Can Blockchain-based Gaming Reshape the Industry?
When do adults stop playing and start taking themselves seriously? Typically, when they need to earn a living. But what if you could play for a living? A path that isn't just for the top 0.1% of esports athletes? This mythical land does exist, and it began to reach its full potential in 2021. It's known as GameFi.
GameFi extends games into the financial realm. Stronger property rights mean players can take their beloved characters outside their native world for fun and profit. Blockchain technology provides the economic building blocks that used to take game developers so long to create that it prevented them from even starting. Economic activity on GameFi has recently exploded, and entire economies have stemmed from this activity. This report looks at the history of planned-economy games like World of Warcraft against their modern crypto counterparts that create maximum value for their players.
What is GameFi?
The blockchain-based game Axie Infinity launched its Ronin sidechain to Ethereum in February 2021. Within weeks, transaction volume and deposited balance smashed through all reasonable and even the most outlandish expectations. The gaming world was perplexed. What just happened? In one word: economics. Games in the past had minimal trading functionality, but not due to game developers’ lack of wanting. It was simply too difficult and remote from the game’s main objectives to implement a functional in-game currency and a marketplace that facilitated trades with the lowest possible transaction costs. Enter blockchain technology. A junior Solidity developer can create an ERC20 token for a game currency in less than an hour. When game developers use the ERC721 standard for non-fungible tokens, in-game materials like swords and wands automatically become tradable on popular third-party marketplaces like OpenSea.
Axie Infinity and Defi Kingdoms demonstrated that they could reach more than $400 million in transaction volume on some days. These games are the poster children of a new category called GameFi.
MixMarvel’s founders first mentioned the term “GameFi” in November 2019. Andre Cronje then used it in a September 2020 tweet, and the word became standard vernacular after that. GameFi is a concatenation of gaming and finance and broadly stands for blockchain games with a financial element, yet distinct from gambling activity. These games require skill and determination, with a smaller component of luck. Players earn currencies and materials by completing tasks or grooming their characters. What sets them apart from the past is what players can then do with their loot.
Essential features of GameFi
Play-to-earn
Players can sell rare items earned in the game to other players on marketplaces in and outside the game, thanks to open standards. The connection between the “real world” and the virtual world becomes stronger when game materials retain utility outside their native surroundings. Some games have spawned a whole complementary industry where players make a decent living growing and training characters or finding powerful in-game Items. In-game currencies often have clever incentives to attract investors regardless of their involvement in the game itself. While this was a boon for early adopters, escalating prices created steep entry fees for newer participants because characters required to play are priced in the game’s native currency.
Tokenomics
A word combination of tokens and economics, it describes these incentive schemes. “Only 21 million Bitcoin will ever exist!” is Bitcoin tokenomics in a nutshell. There’s a limited supply, and the issuance keeps decreasing. Let’s look at Axie Infinity’s AXS token. Breeding characters sends tokens to the community treasury and removes them from circulation. Users can stake their AXS to secure the network and receive rewards from the treasury. At the same time, AXS tokens have a maximum supply of 270 million, with tokens for the team released gradually over five years so team members cannot dump their shares and ruin the price. The maximum supply, slow-release, and staking rewards work harmonically to make holding AXS more attractive to investors and fuel its price growth.
Play-to-earn before blockchain
Second Life was the first game that sparked a veritable in-game currency — called Linden dollar — and transactions of virtual items outside the game world. Real estate agent Ailin Graef made more than 1 million British pounds selling in-game plots in 2006. Second Life is still operational, and creator Philip Rosedale recently returned to tackle the metaverse. Perfect timing, since Second Life, pioneered much of what the metaverse is made out to be, like virtual professions, virtual land, or an entire virtual economy.
The next game to smash the confines of its virtuality was World of Warcraft (WoW). This fantasy adventure saw players bid tens of thousands for blue Murloc eggs on eBay. Inside the game, characters used virtual gold for trades, but only specific items could be exchanged, often at set prices. Developer Activision Blizzard recently released its own digital currency, albeit one that is only available from the developer and only tradeable in the game itself.
