Token gesture: the convergence of NFTs and gambling

When Dave Roth snapped his four-year-old daughter smirking mischievously in front of the controlled burning of a house in North Carolina back in 2005, he probably had no clue it would become an internet meme dubbed ‘Disaster Girl’. Fast forward to late April 2021 and the girl in the image, Zoë Roth, now 21, sold the original at auction as an NFT, or non-fungible token, for a staggering $473,000. The transaction was just the latest in a growing list of early internet memes flogged as NFTs, from so-called Nyan Cat – a psychedelic GIF of a cartoon cat with a Pop-Tart for a body and a rainbow trailing behind – selling for around $590,000 to Twitter CEO Jack Dorsey achieving almost $3m (donated to charity) for his first ever tweet in March 2006: just setting up my twttr.

NFTs, or ‘nifties’ for short, create a digital certificate of ownership as the buyer receives a cryptographically unique token that proves who the one-of-a-kind digital original – be it art, a song, a video or whatever – belongs to. These non-interchangeable tokens have been around for a few years now, with an early example being the digital collectibles CryptoKitties in 2017 which almost brought the ethereum blockchain to a standstill such was their popularity. A similar collectable released in 2017 was CryptoPunks from Larva Labs. These are essentially crudely drawn, 24×24 pixel art images of heads with different hairstyles, skin colours, beards, glasses, cigarettes and other distinguishable features and accessories. Just 10,000 were ever minted and Stefan Kovach, a former PokerStars exec and now MD of consultancy ThinkChangers, owns one. His male ‘punk’ with its black hair, sideburns and earring is now his Twitter profile image.

“When the punks were issued, they were given away for free, which is quite extraordinary considering the value of them now,” says Kovach. Judging by the prices these collectables change hands for, Kovach is sitting on a digital asset that is probably currently worth somewhere in the high five-figure range. He has no interest in selling, though. For now, at least anyway. The more unique and desirable punk portraits can fetch extraordinary sums, as was the case when auction house Christie’s recently sold nine rare ones for almost $17m. Yes, you read that right. According to Larva Labs, the total value of all punk sales to date is more than half a billion dollars, while research by the University of Nicosia’s Institute for the Future has calculated the total market cap of all 10,000 punks stands at just shy of $2bn.

#AuctionUpdate 9 rare CryptoPunks from Larva Labs' own collection makes history realizing $16,962,500 pic.twitter.com/qsPs5nqVYY

— Christie's (@ChristiesInc) May 12, 2021

“In hindsight, I wish I’d picked up many more NFTs much earlier,” Kovach laments. “But I’m very lucky to own a CryptoPunk. I managed to get it relatively early, so it has increased quite a bit in terms of value, which I’m obviously happy about.” As well as CryptoPunks, it has been difficult to hard to avoid the mania around digital collectables in 2021 such has been the noise on social media. Perhaps partly driven by a surge in the value of cryptocurrencies as bitcoin touched an all-time high of almost $64,000 in April (the price has since fallen to under $40,000), this aspect of blockchain technology has exploded. When it first really hit the mainstream media was the interest in NBA’s Top Shot from Dapper Labs (the company behind CryptoKitties) whereby users can purchase video highlights. For example, a Steph Curry three-pointer or a Lebron James slam dunk. In fact, a dunk by James recently fetched $387,600 at auction, the highest amount so far.
Digitally native
To NFT sceptics, this is pure madness as anyone can search for and view the clip or image online. For NFT evangelists, it’s an asset they own and can sell in the future, much like physical art. What’s more, the original seller can stipulate through a smart contract on the blockchain that he or she receives royalties on future sales on platforms like Nifty Gateway, OpenSea and Rarible. “There is a generation who would value digital goods as highly, or maybe even higher, than physical goods,” suggests Lloyd Purser, COO for decentralised gaming provider Funfair Technologies. “And those are the youngest generations that have been used to playing games within game economies where digital goods have significant value.” Indeed, you could argue the popularity of loot boxes and skins betting in recent years underlines that principle.

How NFTs converge with online gambling, which is usually at the vanguard of new technologies, be it the internet or cryptocurrencies and blockchain, is less clear. DraftKings recently purchased CryptoPunk #1871 for just over $70,000-worth of ether and gave it away for first prize in a DFS Masters golf contest with a $50 entry fee. But could we see much deeper integrations than digital asset giveaways? “I think the gaming industry has, probably more than the gambling industry, embraced NFTs. The gambling industry should take note,” says Kovach. “In-game assets like swords and powers, so rather than have the game developer own those, if they’re an NFT I can own them. And if I own them, I can then sell them.

“What we’re beginning to see within the blockchain space is the ability to use those assets in an interoperable way. So, I can take them from one game into another game. Or I can use them within a metaverse. And I can take them between different games within that metaverse. The list goes on. I can own land or buildings, and there’s a trend at the moment called play-to-earn gaming whereby these NFTs, whether it’s land or in-game assets, mean I can actually earn money from them by the NFT interoperating with DeFi, or decentralised finance, and earning me passive interest on those assets.”

