What is GameFi?

GameFi is a very hot topic in the crypto industry at the moment. Its name symbolises the marriage of the old-fashioned video game industry, and the new decentralised finance industry. This has resulted in video games that employ a ‘play-to-earn’ feature, allowing individuals to earn tokens by playing, and even outright owning their own avatars and characters. But is this the future of gaming, or just another way for game developers to get more money from consumers?

What is GameFi?

DeFi is an abbreviation for decentralised finance, a field in which token-based transactions such as lending or borrowing take place on blockchains, without a centralised body overseeing said transactions.

GameFi is most commonly used to refer to decentralised applications ("dapps") with economic incentives. Those generally involve tokens granted as rewards for completing game-related tasks like winning battles, mining valuable resources, or growing digital crops. It has become known as "play-to-earn." Many GameFi apps allow users to earn money passively by allowing others to mine their virtual lands, or via earning interest by lending assets like digital characters they own to other users.

How does GameFi work?

Axie Infinity is currently the most successful blockchain game to date. There are a few tokens in the Axie ecosystem, AXS, SLP, and non-fungible tokens (NFT). You can also get digital certificates of authenticity for game characters and digital real estate in Axie's economy.

Axies, the game's little blob-like monsters, can cost only a few dollars, or a few hundred thousand dollars depending on rarity. And in return for winning battles and completing missions with your Axies, players are rewarded with SLP.

Axies can also breed and their offspring will then be sold. AXS is a governance token, as such holders are granted the right to participate in discussions about the project's future direction. AXS tokens can be staked to earn more tokens passively as well.

Are gaming NFTs and tokens expensive?

They definitely can be, but at the same time many ‘play-to-earn’ games do not charge as much money up front as traditional video games. In some cases, playing can be extremely rewarding. Essentially, if you earn tokens in a popular game, those tokens can still increase in value. For example, AXS's price increased from 54 cents to $94 in 2021. The chance for high returns in games such as this resulted in an influx of players from lower income countries who turned games like Axie and Mines of Dalarnia into full time jobs. Those who couldn't afford the game's initial cost frequently rented existing Axies from previous players. In many cases, they paid for their rented Axies by splitting their game earnings.

What is the difference between these tokens and existing in-game currencies?

Almost all online games have in game currencies. The virtual universe Roblox has Robucks and you can use these to buy virtual Gucci purses for avatars, while V-Bucks can be used to purchase pickaxes and skins in Fortnite Battle Royale. However, such money and digital goods are not always easily – or legally – sold outside of games or converted into cash.

This is not the case when it comes to play-to-earn games. Tokens in these games are designed to function as full-fledged cryptocurrencies. This means that players can theoretically convert in-game winnings into cash. The Metaverse Index, which tracks the prices of tokens from 15 different game and entertainment projects, including Axie Infinity and Decentraland, has more than doubled since its launch last April. Of course, holding volatile assets can result in steep losses as well. NFT avarters are also a break from the norm, allowing players to actually own their in-game assets, and if they decide to move on from the game they are free to sell those assets on a NFT marketplace.

How do GameFi companies make money?

Typically, game developers are compensated with tokens, thus the more people who play the game and exchange the tokens, pushing up their value, the more money they gain. Some games also charge fees for certain transactions, and that money flows into the efforts' related companies or treasuries, from which developers are paid.

How big is GameFi?

According to DappRadar, the number of blockchain games increased to more than 544 active dapps by the end of 2021, up from about 200 in 2020. In the first week of January of 2021 alone, the top ten of those games processed more than $841 million in transaction volume and attracted more than 2 million unique active cryptocurrency wallets. While many of these games are fairly simple, venture capitalists have poured $4 billion into projects like Forte, providing tools for creating play-to-earn games. This could result in so-called AAA-quality video games with modern graphics and more engaging gameplay than the present play-to-earn games. Traditional video-game developers are also getting in on the act:

• Ubisoft, the creator of Assassin's Creed, has invested in Animoca Brands, which creates its own blockchain games and is also an investor in companies such as Axie. Yves Guillemot of Ubisoft recently called GameFi "one of those revolutions."
• Square Enix, the creator of Final Fantasy, recently stated that it would consider creating its own token.
• Mobile game-maker Zynga, which Take-Two Interactive just acquired, is exploring NFTs, and Take-Two CEO Strauss Zelnick stated in January that the merged firm can more effectively tackle blockchain-related opportunities.

In saying this, many hard-core gamers are concerned that adding NFTs and other blockchain-based features will simply give companies another way to earn money from players. Aside from the possibility of token values cratering, there are a few things that can go wrong in GameFi:

• Regular people who play these games risk losing out to bots, which are computer programmes designed to play these games for profit and can post millions of transactions per day. Sunflower Farmers, a game in which players are rewarded for growing and harvesting digital crops, had to shut down its website to patch a vulnerability exploited by bots: its SFF token went from $5.25 on January 2 to 8 cents on January 13, according to tracker CoinMarketCap.
• Programming errors can result in losses.

Is this about more than just making money?

Many supporters see GameFi as a way for the average player to break free from the grip of traditional game makers. Many players have issues with the companies that create their games. Some criticise the companies' sexist cultures, while others are outraged by how they entice users to pay for additional content via microtransactions. In their ideal form, GameFi apps are governed by player driven communities that decide on things like fees. Tokens also allow players to own a piece of the ecosystem. And in cases like Axie, users have complete control over their digital avatars and characters. Instead of buying current in-game currencies that become obsolete as soon as the new game comes out, GameFi tokens can be bought, sold or traded, allowing players to at least earn something for the effort they have put into their game.