Tokenization in the eSports Industry
When it comes to the application of blockchain technology, it’s never a matter of if, but when. If you look at the inroads that blockchain has created over the past few years, there is one area that has been overshadowed by big industries: the rapidly evolving esports market.
Many industries can benefit from the applications of blockchain technology. A potential market that can harness the benefits of blockchain is the esports market. eSports stands for ‘electronic sports,’ referring to competitive video-gaming where players compete against each other to win prizes. The most popular esports game is League of Legends, which has approximately 67 million active monthly players.
How big is the esports market?
The esports market is undergoing tremendous growth. According to a Newzoo report, the esports industry is projected to bring in US$1.15 billion of revenue in 2019, marking a 26.7% increase compared to 2018. This growth comes as no surprise as 29% of the industry’s fanbase of 300 million people became involved in the past year, and 84% in the past three years.
With the number of fans growing exponentially year-on-year, the community is set to take the sporting world by storm in the coming years. eSports competitions are already offering prize pools exceeding that of traditional sports. For instance, the 2018 prize pool for esports was $24.7 million, compared to $20 million for the Confederations Cup and $11 million for the Golf Masters.
Many investors are taking note of the industry’s skyrocketing growth, and most choose to get a piece of the pie by investing in teams. In October 2018, Michael Jordan invested $26 million into aXiomatic Gaming, the parent company of Team Liquid. Team Liquid is a leading worldwide esports organization, whose players compete in StarCraft 2, League of Legends, Dota 2, and more. Competing against Team Liquid in the League of Legends LCS Summer 2019 tournament is Team 100 Thieves, the esports team owned by Grammy-winning artist, Drake.
The esports industry in Hong Kong and China have also experienced growth, with around 300,000 active gamers. Institutions from varying industries have been getting involved. For instance, the Emperor Group has invested in G-Rex. At the moment, G-Rex is focused on League of Legends, which is by far the most popular esports game in Hong Kong.
How do esports teams make money?
Let’s take a look at the revenue model of esports teams:
Sponsorships: Around 80% of an esports team’s revenue comes from sponsorship deals requiring them to advertise on player jerseys, digital media, and gaming consoles. Players also feature products on their Twitch and YouTube streams as part of sponsorship contracts. For instance, top energy drink brands like Monster Energy, and food delivery companies like Uber Eats have used Tyler “Ninja” Blevins, a famous Fortnite player on Twitch, to sell their services.
Broadcast rights: Leagues sign contracts with esports teams, which often include agreements to share media rights. Esports broadcasting revenue comes mainly from online streaming platforms such as Twitch and TV networks. In 2018, ESPN announced a deal with Riot Games to broadcast League of Legends and Twitch reportedly paid the Overwatch League US$90 million for broadcast rights.
Prize money: This usually makes up a small portion of the overall revenue. However, successful teams like Team Liquid have earned over $18 million in prize money.
Merchandise: Minor portion of the overall revenue.
Sponsorships dominate the revenue model. However, the best sponsorship deals are awarded to the best-performing esports teams. This system means that if a second-tier team gets promoted to a popular league, it could earn around five to ten times more sponsorship revenue in the future. Furthermore, as esports continues to attract a more massive fanbase, esports teams have become assets that many investors want to own.
So, what’s the problem?
Although esports teams are assets that many want to own, few have access to this asset class. The problem is that esports teams are illiquid assets, which means they cannot be easily traded. Even if the value of the team rises, owners may not be able to sell their stake due to lack of potential buyers. Many investors are interested, but they cannot meet the minimum investment amount or cannot afford the risk exposure. Most of the times, the owner must offer illiquidity discounts to attract buyers.
Additionally, the online esports community also faces challenges where earnings are concerned. Since it is an infant industry with lack of proper regulation and systems, there is a lack of transparency in the distribution of prize funds, difficulty in withdrawing funds, and many fraudulent third-party services that scam online players.
Tokenization and blockchain technology
The problems mentioned above can be solved by integrating blockchain technology into the esports ecosystem. One of the main use-cases of blockchain technology is tokenization, which refers to the process by which tokens on a blockchain can represent assets.
Tokenizing esports teams is a great opportunity, as it permits fractional ownership of a team, lowering the minimum investment amount in the process. Fractionalization initiates a greater influx of investment as smaller businesses and investors can access the market, making esports a more liquid asset-class. Even fans can own utility tokens of their favorite esports teams, which entitles them to voting rights, opportunities to meet their favorite player, priority status when it comes to purchasing tickets for events, access to exclusive merchandise, and more. Fan investors would undoubtedly feel a closer connection to their favorite teams.
Shifting ownership rights onto the blockchain allows for an immutable record of ownership. There is a record in the ledger supporting every fact, and it is tamper-resistant. The ledger has applications in live and online events, which include recording the transaction process, matching the teams to compete with each other, recording the scores of each team, and allocating the prizes. All the procedures are transparent, and the database can be monitored by everyone, promoting security in the entire ecosystem.
Automated Compliance is another advantage, which encodes compliance laws, such as anti-money laundering, know your customer, and securities laws, in each jurisdiction to save time and cost.
One of the most significant opportunities from tokenization is reducing the cost of paperwork. Currently, transferring ownership would involve lawyers and company secretaries to handle the paperwork of that transaction. Tokenization would automate the transfer process, which will streamline the process.
With the help of blockchain, the esports industry will be more accessible and transparent to investors, players, and fans. In other words, tokenization will promote a more level playing field.
About the Author
Adrian is the co-founder and CEO of Liquefy, a venture-backed security token issuance platform. He is also a trainer at the Hong Kong Securities and Investment Institute, and a columnist at the South China Morning Post. Adrian has been a commentator on digital assets for major international media such as the Wall Street Journal and CNN. Before joining the blockchain space, Adrian worked at BlackRock Asset Management.