More practically, he sees gambling embracing the space by offering bonuses or money-can’t-buy access to different features or levels as NFTs. Or you could have a bet that becomes an NFT. “Then I’m able to trade that bet as an NFT on a peer-to-peer basis,” says Kovach. He is currently working with a client on an NFT hybrid poker game that will run dual chain, so on ethereum and also the Binance Smart Chain due to the high gas, or transaction fees, associated with ethereum. The product will include “beautifully created” playing cards and decks by different artists that will be released as “drops” or available to purchase. “We’ll be baking scarcity into those cards through attributes. The intention is that these are collectible items in their own right,” says Kovach.
A horse of a different colour
“It’s 1am. I am alone in a hotel in Miami racing digital horses. My colt Spicy Mayo has just had an amazing comeback. I’m having the time of my life.” That was a tweet on 3 April by Jonathan Bales, a well-known competitor in the DFS space who co-founded FantasyLabs. What he was referring to was Zed.run, a digital horseracing platform where you can own, trade and breed (yes, breed much like CryptoKitties, but more on that in a bit) thoroughbreds as NFTs on the ethereum blockchain. His tweet’s accompanying video of Spicy Mayo making a late surge for the line racked up 200,000 views and thousands of interactions. He later retweeted his original post by adding: “This is my excitement at winning $24. Imagine when there’s real money on the line.”

Launched in 2019 by Australian studio Virtually Human, Zed Run has been “blowing up” of late, says Rahul Sood, an early investor in the product and the founder of esports bookmaker Unikrn. “It’s had hockey-stick growth in the last three months. It’s crazy,” he tells EGR Technology from Seattle. Visually, Zed Run doesn’t aim to replicate the realistic virtual horseracing you’d find on bookmakers’ sites, nor the Japanese horseracing video games series G1 Jockey from yesteryear. Instead, the protagonists are brightly coloured and angular ‘horses’ galloping in a neon-drenched environment surrounded by futuristic cityscapes. It’s certainly an eye-catching spectacle. “These horses look like digital beasts,” says Sood. “They are not trying to make them look realistic with their manes flowing; they tried to make them polygonic, futuristic digital thoroughbreds.”

PREAKNESS IS MY WEAKNESS
Let's go!! Less than 2 days to join the live auction on now https://t.co/kVQ7JVV9vT
This is your chance to own a piece of @PreaknessStakes history! #preakenessstakesnft #auction #zedrun #art pic.twitter.com/y7Lz8rxGiB

— ZED RUN (@zed_run) May 14, 2021

While owners can enter their horses in races to compete for modest prize pools, what makes Zed Run interesting is the whole industry that has sprung up around buying, selling (one recently sold for $125,000, while the recent TERA drop resulted in sales worth $18m to 2,400 buyers) and breeding of these virtual steeds. How breeding works is basically this: there will be no more than 38,000 genesis horses and there are four blood lines – Nakamoto (the rarest as a maximum of 2,000 will ever be created), Szabo, Finney and Buterin, which are all named after famous people in the world of crypto. Certain bloodlines are linked to better performance. Part of the gamble is breeding two horses and hoping you hit the jackpot and they produce a star thoroughbred based on the male and female horses’ attributes.

If you own a male horse, you set the stud fee. Sood explains: “Let’s say I own a Z1 Nakamoto and it’s a prized horse. I might set the price at $500 or $1,000 per stud fee and my horse can breed eight times a month. If you own a female horse, your horse can breed twice a month, but you get the offspring and you get to name the horse. There are people who just buy and trade horses, and there are people who full-time breed now,” Sood adds. “That’s all they do. They have a formula for breeding, and they want to breed the best racehorses. There are people who just race horses or race horses for other people. Eventually there will be those who own tracks and bring in sponsors.”
Beyond the hype
The way the NFT craze has exploded of late has got many asking if this is one big bubble destined to pop much like the initial coin offering (ICO) frenzy a few years back. Some go as far to accuse these large NFT trades of being a potential vehicle for money-laundering. NFT art, though, continues to be especially frothy despite the concerns about this being a bubble. Auction house Christie’s sold a piece of art as an NFT by artist Mike Winkelmann, known as Beeple, for $69,346,250 in March. It put him among the top three most valuable living artists, Christie’s said. And, in April, a single grey pixel by digital artist Pak went for $1.3m.

“We are 100% convinced that NFTs will have significant value in the future,” Purser says. “What we are seeing right now is a bubble and that is normal in any phase of technology.” There is one aspect that he believes needs to be solved, however: “There are some fundamental problems that the NFT space needs to tackle, mainly around this idea of true ownership. If you spend $60m on a piece of art you don’t want it sitting on someone else’s server, but your average Joe doesn’t have an Amazon AWS account.”

This aside, Mikael Pawlo, co-founder of online casino Mr Green and now chairman of yet-to-launch NFT start-up Nifty Ventures, has no doubt this exploding sector has a sustainable future. “NFTs of today could be compared to angel investing in culture,” he says. “Sure, there will be both blow-ups and frauds, but some things will become very valuable. Also, the technology is solid and both digital art and crypto provenance are here to stay.” For Kovach, the concept is straightforward and extremely compelling: “In its simplest form, it is the ability to own a digital asset, and hold that asset. Why is that important? If you truly own it, you can do with it what you want and you’re able to sell it.”

2017

Year CryptoKitties launched and almost brought the ethereum blockchain to a standstill

10,000

Total number of 24×24 pixel CryptoPunks that were ever minted by Larva Labs

$70,000

The amount DraftKings roughly paid in ether for a CryptoPunk given away in a DFS golf contest

38,000

Maximum number of genesis horses there will ever be on NFT horseracing platform Zed.run

$69,346,250

Amount paid for a piece of digital art by Beeple, putting him among the top three most valuable living artists