Imagine a world in which you can make money just by playing a video game. Not fake, in-game money, but the kind of money that helps pay the bills and keeps food on the table. And imagine all the assets in a game — the characters, the outfits, the weapons — could be bought and sold in the real world.
This, in a nutshell, is the promise of GameFi — one of the hottest sectors in Web3. And it’s a reality that some of the space’s most active players say isn’t too far off.
GameFi is one of the fastest growing segments in the video game industry, according to industry veteran Tracy Spaight. With more than 20 years of game design experience under his belt, Spaight now works as the head of gamification at Synesis One, reportedly the world’s first decentralized autonomous organization, or DAO, for data yield farming. While the space is still pretty new, he said what excites him most about GameFi is the “new type of ownership” enabled by the industry’s structure.
What Is GameFi?
A portmanteau of “game” and “finance,” GameFi involves blockchain games that offer economic incentives to the people that play them, otherwise known as play-to-earn games. Players can typically earn in-game rewards like crypto tokens, virtual land, avatars and other NFTs by completing tasks, battling other players or progressing through various game levels. Unlike traditional video games, play-to-earn games let you buy and then transfer the in-game assets to outside of the game’s virtual world. Some of the most popular blockchain game titles right now are Axie Infinity, The Sandbox and Decentraland.
Before now, video games were housed on centralized servers owned by a gaming company who had the implicit power to shut off the world whenever they felt like it. What’s more, players had no actual ownership of the items they accumulated through their character — the clothes, the weapons, the prizes. It all existed solely within the confines of the game, and had no real value in the outside world.
That’s not the case with GameFi products, thanks to its decentralized nature and reliance on blockchain technology.
The benefits of actually owning the digital assets in a game are beginning to be recognized as not just something cool, but something that gives you power as a player, Spaight explained.
“If they help create part of the value of the gaming universe, maybe they should have a piece of it,” he said. “I think this is just a next chapter in what our relationship is with our digital lives and the digital items that we accumulate.”
And many of Web3’s key players are enthusiastically betting on that next chapter, including Telstra Ventures, a prolific investor in crypto companies. The VC firm has backed crypto exchange FTX, which recently launched its own gaming unit, and general partner Yash Patel said Telstra is actively looking at a GameFi token investment that, if it goes through, will be its first non-equity investment ever.
“The idea of giving true ownership of these assets so that these assets are not siloed to one game environment or one server, and actually have real liquidity and value and can be traded, allows these players to actually earn and buy their way to the top. It’s pretty exciting,” Patel said. “It’s kind of incredible how big this market is already.”
What Is GameFi and How Does it Work?
GameFi — a portmanteau of “game” and “finance” — involves blockchain games that offer economic incentives to play them, otherwise known as play-to-earn games.
Typically, players can earn in-game rewards by completing tasks, battling other players or progressing through various game levels. Many of the play-to-earn games on the scene right now rely heavily on what game designers call a grinding mechanic, in which players have to spend lots of time doing repetitive tasks within a game to advance or unlock prizes — or, in this case, crypto tokens.
Rewards also come by way of in-game assets like virtual land, avatars, weapons or costumes (also known as skins). In most cases, these assets are non-fungible tokens, or NFTs, which essentially serve as a “virtual deed” conveying ownership of a piece of digital art or media file. Like cryptocurrency, NFTs run on the blockchain, meaning they can be taken out of a game and traded or sold on a marketplace.
Each game has its own model and game economy. But, for the most part, these digital assets provide some sort of monetary benefit to its players — whether that be because they won a fight and earned crypto, sold an NFT they bought in-game or charged fellow players rent for staying on their virtual land. For instance, popular titles like Decentraland and The Sandbox focus on virtual land ownership, allowing players to purchase digital pieces of real estate, develop them, then charge other players to stay there.
Some play-to-earn games even let players generate passive income without playing the game at all through liquidity mining or lending their gaming assets to other players. Introducing abilities like these not only decentralizes the game even more, but it allows players to influence the development of the actual game via DAOs.
For example, Decentraland players get voting power on in-game organizational policies based on the total number of relevant assets they have in their wallet connected to the DAO. These include tokens, or MANA, “names” (which allow users to trade tokens), and parcels of virtual land. The idea is that, the more MANA, names and land a player has, the greater their personal stake is in the game, thus earning them more of an influence within the DAO.
