A chat about FTX's gaming ambitions with the head of its $2 billion VC fund
FTX's unexpected push into gaming came at a time when even established game publishers were struggling to introduce crypto and NFTs. I sat down with FTX's VC lead Amy Wu to discuss how the new FTX Gaming division plans to overcome this ongoing resistance.
When FTX announced that it would be launching an FTX Gaming division, we questioned what may have driven a company that specializes in cryptocurrency and NFTs to attempt entry into a market that had shown widespread hostility to both. In response, FTX reached out and offered to organize a chat with Amy Wu, the head of FTX's push into gaming. I sat down for a conversation with the recently appointed VC lead to talk about FTX's hopes for this new venture, the reasoning behind its venture into gaming, and how it plans to overcome the obstacles its ambitions may face.
Wu came to FTX from Lightspeed, a major investor in FTX, where she served as a partner and the company's top VC focused on gaming. She described herself during our talk as a lifelong gamer, and someone that continues to be passionate about gaming.
While her personal passion for the media category certainly played an important part in Lightspeed's, and subsequently FTX's, respective initiatives, she and FTX's senior leadership agreed that gaming was simply too big and too attractive of a venue for FTX's technologies to be ignored, even if there were certain risks involved.
The new gaming division lead made my job easy as we began our chat, asking herself "So first, why gaming?" This is the question that sat foremost in my mind, and likely the minds of many readers. Why would a company that was recently valued at $32 billion and relies entirely on cryptocurrency and blockchain-related technologies want to take the risk of delving into gaming? Even game developers and publishers themselves, who should be highly adept at communicating with gamers, have run into severe headwinds during early attempts to launch NFT-based and crypto-based products.
The answer, it seems, is a combination of factors that makes Wu and FTX's leadership think they have the formula to convince the tech-savvy gaming community that crypto and NFTs are not the evil, scam-filled, game-ruining money grabs some have described them as, but simply a new direction for gaming technology that they could ultimately come to enjoy.
If successful in this attempt to change gamers' hearts, FTX could tap into a market that Wu described as bigger than music and video combined. FTX wants to help customers of its new segment tap into the wallets of the 2 billion gamers that produced over $200 billion in revenues last year. It's not hard to see why such an untapped windfall of potential customers might drive the crypto exchange's acceptance of a little risk.
The VC sees it as ironic that gamers are, as a group, so technologically savvy, yet many are still, as she put it, "super anti-NFTs right now." It was clear to me during our talk that she is well aware of this obstacle. But, she also believes a path forward for crypto and NFT acceptance in the gaming community exists on a trail blazed by a far older gaming industry business model that had a similarly rough start: free-to-play games.
NFTs and crypto as the next evolution of free-to-play
The FTX Ventures lead had previously referenced free-to-play games as a sort of inspiration when speaking with other media outlets. Her commentary on that game format was particularly important due to its sharing a similar early trajectory to where crypto and NFTs currently find themselves.
When games using the free-to-play model began launching over a decade ago, they were often seen as low-quality money grabs, poorly-made titles that would nickel-and-dime their players by requiring them to open their wallets before allowing any real in-game progress. Free-to-play quickly became synonymous with "pay-to-win," a generally-despised business model that entices players into skipping the hard work and practice typically required to make progress within a game. Instead, this payment scheme replaces gameplay achievements with options like simply buying new progression levels, paying cash for better weapons, or plunking down more than other players to skip straight to the endgame.
For years, even free-to-play titles that strictly avoided pay-to-win mechanics were lumped in with their less scrupulous counterparts, earning a general disdain from the gaming community. Then, slowly, things started to change. Here and there, free-to-play games started gaining recognition as not only something that could be offered via non-predatory business models, but also as titles that were some of the best and most popular in their specific genres.
Blockbuster successes like League of Legends from Riot Games (a current advertising partner of FTX), Epic Games' Fortnite, and even Activision Blizzard's Call of Duty Battle Royale mode, Warzone, all began their life as, and remain, free-to-play games. What was once a dirty word in the gaming industry had now become the vehicle driving some of the most played titles in the world.
