In-game NFTs are projected to grow into a $15 billion market by 2027

Kagan estimates that publishers earned $3.64 billion in revenue from non-fungible tokens linked to items for use in video games in 2022, and we expect this number to grow at a compound annual growth rate of 33.5% through 2027 to 15, $46 billion as more games with NFT mechanics come to market and attract a wider player base.

In-game purchases were transformative for the video game industry, and many in the industry believe that giving users the ability to trade and sell these items on the open market through NFTs is the key to unlocking a new level of demand. On the horizon lies the potential for these NFTs to transport virtual objects across different gaming experiences and into the metaverse. Developers must convince players, regulators and platform holders that NFTs are a valuable and safe investment.

In-game NFTs are digital assets backed by blockchain technologies that authenticate the ownership of in-game items such as weapons, costumes, property and avatars. By linking in-game assets with NFTs, users can exchange the item for cryptocurrency via exchanges, such as Ozone Networks Inc.’s OpenSea, which can then be exchanged for fiat currency.

Our analysis of the gaming market is based on our research on startups in the segment and discussions with prominent industry figures. We have also leveraged our research and data around the wider video game content and in-game purchasing markets.

Game publishers monetize NFTs in two ways. The first is the original sale of a newly created, or minted, NFT. The publisher offers NFT for sale on its website or through an exchange and receives the bulk of the purchase price as income (net of payment processing, blockchain transactions and exchange fees).

The other way a publisher makes money is from any resale of NFT. Many in-game NFTs include mechanisms that send a portion of any aftermarket transaction back to the original coin authority.

The biggest game working with NFTs is SKY Mavis PTE. Ltd.’s Axie Infinity. The game asks users to engage in turn-based battles with other players using Pokémon-like Axie monsters. The monsters are tied to NFTs, which must be purchased from Sky Mavis or from an NFT exchange. The lowest “last sale price” for an Axie monster on OpenSea as of January 13 was 0.0174 ETH, or about $25. During the height of Axie’s popularity, some monsters reportedly sold for hundreds of thousands of dollars.

The winner of the match gets a “little love potion”. Once the player has a certain number of potions, they can exchange them to create a new monster. The new monster can then be used to win more matches or sold on the open market.

The game became known for its robust capital class, which engaged in speculative trading and operated networks of players who cultivated love potions in working arrangements that resembled pyramid schemes. This metal layer of asset management overshadowed the actual gameplay, which is relatively thin. And the lack of compelling mechanics or story limited the game’s organic player acquisition potential.

Still, the game’s economy grew rapidly throughout 2021, in part due to the boost the pandemic gave to the broader crypto and gaming markets. In February 2022, the company announced that it had earned nearly $4 billion in lifetime revenue.

But in March 2022, a hack on the company’s servers drained $600 million from the game’s finances. We see this event and the resulting decline in abundance around Axie as the key factor behind the market’s decline in 2022.

Other top NFT games in operation include Immutable Pty. Ltd.’s trading card battler Gods Unchained, Dacoco GmbH’s space miner Alien Worlds and Dapper Labs Inc.’s cat breeding simulator Cryptokitties.

This analysis also includes NFT revenue driven by metaverse-like experiences such as Animoca Brands Ltd.’s The Sandbox and Decentraland’s Decentraland, which provide traditional gaming environments and mechanics in service of socializing and shopping. These games may grow into hubs of the eventual metaverse, but are now mostly niche curiosities for speculators.

We have identified 30 publishers covered by CapIQ with a strong operational or strategic focus on the NFT segment of the game. Together, these companies have raised $1.74 billion in investments since 2018. These funding rounds and minority stakes support enhancements, expansions and new projects focused on user acquisition.

Note that our analysis includes some companies with operational interests in NFTs that are not strictly related to gaming. Specifically, Yuga Labs Inc. is best known for its Bored Ape NFT images, and Dapper Labs is known for its collaboration with the NBA on Top Shot NFT collectibles.

Potential 2023 NFT game releases with broader appeal to average gamers include Yuga Labs’ Bored Apes-based game Otherside, ATMTA’s space exploration game Star Atlas, Ember Labs’ massively multiplayer online role-playing game The Walking Dead Empires, and sipher’s looter shooter. Cipher Odyssey.

Most of these publishers will start selling NFTs associated with their games as soon as possible, if they haven’t already, but the games themselves will arrive in various stages of completion with alpha and beta testing stages, limiting the market’s growth potential in the nearest time concept.

In the long term, it becomes increasingly likely that one or more games will find the right game to match the new commodity ownership model that NFTs convey. We see this move as potentially disruptive in the same way that gaming’s move toward in-game purchases with titles like Supercell Oy’s Clash of Clans and Riot Games Inc.’s League of Legends was last decade.

We estimate that as of the end of 2022, NFTs accounted for about 3% of the total in-game purchase market, and we expect that to grow to as much as 8% starting in 2026.

Should major publishers or platform holders embrace the market more fully in the next year or two, expect a more dramatic growth curve. If they still haven’t embraced it by the end of the forecast, expect a more modest growth curve.

The biggest challenge for the NFT market is the reluctance of major platform holders such as Apple Inc. and Sony Group Corp. to engage in crypto-related transactions. This effectively leaves PC gaming as the only real market opportunity. By itself, PC gaming accounted for only 19% of total video game content revenue in 2021.

Some mobile games available on Alphabet Inc.’s Google Play Store and Apple App Store can connect via a web browser to an aftermarket NFT ecosystem where goods can be traded and sold, but this two-step interface limits players’ engagement with NFT transactions. Examples of these types of games include NPLUS ENTERTAINMENT Pte. Ltd.’s League of Kingdoms and Animoca Brands’ Benji Bananas.

Publishers hope that the strength of the new mechanics and models will force the hands of the larger platform holders to support NFT games, but this thinking presents something of a chicken-or-egg conundrum: How will new mechanics gain a foothold if they’re not available where consumers play?

We expect any shift in policy among the likes of Sony and Apple to occur cautiously and perhaps only at the behest of an internally developed or sponsored project.

However, we are not aware of any platform holders that have specific plans for the NFT gaming space in the near term. Furthermore, the major listed publishers have largely gone silent on NFT gaming after a handful of ill-fated experiments, such as Ubisoft Entertainment SA tying some weapons in Ghost Recon: Breakpoint to NFTs.

The biggest threat to NFT gambling is regulatory actions. Given the perceived risk of cryptocurrencies and the collapse of FTX Trading Ltd., governments around the world will be increasingly wary of allowing the average consumer to become more exposed to blockchain-related transactions.

We expect that some level of regulation will respond to the first waves of mass market NFT games that address some particularly predatory mechanics. This will mirror the way paid “loot boxes” containing randomized items were regulated in the early days of in-game transactions. Publishers eventually moved to more transparent “season pass” rewards, although some regulatory overhang remains, as evidenced by the FTC’s action against Epic Games Inc. in December 2022.

Technology is a regular feature of Kagan, a media research group within S&P Global Market Intelligence’s TMT offering, which provides exclusive research and commentary.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.