Since the term 'DeFi' was coined and spread all over the Internet, there has been an ongoing trend of 'Fi' things - SocialFi, GameFi, and NFTFi. Some of them may not make much sense at first glance, but put under scrutiny and cross-referenced with similar cases, you may start to discover new opportunities. One such example is NFTFi.
What are CS skins?#
We're gonna talk about NFTFi, don't worry. But to do that, we need to first take a look at something that was created a decade ago and has everything that you may ask for from an NFT - except that it's centralised - and more. You may also refer to this article of mine to get a lay of the land first (or you can keep reading 'cause I think I can do an even better job this time).
In short, CS skins are Counter Strike: Global Offensive's in-game cosmetic items that often come with a random-generated pattern (out of 1,000), float value (the amount of wear-and-tear on your skin, 14 figures after the decimal point), and wear positions. It is technically possible to have 2 identical skins without abusing anything or the intervention from Valve but the chance is infinitesimal. CS's cousin, Dota2 took a similar path but most of the skins are fungible, making it much less fun and profitable (some skins still dwarf the crypto market).
You can get CS skins via in-game drops or opening cases (which are also dropped in-game). To open cases, you'll have to buy case keys from Valve at $2.5 each. Skins come in several tiers with Consumer Grade being the lowest and Covert/Extraordinary the highest. Needless to say, higher-tier skins are rarer and generally more expensive. Valve also introduced an epoch-making feature called trade-up contracts. By putting 10 skins of the same tier (except the highest tier), you can turn them into 1 skin at 1 tier above. This would later be the anchor of the entire CS skin market.
Over the past decade, a somewhat well-developed but modest market formed around CS skins. It started with simple marketplaces where people post the skins they bought (and grew tired of in 24 hours) and look for something they think they wouldn't get tired of this time. It took people some time to agree on a currency - keys that were sold by Steam at a fixed price - before haggling backwards and forwards when trading two vastly different skins. Those days were primal. People get scammed every day (they still do but scammers are working harder and harder). You could trade your $1 skin all the way to a $100 knife in a week or two, with a lot of persuasion and pleading. You couldn't easily turn your skin to cash or vice versa without being scammed for lack of a trusted party.
Quick heads-up. These skins are considered in-game items and you can only 'trade' these via Steam trade offers - trading skins for skins. You can't send money or crypto in these trade offers so you'll either give the buyer your skin first and take a leap of faith or try to persuade the buyer to do the same. You can buy those at the Steam marketplace but you'll have to pay a 15% premium so it was soon abandoned by legitimate traders. People still buy and sell skins there but mostly to get more Steam wallet balance so they can buy games at a cheaper cost.
Skins were not studied down to the last pixel, either. There are patterns that most people prefer but not many traders were blessed with that knowledge and even fewer were willing to pay a premium for them. People traded up skins but mostly for fun. They did not quite understand (Technically, we still don't. There are 2 schools of thought in this field and since Valve never disclosed any technical detail about trade-up contracts they can only agree to disagree) how these contracts work. Most of the time, people were just glad they had something to play around with and willing to spend some money on it.
Then, centralized marketplaces like OPSkins emerged. They offer a platform with escrow services for both money and skins. People did not have to worry about scams (that much) at a 10% premium. It's still expensive but at least it's less than what Steam charged people. There was also a $400 price limit in the Steam marketplace. If you think your skin is worth more than that, you would have to take it elsewhere to sell. OPSkins didn't have that, and they took crypto!
People also had a deeper understanding of the whole skin mechanism with McSkillet and others as their guides. Trade-up contracts were no longer considered completely random and many skins were categorized down to different sub-groups. Valve even started doing this themselves with the Doppler series. It was in their code that the Doppler skins be divided into 7 sub-groups: Phase 1/2/3/4, Ruby, Sapphire, and Black Pearl. OPSkins never missed this trend. Their website soon supported looking up unique patterns and sub-groups.
But Valve was never happy about this. OPSkins had an army of bots as their warehouse for skins. A seller must first deposit (transfer) the skins before listing them. A buyer would also receive their purchase from OPSkins's bots, not the seller. Since these bots were just Steam accounts, Valve could ban them from trading permanently to remove this competitor. And so they did. OPSkins had to compensate their users with millions of dollars but they survived. People soon realised that bots were just an array of time bombs and the market was in dire need of a better, safer delivery system. It wasn't long before other people developed a system that tracks the trade offers between buyers and sellers and bypasses the warehouses completely. OPSkins later sank with their overgrown ambitions but that's another story entirely.