Of course, the tokenomics — or supply and demand of a particular cryptocurrency — vary depending on the game. But most of the studios making these games are raising capital through token sales. How these tokens are allocated, how they’re unlocked and whether they’re finite or not varies. And many of these games are built on Ethereum, Solana and Polygon, which is a layer 2 chain on top of Ethereum that offers faster and cheaper token transactions.
“When you talk about the infrastructure here, it’s really around the type of blockchain you’re building upon,” Patel said. “Many of these play-to-earn games are almost virtual economies in and of themselves.”
How to Get Started With GameFi
There are thousands of blockchain games, and they each follow their own economic model. Unlike traditional video games, play-to-earn games let players buy and then transfer the in-game assets they acquire to outside of the game’s virtual world — they can sell their NFTs on a marketplace like OpenSea, or trade their crypto earnings for money on a crypto exchange like Coinbase. All of this is to say that, like every other facet of the burgeoning Web3 space, GameFi requires a crypto wallet. From there, it’s all about finding games that are secure and managing your finances responsibly.
Here’s a quick primer on how to get started.
Step 1. Set up a crypto wallet that is compatible with whatever game you want to play. While they don’t exactly store money the way a traditional wallet does, crypto wallets house encryption keys associated with digital assets, allowing you to retrieve, send and receive cryptocurrency. There are all kinds of wallets and currencies out there, but most games require specific wallets to work. You’ll need to check the given game’s official website to figure out which wallets they support.
Step 2. Connect your crypto wallet to the game. This will be your means of logging into the game as well. Unlike traditional online games that make you set up a username and password or ask for your email address, blockchain games use your crypto wallet as an account. When you connect your wallet, make sure you are connecting to their official website and not a fake look-alike.
Step 3. Become familiar with the specific requirements of the game. Many play-to-earn games require players to purchase their in-game cryptocurrency token or NFTs to get started. In general, it’s good to weigh the earning potential against the overall risks of a given game, including how long it takes to earn your initial investment back and start making profits. If you don’t have enough money to buy a token yourself, or don’t want to take on the financial risk, consider looking for an in-game scholarship program, which allows you to borrow NFTs from other players to get started. Granted, if you go that route, you will have to share your earnings with the NFT owners.
Bear in mind that, like anything else on the internet, GameFi has its fair share of scams, so be on the lookout for fake sites. Also, a good rule of thumb is to create a new crypto wallet for each individual game you play, that way you’re more likely to only lose funds that you can afford to lose.
Axie Infinity: GameFi in Action
One of the most well-known play-to-earn titles out there right now is Axie Infinity, a two-dimensional game consisting of cute creatures, known as axies, battling each other Pokémon-style. It was founded in 2018 by Vietnamese game developer Sky Mavis, and has since become a massive hit. The company is now worth some $3 billion, and has garnered the support of major investors like Andreessen Horowitz and Paradigm.
To join the game, players must buy or rent three NFTs linked to axies, which each have their own associated stats and battle cards. Winning battles earns players tokens called “smooth love potion,” or SLP for short. Axies can also be bred using SLP and another governance token called AXS to produce new NFTs, which can then be traded, sold or used.
Up until now, Axie’s key selling point was that it gave players a chance to make real money by simply playing a game. Axies and SLP can be sold for cryptocurrency, and players can earn SLP by not only playing the game, but participating in a scholarship program in which they lend their axies to other players and receive a percentage of those players’ winnings.
The game’s model provided full-time job prospects to some people living in developing nations like the Philippines and Venezuela — presenting an opportunity for a “wonderful redistribution of income,” said Edward Castronova, a game design professor at Indiana University who literally co-authored the book on virtual economies.
“With any kind of speculation-driven market,” he said, “the first people make a lot of money. There’s massive amounts of money lost by other people, but it’s the people who come late.”
At its peak, Axie Infinity fetched an entry price of $1,000, and players were earning thousands of dollars a month for just playing a few hours a day. And although it was never available on popular app stores, the game hit No. 1 in NFT collectibles last year, according to DappRadar. In a matter of months, Axie and its wildly successful capital market became living proof that the play-to-earn model could work.
“This space needs to mature so that we can move beyond it and do some real building. The promise is enormous, but so much plumbing has to be built.”
But just as quickly as Axie ascended, it ran into problems — most notably a hack in March that caused the game to lose more than $600 million. Even before the hack, though, Sky Mavis was facing larger questions about sustainability. So far, its in-game economy has relied solely on constant growth to keep it going, with inflation built into it. The game produces SLP constantly, and players can earn it through player-versus-player battles and, until recently, by completing daily quests in single-player mode — essentially printing money. Axies can also be bred to produce new creatures, thus increasing the pool of NFTs and producing even more SLP. The game has no way to reduce the amount of SLP or NFTs, so the value of the in-game assets have been watered down.