Economics of gameplay
Blockchain gaming is turning the traditional gaming model on its head. Before GameFi, siloed game worlds didn’t let players genuinely own their in-game assets. GameFi stores in-game material as unique tokens, or NFTs, and lets owners sell them on free markets for a price of their choice. In 2019, the introduction of an in-game currency called Smooth Love Potion (SLP) boosted Axie Infinity’s popularity. It paved the way for other decentralized finance (Defi) components to penetrate blockchain gaming. Such parallels that GameFi has with Defi include staking, liquidity mining, NFT trading, and NFT fractionalization. Crypto gaming has grown in popularity as more players collect and trade digital assets, generating a dependable income for game developers and creating value for players. In 2020, Axie Infinity gamers in the Philippines earned their regular monthly salary by just playing the game at a time when measures against the COVID-19 pandemic brought economic hardship to the country. And here we have it: The mythical lands were playing and making a living converging. No wonder this attracted a copious amount of users. According to Bloomberg: “Nearly 50% of active cryptocurrency wallets connected to decentralized applications in November (2021) were for playing games. The percentage of wallets linked to decentralized finance, or Defi, dApps fell to 45% during the same period, after months of being the leading dApp use case.”
How players make money
Axie Infinity was the first smash hit in GameFi. With a sophisticated ecosystem, it dwarfed its competition at the top of DappRadar’s NFT sales rankings for much of 2021 and into Q1 of 2022, with $563.6 million in sales in Axie Infinity is an NFT game inspired by Pokémon and Tamagotchi. Players earn by breeding, racing, battling, and trading cute Axie creatures. All in-game materials are NFTs using Ethereum’s ERC-721 standard. This is the same standard that all NFT marketplaces use. Axie’s developers met while playing CryptoKitties, where they could witness the power of giving players economic liberties. All assets and all data on Axie are open sources, and using it does not require permission from Sky Mavis. Developers in the community can just build what they want and let the players decide whether they like it or not. In other words, a free and open market is baked into the game design.
Axies can be bred by using Smooth Love Potion (SLP), a utility coin, and AXS, the game’s governance token. SLP is rewarded for completing quests in the game. Like in Ready Player One, players can shape a part of the game’s universe. But there’s more. One of the most significant digital land sales in the NFT and metaverse sector to date also comes from Axie Infinity: One of its 75 genesis land plots sold for $2.3 million. The collection has already clocked nearly $4 billion in total sales.
Staking, or locking up, AXS over a more extended period of time reaps a substantial annual percentage yield (APY). Even though this reduced from over 200% to about 88%, investors have over $1.56 billion worth of AXS staked.
Regulatory woes
Since the emergence of Bitcoin (BTC) in 2009, on the heels of the subprime crisis, lawmakers have been slowly trying to find ways to regulate and tax cryptocurrencies. With the runaway success of digital assets since 2020, these efforts have intensified. United States President Joe Biden recently labeled crypto as a “national security threat” and announced an executive order to be sent to a plethora of government agencies asking them to develop regulatory policies. Democrats proposed another piece of legislation, worrying the crypto industry in the U.S. House of Representatives in January, the COMPETES Act. Jerry Brito, executive director for Washington D.C.- based think tank Coin Center, noted that one provision in the proposed bill would allow the Treasury Secretary to ban crypto exchanges from operating without any prior notice. Brito stated that he believes the bill will very likely pass “in some form”.
In November 2021, a report published by the President’s Working Group on Financial Markets suggested that stablecoin issuers in the U.S. should be subject to “appropriate federal oversight” akin to that of banks. The report did not specify which federal agency would lead these efforts but said the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC) had “broad enforcement, rulemaking, and oversight authorities” to address crypto transactions and companies. Governments across the world are moving toward some form of a regulatory framework. India has recently announced the introduction of a 30% crypto tax that targets all transfers of digital assets, along with plans to introduce its own central bank digital currency (CBDC) by 2023. Thailand also announced its plans to introduce a CBDC but recently backtracked on plans to introduce a 15% capital gains tax on all cryptocurrencies after a public backlash against the proposal.
Disclaimer: All products and projects listed in this article are not endorsements and are provided for informational purposes only. This article is for educational purposes only and is not intended as investment advice. Qualified professionals should be consulted prior to making financial decisions.
