For venture capitalist William Quigley, the future of the economy is digital items.  

"The majority of the world's wealth will be non-physical in 10 years," he said. "And the way that wealth will be protected, transferred, authenticated, borrowed, lent, and monetized will be through NFTs [non-fungible tokens]." 

This may sound implausible at a time when physical stuff like gasoline, baby formula, and semiconductors are more consequential than ever to the health of the economy, but Quigley isn't alone in thinking that the digital economy is still ascendent. 

Mark Zuckerberg last year announced that Meta, formerly known as Facebook, was going all-in on monetizing virtual reality (now called the metaverse). Brands like Heineken and Miller Lite opened virtual bars on popular metaverse platforms, and Nike released a set of virtual sneakers called  "Cryptokicks," one of which sold for $130,000. JPMorgan, meanwhile, predicted the metaverse will soon become a $1 trillion market. 

All of this hype has inspired much debate around the value of digital goods, but one industry has been dealing with this question for decades: video games. 

Once upon a time, most gamers bought a cartridge or a disc, and that was the last time they spent money on a game until they moved onto the next one. Now there are a number of transactions that can take place after the purchase of a game, from new downloadable content to special avatars, and not all of them are equally valued by players. 

Gamers have a name for digital items that serve no real purpose: horse armor. The term was inspired by the Xbox 360 fantasy RPG Elder Scrolls IV: Oblivion, which in 2006 allowed players to buy their in-game horse a suit of shiny gold armor for $2.50. 

At the time, it was unusual for game developers to charge real money for virtual, mostly decorative items, and gamers reacted poorly to being nickel and dimed.

Since then, mobile gaming has exploded, and microtransactions are a leading source of income for an industry that now rakes in $200 billion per year and has surpassed both music and movies in total revenue. 

Today, gaming is once again at the forefront of questions about digital value, as a new category of games based on the blockchain promises not only the ability to buy digital items but the opportunity for players to earn money themselves.

Blockchain or Web3 games, which incorporate cryptocurrencies or NFTs into their gameplay, have become a favorite of venture capitalists like Quigley. In the first quarter of 2022, 128 blockchain games raised $1.2 billion in capital, according to a report from DrakeStar Partners, making up a third of all private investment in the sector and even outpacing funding for mobile games. 

"I think the reality is that this is the inevitable direction of the industry," said Andrew Durgee, head of crypto and tokenization at Republic Crypto, an investing platform that is bullish about blockchain gaming. "Being extra careful not to activate any [non-disclosure agreements], I'll simply say that very large publishers will be heavily involved in the space within the year. That's not 12 months. That's like six months." 

A handful of major game companies have already taken the plunge. Square Enix, the maker of Final Fantasy and Kingdom Hearts, sold off its iconic Tomb Raider property in May for $300 million to raise funds for new investments in blockchain, AI, and the cloud. Grand Theft Auto publisher Take-Two Interactive, meanwhile, signaled its interest in crypto earlier this year with the acquisition of Zynga Games, which had already hired a vice president of blockchain gaming and partnered with crypto software firm Forte. 

Against this backdrop of looming mainstream adoption, however, the existing blockchain gaming space has struggled to find the right balance between gameplay, crypto-economics, and sustainable business models. Back in March, the most popular blockchain game, Axie Infinity, lost $600 million to a North Korea-led cyberattack that took advantage of game developer Sky Mavis' weak security protocols. Axie Infinity's in-game economy has also experienced several crashes, forcing Sky Mavis to intervene (central bank-style) to prop up its digital currencies. 

"The problem with Axie Infinity's model specifically was that it wasn't monetizing a base number of users," said Lars A. Doucet, co-founder of independent game studio Level Up Labs and an outspoken critic of blockchain gaming. "It was monetizing growth itself. When it's going up, you're making lots of money. But if it flatlines, the whole revenue model stops."

According to this critique, blockchain gaming is similar to large swaths of the decentralized finance (defi) space, where companies rely on continual growth to deliver outsized returns to those who invest early but collapse when growth slows down. Axie Infinity, for example, has touted the ability of players in some countries to make more money playing their game than they would from the local minimum wage, though more recent research shows in-game earnings have plummeted. 

With the high-profile hacks and in-game economic crashes around Axie Infinity, Web3 game developers tend to be pretty open about their business's failures. Of course, they also tend to emphasize how their particular model is different. 

For critics, Axie Infinity's problems are an indictment of the entire concept of blockchain gaming, which they say is needlessly financializing video games. 

For the proponents of the industry, these are just bumps on the road to mainstream adoption of a model that could eventually inform the even more ambitious project of digitizing the economy through innovations in the metaverse and augmented reality.  

"If I had to summarize my worldview in one sentence, I'd say we're in the very, very late stages of the earliest innings of this game," said Richard Kim, general partner at Galaxy Interactive, a division of venture capital firm Galaxy Digital that has invested in over 100 companies in what it calls the "interactive gaming vertical." 

If these are the early innings for blockchain gaming, then the nearly three-decade-long history of video game economies and marketplaces must have been the pre-game. 

"One thing to note is that this is not new," said Alex Miller, CEO of blockchain developer Hiro, who has tracked the rise of blockchain gaming. "When I was in college, one of my roommates sold his World of Warcraft character for thousands of dollars. As soon as you could save attributes around a character, game economies existed."

Miller was referring to the unofficial market that emerged around Blizzard's wildly popular massively multiplayer online (MMO) game. From the mid-2000s, people all over the world started racking up "gold" by grinding through levels — sometimes under extremely exploitative working conditions — and then selling that in-game currency to other players in exchange for real money. 

Versions of this kind of black or gray market have existed as far back as the 1990s, with online games such as Ultima and Everquest being early examples. It wasn't until later that game developers themselves tried getting in on the action. 

In 2012, Blizzard experimented with allowing players to use real money in Diablo III's popular auction house for rare weapons and armor. The company made the decision in an effort to meet players where they were, and preempt any private marketeers. But the system produced rampant speculation and volatility, and effectively broke the core gameplay mechanics, leading Blizzard to quickly reverse course.   

The episode is an example of the uneasy relationship that game developers have with the private marketplaces that sometimes grow organically around their games. 

Quigley saw this tension first-hand, as a pioneer in the market for “skins,” or purely cosmetic in-game items that change a character's appearance. 

"The skins were the first financialization of consumer products that I saw," he said. "Not a lot of people know this, but a lot of people in crypto came from that industry."

OPSkins, a platform for trading character skins that became popular with players of the first-person shooter Counter-Strike: Global Offensive, was one example. The game's developer, Valve, offered its own trading platform for skins and other in-game items, but it did not allow the use of real money. In 2018, Valve issued a cease and desist order to OPSkins, and the trading platform shut down for good soon after.  

"The video game companies hated it, and they hate it to this day," said Quigley, who invested in and eventually acquired OPSkins. He added that pushback from game companies was why he got out of video game skins and started investing in NFTs. 

Quigley also identified what would become of one of the central arguments of proponents of blockchain gaming: that if players are going to put all this time and money into video games, they should get something in return for their efforts. 

"Even though the global video game industry generates $200 billion dollars every year, mostly on video game virtual items, they do not like anyone to own them, to trade them, to profit from them," he said. "My partners and I invented that concept."

Whoever invented the concept, Quigley did prove prophetic. Soon blockchain gaming developers would take this idea of ownership in gaming, and run with it.