In short: Axie’s main goal was to generate currency that could create more NFTs, which only works if there are enough people who want to participate. By design, Axie acknowledged, its economy is “dependent on new entrants.” This has led some thought leaders, including DAO operator M Goes, to wonder whether Axie is “the biggest Ponzi scheme in crypto.” And it’s a hurdle the larger GameFi space is facing right now.
“There are lots of Ponzi schemes, pyramid schemes, rug pulls, scams,” Spaight said. “This space needs to mature so that we can move beyond it and do some real building. The promise is enormous, but so much plumbing has to be built.” To build “something enduring,” he added, there need to be regulatory frameworks in place. “That hard work is happening now.”
Beyond its economic flaws, there’s another key issue with Axie Infinity that’s actually quite common among the play-to-earn games out there right now: It’s not very fun. The battles are repetitive and there’s very little creativity involved.
In general, blockchain games aren’t particularly good at eliciting feelings of “epic meaning” or accomplishment, or presenting real challenges that force a player to really “test their mettle,” Spaight said. But, he predicts this will start to change as more professionally trained game designers enter the fold.
“I think those skill sets are going to improve and we’re going to end up with more fun titles. I think there’ll be more financing that enables the quality level to rise. And I think it’ll happen fairly quickly,” Spaight said.
The Game Industry’s Take on GameFi
The GameFi industry is seeing massive amounts of funding right now, as venture capital firms shovel millions of dollars into crypto gaming companies. Investors poured $3.6 billion into these startups last year alone, according to Drake Star Partners, with heavy hitters like Andreessen Horowitz, Coatue and Softbank leading the charge.
Game industry veterans are beginning to enter the fold as well, including Ultima Online creator Richard Garriott, who recently announced he is making a play-to-earn-style MMO (massively online multiplayer game). And prominent game studios like Blizzard and Atari have begun “tentatively dipping a toe” in the GameFi space, as Spaight put it.
“They noticed that Decentraland, Sandbox, Axie Infinity all have market capitalizations in the billions of dollars. And that’s insane,” he said. “They’re wondering what’s going on and how do they get a piece of it.”
Plus, there’s the matter of ownership and the money-making potential tied to these games on the players’ end. This is something that’s been reiterated by some of GameFi’s most prominent proponents as well. Amy Wu, the head of FTX’s new gaming initiative, argued on a recent podcast that play-to-earn games simply formalizes an aspect of gaming economics that was “around anyway.” It also stands to “deepen the gameplay experience” by promoting a sense of ownership and compensation among not only players, but creators and developers as well, thanks to the trackability of NFTs.
“Today,” Wu said, “a lot of [game developers] stay at a company because if they leave they’ll no longer get sort of a royalty from a game that they created, like, eight years ago. But what if they can do that in perpetuity? And you’re tied to the NFTs in that game or tokens in that game, and now you’re free to go make your next project without worrying that you’re giving up financial upside.”
“A game that is art should not have this sort of real-world commercial activity.”
But at the same time, there’s still quite a bit of “institutional conservatism,” Spaight said. Indeed, many gamers and game developers view the emergence of in-game NFTs and the play-to-earn model as little more than a cash grab. A Game Developer Conference survey from January found that 70 percent of respondents said they were “not interested at all” in adding NFTs to their games, citing their “potential for scams,” their “environmental impact” and general “monetization concerns.”
As someone who’s been studying game design for 20 years, and thinking about play-to-earn specifically for the better part of a decade, game design professor Castronova’s concerns are more conceptual.
“I try to draw a big bright line between a game that is an artwork, and a game that is kind of a social utility platform. A game that is art should not have this sort of real-world commercial activity,” he said. He doesn’t believe the larger game industry will stray too far from its artistic core, therefore he doesn’t see the play-to-earn model having a big impact on the game industry as a whole.
That being said, there are an estimated three billion gamers in the world today. Many of them would like the opportunity to own and benefit from their virtual items, Spaight said. If they are a loyal fan and play the game for a long time, all the while creating value for the game, then it stands to reason that they would want to cash in, too. So long as there is that demand, there will be companies that will cater to it.
“It will find its space. It may not become the dominant model of how people enjoy online games, but it will be one of them,” Spaight said. “This will be another model out there that people enjoy and profit from and participate in. I don’t think it’s a blip, I think it’s here to stay.”