The first generation of blockchain games typically required players to own one or more NFTs— a costly investment which creates a high barrier to entry for newcomers to try out the game. To solve this problem, many games have created scholarship programs like YGG, OLA GG or Merit Circle where players can lend their NFTs to each other so anyone can enjoy the game without an initial investment. This trend along with limited “free to play” modes are being adopted by most if not all games in the space.
Put simply, the basic idea of NFT rentals is that NFT owners can rent out their digital assets for temporary use for various purposes. This is a relatively new concept, but as it continues to gain traction within NFT communities, it has the potential to significantly impact the broader Web3 landscape.
Current approaches to NFT Rentals
There are currently four approaches to NFT Rental, each with it’s limitations and risks:
Wrapped NFTs
Instead of giving the original asset to the borrower, the rental protocol mints an expirable version of the NFT (which contains all of the unique features and metadata of the original). This wrapped version of the NFT is then given to the borrower.
The protocol secures the original NFT which is returned to the owner after the agreed-upon rental contract has expired. Now, token holders can enjoy the benefits of renting out assets that they aren’t currently using, but that they would not like to sell.
The problem with this approach: the borrower is not actually using the NFT but a wrapped version, which is not elegible for Airdrops. Also, as the borrower is not holding the real asset, there is a risk that other protocols and systems won’t consider it valid (ie: game server authentication scheme)
Registry smart contracts
This approach requires the borrower an up-front payment that enables NFT rentals without collateral. The NFT is put into escrow in a registry smart contract. The smart contract assigns a use right to the renter when the NFT is rented. The project that wants to make use of collateral-free renting must check the registry contract to see if someone is renting an NFT, therefore this solution requires integration between the rental protocol project smart contract and the client project.
The problem with this approach: the borrower has to pay all the rent upfront, putting a friction to the rent.
Collateralized Rentals
In this method, the owner will transfer ownership of the NFT to the user with some collateral or conditions to ensure that the renter will return ownership after the rental period is complete. Once the NFT is rented out, the original owner has no control over it, which creates many potential risks:
- A collateral is a huge barrier for people to rent because rent often makes sense due to a lack of funds
- If the value of the NFT changes and becomes higher than the collateral, the lender is at risk
- The renter can use the NFT as collateral for a loan without asking permission from the lender
Develop smart contracts in-house
The project can develop its own smart contracts and control the rental experience end to end. This is the case of Splinterlands, using the Hive blockchain. The benefit of this approach, is that you can control the rules and adjust them as you go.
The problem with this approach is that you need to develop all the rental solution in-house, which can be prohibitive to most projects.
The brand new ERC-4907 NFT Rental Standard passed the final review by the Ethereum development team on June 28, 2022, and became the 30th ERC standard. Now, Rentable NFTs are made possible by the new Ethereum token Standard ERC-4907.
ERC-4907, allows an NFT owner to permit another individual to use their NFT for a designated period of time. After that time ends, the user no longer has access to the NFT.
These are some benefits that this ERC will bring to Web3 in general:
Clear Rights Assignment
With Dual “owner” and “user” roles, it becomes significantly easier to manage what lenders and borrowers can and cannot do with the NFT (in other words, their rights). Additionally, owners can control who the user is and it’s easy for other projects to assign their own rights to either the owners or the users.
Simple On-chain Time Management
Once a rental period is over, the user role needs to be reset and the “user” has to lose access to the right to use the NFT. This is usually accomplished with a second on-chain transaction but that is gas inefficient and can lead to complications because it’s imprecise. With the expires function, there is no need for another transaction because the “user” is invalidated automatically after the duration is over.
Easy Third-Party Integration
In the spirit of permissionless interoperability, this standard makes it easier for third-party protocols to manage NFT usage rights without permission from the NFT issuer or the NFT application. Once a project has adopted the additional user role and expires, any other project can directly interact with these features and implement their own type of transaction. For example, a PFP NFT using this standard can be integrated into both a rental platform where users can rent the NFT for 30 days AND, at the same time, a mortgage platform where users can use the NFT while eventually buying ownership of the NFT with installment payments. This would all be done without needing the permission of the original PFP project.
Potential benefits for game developers
The gaming industry is projected to surpass a global audience of 3 billion and a size of $103.5 Bn in revenues according to NewZoo.