These skins were also widely used as chips on gambling sites and Valve worked very hard on cracking these sites, taking non-Valve marketplaces as collateral damage in the process. They eventually rooted out almost all gambling sites by introducing a 7-day trade lock on CS skins and later Dota2 skins, decimating (almost) the last drop of liquidity of these skins. This is not technically 'Fi' but gambling and crypto have always been almost inseparable.
Keep reading, I'm getting there#
ASMMs & skin pools#
These skins have their own version of AMMs but are completely centralised and do not need your liquidity. I remember seeing one of these trade bots on Reddit one day in 2015. It was a simple swap-bot that only accepted 'worthy' trades, i.e., trades that were profitable to them. It took 1 or 2 years before others realised this potential and deployed these bots at scale as various swap sites.
Founded in 2018, about the same time when Bancor introduced the first crypto liquidity pool, cs.money is now the most famous automated skins market maker (ASMM, I made this phrase up but it's as accurate as it gets). It used to be a place strictly for swapping skins but later they added support for cash/crypto deposits and withdrawals.
These ASMMs work like this: they have an army of bots (dangerous but not as dangerous as gambling sites and OPSkins bots since most trade offers are two-sided) as their pool. It's not technically a liquidity pool since you're just swapping one skin for another - no actual liquidity was provided. Some skins are easier to sell and relatively stable in price but they are still a long way from cash or stablecoins. Besides, these skins all belong to cs.money. You had to pay a ~3% fee (lower if you're willing to include their url in your various profile pages) for each trade and all proceeds go to cs.money.
These skins are also priced with the help of oracles. As I mentioned above, even though almost everyone despises Steam market for their 15% tax, people still buy and sell skins there. Thus, Steam market price at a certain discount became a major, sometimes the only price reference.
Rent & IL#
You can also put your skins out for other people to rent. Your renter would first need to deposit some equity (cash) as collateral, like when you take loans from most crypto lenders.
This mechanism may seem clever but depositing more than enough cash to buy something before renting it sounds stupid. Besides, skins' prices fluctuate, sometimes very violently. When the skin price hikes up exponentially, there's nothing stopping your tenant (for lack of a better word) from keeping that skin and even selling it for cash because as much as Valve's concerned, you've already given that skin to your tenant. Also, if the skin depreciates, you may wish to sell it to cut your loss but you can't just have it back at will. Doesn't this sound like CS's own version of impermanent loss?
How pricing works#
Remember I mentioned that trade-up contract is the anchor of the entire CS skin market? It sounds laughably simple but is incredibly powerful.
Trade-up contracts allow you to combine 10 skins of the same tier and turn them into 1 skin at 1 tier above. Skins are categorised into different collections and can only trade up to skins of the same collection. If you mix them up, for example, take 5 skins from two different collections, each with one possible outcome, you will have 50% chance to get either one of the expected outcomes.
As long as someone wants the highest tier skin, they will try to trade up to it. And as long as the price of the highest tier skin is set, the price of all other skins from that collection will be set, too . Take the most-known skin, AWP | Dragon Lore (Factory New), for example. It's priced at ~$14,000 at the moment. That means M4A1-S | Knight, the skin 1 tier below it from the same collection, will not be cheaper than $1,400 each even if no one wants to equip that skin or arbitrageurs will flock in. In fact, Knight is sold at ~$2,500 each because a). too many players desire that red dragon and b). it's a somewhat good-looking skin. Then, CZ75-Auto | Chalice, the skin 1 tier below Knight will not be cheaper than $250 for the same reason, and so on, so forth.
There are quite a few ugly skins - too ugly to even be desirable - in CS but with this mechanism, they will always be able to sell at a price they could never dream of.