This transition was a long and complicated one, but it primarily focused on one thing: leaving gameplay alone. Each of these tiles, and similarly successful free-to-play offerings, tend to revolve around providing a high-quality base game for free, while relying on the sale of completely optional in-game items to generate revenue. The important factor here is that those items have no effect whatsoever on the actual gameplay. These cosmetic items can be skins for in-game characters or weapons, sprays the player can apply to in-game terrain, player portraits for the user's profile, background graphics, particle effects, cinematic intros of their "play of the game" moments, and more.
The forms these cosmetic offerings take are diverse, but they all share the same benefit of being an attractive way for players to personalize their play experiences, while also never providing an advantage to paying customers that isn't equally available to players that haven't spent a single cent.
Wu and FTX see NFTs and crypto as not only being able to offer similar benefits, but as what the VC called "probably the next evolution of free-to-play." She firmly believes that NFTs and other blockchain-based digital items can, like current digital cosmetics, be offered in ways that are both attractive and beneficial to gamers.
Wu blames the existing backlash against NFTs and crypto-based products on them having been historically offered to gamers in ways that she said "don't improve the gaming experience," or "very predatorial ways."
FTX's leadership, including Amy Wu herself, appears to believe the best way to avoid these types of predatory offerings is to rely on the experience of the game companies they hope to serve. The exec pointed to the many game publishers that are already operating successful digital shops for in-game items. FTX doesn't want to sell them a user manual on how they should introduce NFTs to their players. Instead, it wants to provide a "crypto-as-a-service" platform that publishers can use as a "whitelabel" solution to introduce NFT and crypto-based products via storefronts of their own creation.
Wu envisions a "crawl, walk, run" approach among FTX's potential gaming customers, with the crawl phase defining their initial research into Web3 technologies, the walk phase outlining the introduction of simple NFTs and crypto-based offerings, and the run phase seeing them introducing their own blockchain tokens to power the sale of fungible and non-fungible digital goods. Wu sees the launch of tokenized, in-game items as an important final step into the arena of blockchain-based digital offerings, a step that she believes could result in "a world of pain" for publishers that attempt it without proper guidance.
Unsurprisingly, she and FTX believe it's much safer for the companies attempting to make this leap to rely on a ready-made technology platform and advisory service exactly like the one FTX Gaming plans to offer. This, according to Wu's comments, creates an ideal combination of a ready-made technology solution with gaming studios' own experience at managing and promoting digital economies in ways that are profitable and fair to customers.
As a veteran of both the crypto and gaming industries, Wu is clearly aware that, even with FTX's guidance, gaming industry customers may face some headwinds. When I asked if the play-to-earn model of distributing NFTs and unique digital tokens for in-game achievements would run afoul of the same regulators that took issue with the gambling aspects of in-game lootboxes, she agreed that it could be an issue given the "similar mechanics" at play.
Still, one of the tentpoles of FTX gaming's offerings, as Wu described them, is to not only help customers understand "how they should do what they want to do" in blockchain, but also how to "do it compliantly." She sees FTX as being able to advise customers on "the whole stack." The only aspect of the business FTX currently has no interest in providing is "the blockchain itself," Wu said.
The importance of choosing the right blockchain partners
While FTX intends to provide the platform and advice gaming industry customers need to successfully venture into crypto, it hopes those same companies will come to rely on Solana and Polygon as two of their blockchains of choice.
In fact, Amy Wu came to FTX as part of a joint venture between it, Lightspeed, and Solana, in which the trio jointly invested $100 million to create a "Web3.0 gaming initiative" late last year. FTX's participation in that initiative was later rolled into FTX Gaming when it was founded a few months later.
What makes blockchains like Polygon and Solana special, in FTX's opinion, is their reliance on "proof of stake" technology. Unlike the "proof of work" model used by cryptocurrencies like Bitcoin and its derivatives, proof of stake blockchains do not require miners to generate their registered tokens. Instead, those tokens are generated when they are purchased, and validated through digital means that don't require the GPU-based networks that proof of work relies on.