Web 3.0 will revolutionize gaming
The gaming industry hasn’t really allowed users to own pieces of the games they love. Since it’s inception, it’s been this way and it has worked fine. Gamers download and buy games or just buy in-game virtual goods. Game developers or publishers create and run live games with little input from the users, since there is no shared ownership.
However, when Crypto Kitties went live and users discovered they could own, breed and sell their cats, the whole gaming industry changed: for the first time, end users could own pieces of the product and decide if they wanted to just have fun and play or if they also would start a breeding operation and make a profit. This game was built on top of Ethereum, clogging it’s blockchain, even though its user base was small. The cost of playing the game has risen significantly due to the rapid rise of Ether price in the third stage. Ether price increased from US $451 on December 10, 2017, to US $1,322 on January 10, 2018 (see Figure 13), resulting in a significant increase in the cost of playing the game, raising the bars for new players entering the game.
To all of us involved in the gaming industry, it was evident that this new technology would change some fundamental things:
In order to open the gates to many more users, I believe the whole gaming industry should be obsessed with presenting Web3 Games to non-technical users in a friendly and frictionless way that competes with the Free To Play model. The barrier of entry must be lowered with easier to use tools and with low (or non) cost to try new games, and NFT rentals can help a lot to achieve that goal.
NFT Renting can help reduce friction to try games
The Free To Play (F2P) refers to the business model for online games in which the game designers do not charge the user or player in order to join the game. Instead, they hope to bring in revenue from advertisements or in-game sales, such as payment for upgrades, special abilities, special items, and expansion packs.
The reality is, if a game is successful, only up to 2% of the users will become paying customers. And in order to make the numbers work, there needs to be a high volume of new users each day and a high volume of Daily Active Users (DAUs) engaged with the game.
With NFTs required to start playing new games, onboarding new users in the thousands is just impossible, because users need to try games and feel engaged before committing to playing them long term and become regular paying users.
This is why I personally believe NFT Rentals and NFT Mortgages can help open up the gates to new audiences joining Web3 Games.
Potential use cases for Gamers
There are many situations in games, in which having a temporary asset can make the difference. Below are some examples of these.
NFT Rentals to participate in special in-game Events
Special events are very common in the gaming industry. They are open for a short period of time in the days range, they are highly competitive and give away important rewards to active participants.
Why not join these events using NFTs rented specifically to participate?
NFT Rentals to level up or evolve other owned NFTs
RPGs are all about owning characters that interact with each other and work together in combat.
A very common feature to see in the game design of an RPG is evolution: taking your character to the next level by sacrificing other characters and using materials provided by the game or acquired with hard currency (or tokens in web3 games).
A way of evolving characters faster could be to rent NFTs that produce required materials, combine them with other NFTs and resources and finally perform the evolution.
NFT Rentals to achieve special Missions
Missions are used in almost any modern game loop to generate user engagement and create a habit of logging into the game daily. Missions guide users during their game sessions and are a popular tool used by game designers to trigger behaviors towards monetization and retention.
For users, completing Missions can be a fun experience and can also become a functional way of getting precious resources to continue progressing in the game story and the game loop.
If a user feels stuck or just doesn’t have the assets to finish them, Renting powerful NFTs or NFTs that create synergies with his/her owned NFTs make complete sense and I believe this is a behavior we’ll see.
NFT Rentals to increase the chances of winning a PvP tournament
Live tournaments are all about competition. They are present in eSports but also in casual games.
Why not rent powerful NFTs to compete in live tournaments to have an edge over other participants?
I personally believe all games with highly competitive mechanics will benefits from NFT Rentals and should actually be designed with this possibility as part of the User Experience and Game Design.
Conclusion
This is an exciting moment of the crypto and NFTs industry. The digitization of assets is a revolution in how ownership is defined. The ERC-4907 standard eliminates the need for collateral in lending and borrowing NFTs. If it is widely adopted as the standard for NFT creation and programming, it will unlock safer and more lucrative possibilities for NFT owners, buyers, marketplaces, artists.
However, the ERC-4907 standard has not yet been deployed by any projects. We’ll have to wait and see how effective it is and if this innovation can move us closer to a wider adoption of Web3 Games.
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