consumers realize their needs are not being adequately met. Over time, Craigslist has welcomed Airbnb, Zillow, LinkedIn, and a slew of other specialized companies. With the advent of eBay, StockX became a more attractive platform for sneaker lovers, StubHub grew into a premier ticketing site, and some players set up shop in retail. If you look at how widespread these vertical platforms have become, clearly this transition is inevitable. In 2022, this evolution appears to have reset. As a horizontal supplier, Amazon has grown into the undisputed giant of e-commerce. Opportunities for verticalization remain, however, like Shopify’s decision to play with local sellers by offering an online storefront.

Based on the past few years alone, the apparent verticalization of the market for blockchain games is here to stay as well. As we look to the future, perhaps Amazon’s domination is a harbinger of Ethereum casting a wider net across the gaming space, leveraging layer-2 in a healthier and more sustainable way. Or maybe the future is more akin to the journey of eBay and Craiglist, pushing for the creation of a multi-chain system with greater interoperability solutions. Either way, the potential for blockchain gaming is endless, and the space will continue to serve as a catalyst for mainstream adoption centered on NFT integration and market interaction.