Trade-up contracts can never be profitable for long. Arbitrageurs and people who believe in their luck cherry-pick their skins and carefully put them together for more expensive skins. They - people who frequently trade-up skins - are aptly called alchemists in Chinese and are one of the major driving forces in the CS skin market. (Other driving forces)
The skin ecosystem#
Everything - from trade-up contracts to skin exchanges, from ASMMs to renting sites - constitutes a lively but not yet widely known economic system. People get skins from in-game drops or opening cases. Most of the skins are Consumer/Industrial/Military Grade cheap skins but there are thousands of alchemists waiting to make a humble buck with these penny guns. They get traded up to higher tier skins and when the trade-up contract turned out profitable, some alchemists seek to pocket their profit immediately via ASMMs or buy orders on big CEXs. These ASMMs and CEXs would trade liquidity for profit, selling skins they acquired with a discount at a normal price. Buyers (average CS gamers) buy skins they seem to enjoy the look of and soon get tired of them. Then they would try to sell them, even at a discount.
This interlocked value chain is able to support the CS skin economy for almost a decade and both the market cap and per-skin value have gone up several times with no signs of stopping. The crown jewel of all CS skins - 'Jasmina Legend' - the only Factory New Karambit | Case Hardened pattern #387, with no gold spot on its play side, used to sell for around $15,000 in 2015. Last year, its owner got an offer of €1.2 million (approx. $1.5 million) in cash but declined that offer.
These skins are also a great way to store and transfer value. Although I refused to use the word 'liquidity' when talking about skin trades, some skins have grown into near-liquidity items that are very easy to sell and relatively stable in price. In theory, you can hodl 100 AK-47 | Point Disarray (Field Tested) at around Christmas and resell it 2 months later within an hour or two, possibly at a 10% profit. Also, trade offers can only be seen by those who knows its id (txn) so skins provide better anonynimity than many cryptos.
The problem#
As a relatively small market (thousands of times larger than any NFT collection but not enough to crack the top 30 on coinmarketcap) with an even smaller collector/whale market, CS skins are prone to price manipulation. In fact, the skins market have gone through waves of manipulations and kept a portion of increase each time to where it is today. Most early liquid items such as AK-47 | Redline (Field-Tested) have gone up by several folds over the years and the top-tier, ultra rare skins - such as the Jasmina Legend - by even more. And it withstood the pandemic! Even when the crypto market was suffering from the aftershock of the Black Thursday, the skin market remained stable and was even gathering momentum.
This turned out to be a problem because not many people (at least that I know of) have made much money despite its mouth-watering APY. This is because most buyers are casual CS players and they do not treat these skins as securities or NFTs. They see them as they are - a bunch of pixels that you'll eventually grow tired of very soon.
CS skins also attract a fair number of spectulators but none of them seemed to have done much research on these skins. Their decisions are easily swayed by self-proclaimed gurus and became sponsors of these gurus' bank account.
In short, most decisions in the CS skins markets are heavily influenced by emotions. A selected few that are either equipped with the knowledge of the market or blessed with enough capital (fortunately, it doesn't have to be much) rip off players who get tired of their skins soon (and aggressively seeking to resell them asap) as well as speculator-wanna-bes who would take anyone's financial advice as gospel.
So, what can NFTs learn from CS skins?#
It goes without saying that CS proved the viability and profitability of NFTs, and even paved some way for NFTs over the past decade. NFTs still have much to learn from CS skins. For starters:
Liquidity#
Many DeFi lending protocols doesn't make much sense since you're depositing what you already have to get a portion of that. Use cases are limited. Depositing illiquid items, on the other hand, seems much more plausible since you're essentially paying for the liquidity, like when you . That's why NFT lending protocols may one day prove more useful and beneficial than standard crypto lending protocols.
Granularity#
NFTs need more granularity. It's not just about high-end apes or low-end AI-generated PFPs. Collections need diversity. They need more meaningful, distinguishable traits to make some NFTs more valuable than the others. Some collections may also need to sacrifice themselves to become almost 'fungible' - near-liquid items. This will greatly boost trading and other activities within the NFT ecosystem.
NFTs also needs more substandial use cases than being PFPs. People may not be willing to pay 20 ETH for a bunch of pixels that anyone can copy but there are thousands of millionaires fighting to pay 60 ETH for a bigger bunch of pixels that's exclusively yours and can shoot other people with.
Some closing thoughts#
This is by no means financial advice so don't take anything I said seriously.
CS may be welcoming a Source 2 Engine makeover soon and the skin market may experience another boom (or bust). The crypto market is also somewhat recovered from several black swans and is now going steadily up. We're still at an infant stage in these two markets. Great things await those with wisdom and courage.