While there is still hardware and energy needed to power validation, the level of required consumption is much lower. This significantly curtails one of the main drawbacks of blockchain-based technology that has put it squarely in the crosshairs of many environmentalists and regulators: its rampant, inefficient power usage. Likewise, the reliance on off-the-shelf GPUs that has irked so many gamers isn't really a factor for proof of stake blockchains like Solana and Polygon, as they're not needed in anywhere near the same volume.
Amy Wu told me that FTX wants to work with "blockchains without a negative environmental footprint." This is why the company chose Solana and Polygon and their respective proof of stake models.
With all of that said, FTX apparently does plan to remain at least somewhat agnostic when it comes to its customers' choice in blockchains. The VC pointed to the popular Ethereum cryptocurrency as an example of what it may continue to support. She specifically referenced Ethereum due to what she sees as its ongoing dominance among the game development community, despite a continued reliance on the energy-hungry proof of work model.
Wu hopes this won't be an issue for long thanks to Ethereum's long-simmering transition to its 2.0 model, which instead relies on proof of stake technology. This transition was originally expected all the way back in 2019, but has been pushed back several times. Its latest intended launch is scheduled for June 2022. If it finally happens, it could go a long way toward alleviating the environmental concerns over Ethereum.
What the future holds for FTX gaming
According to Wu, FTX gaming is talking to "most of the top gaming companies in the world." While she could not reveal which of these companies we might soon see as customers, she did tell me that FTX had "led five deals in gaming so far." These agreements, the exec noted, would be revealed over "the next number of weeks."
The first of these has already been made public since our interview took place. FTX Gaming is now partnering with IndiGG to help it "incubate and drive the adoption of Web3 gaming in India." The deal follows the planned business model Wu described during our chat, with FTX supplying "full stack infrastructure technology" in order to help IndiGG "integrate digital assets into their products in a compliant environment." It will also serve as an advisor and provide funding from its FTX Ventures coffers.
This is the first deal surrounding what FTX likely hopes will be many usages of its promised "whitelabel tech platform."
Looking deeper into the future, the head of FTX Gaming told me her company has further-reaching goals, ranging from "first-party content" to "gaming platforms," all of which she sees as being able to leverage FTX's "unique strength in networks."
Will they be able to convince gamers?
There's a fortune to be made if you can reliably predict the answer to this question. Of course, there's also a fortune to be lost if you get it wrong.
Once upon a time, many analysts would have told you any established gaming company would be mad to get into free-to-play games. Why would giants like Activision risk their necks on such a questionable business model? That should be left to obscure startups like Riot. We already covered how inaccurate those early prognostications turned out to be above.
While the headwinds show similar strength and characteristics to those free-to-play games faced, the outcry against NFTs and crypto feels more widespread to many. Employees of many game companies are regularly piping up to show their displeasure at their employers' various attempts to enter the blockchain world. Accusations of scams, grifts, and schemes abound. Gaming giants like Steam have outright banned games that rely on NFTs and crypto being sold on its platform. And, as we noted in our initial coverage of FTX gaming, several companies that attempted to launch NFTs have been burned by consumer backlash and forced to backpedal.
But, what if FTX really does manage to allay the basic, central fears surrounding blockchain-based technology being applied to games, in much the same way early pioneers did for the free-to-play model? If you take away the concerns over environmental impact, the worries about low-quality money grabs, and the reliance on image file NFTs that cost tens of thousands of dollars but can be copied by anyone that right clicks on them, what's left?
Amy Wu and FTX Gaming hope what's left, once its whitelabel service takes care of all of those obstacles, will be a burgeoning new market in which gamers can earn or buy individualized and one-of-a-kind digital items that provide the same value and pride (or perhaps more, given their relative rarity) as any existing Fortnite Skin or League or Call of Duty: Warzone cosmetic item.
Of course, there remain numerous external and internal obstacles, ranging from dubious regulators, to the technological limitations of producing so many unique cosmetic items, to a simple lack of understanding among potential customers that not all blockchains are created equally. If FTX Gaming, or one of its competitors in the space, can successfully navigate all of these and convince the gaming public that NFTs and crypto are, in fact, not the enemy, I may be writing a similar article to this one in another ten years. Except, at that point, I'll be covering how the next wave of gaming monetization is struggling to revolutionize the gaming business in the same way the widespread integration of blockchain tech did.