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Web3 games built on blockchains, called play-to-earn, enable users to earn token-based gameplay rewards for playing. Incorporating financial rewards into games in this way has led to the term GameFi being used to describe the play-to-earn segment of decentralized applications.
What is GameFi and play-to-earn (P2E)?

Gaming has become a significant use case for blockchain technology, accounting for a substantial proportion of on-chain activity. One reason for this growth is technical advancements in gaming that enables new features and game mechanics, such as the ability to represent in-game assets, like currencies, real estate, avatars, or level-ups, using blockchain-based tokens and NFTs. Unlike in-game purchases stored on centralized servers, NFTs can exist and be traded outside of the game environment.

This has led to the development of the play-to-earn (P2E) model where players can earn token-based rewards for their successes in a game. P2E rose in popularity during the crypto bull market of 2021, with GameFi titles such as Axie Infinity, The Sandbox, and Splinterlands experiencing significant user growth.

While the P2E model offers the opportunity for rewards, it’s important to note that there is no guarantee of returns.

History of GameFi and play-to-earn

Play-to-earn is part of the long history of game monetization. In the 1970s and 1980s, players had to insert a coin to play on arcade machines. As arcade machines gave way to home game consoles, pricing models needed to change with players purchasing a title with a one-time fee for unlimited plays, known as pay-to-play (P2P).

However, with the rise of smartphones and Apple’s introduction of in-app purchases within free apps, the P2P model experienced significant disruption. As the mobile gaming market grew, many game developers switched from up-front charges to the so-called “freemium” model, where the user can play a basic version of the game for free but enhance their experience with in-game upgrades.

P2E is yet another iteration in this evolution but with the added twist of enabling ownership of in-game items. While a robust GameFi ecosystem didn’t develop until around 2020, P2E first became popular among the crypto community with the launch of CryptoKitties on the Ethereum blockchain in 2017.

GameFi is one of the fastest-growing segments of the digital asset space and has attracted investment from some of the leading game studios, including Epic Games, Ubisoft, and Nintendo.

Elements and features of GameFi

P2E titles have huge variations in rules, earning and staking mechanics, reward structures, and more based on the games. However, there are some common features.

Asset ownership enabled by blockchain technology

GameFi exists on-chain, and elements of the game are represented as blockchain-based tokens. Fungible tokens can be used as in-game currency and non-fungible tokens (NFTs) can be used to represent unique or scarce items such as digital real estate, avatar skins (or attires), treasure, and weapons. Tokens can be traded outside of the game environment on exchanges and NFT marketplaces such as OpenSea for Ethereum-based games and Magic Eden for Solana.

DeFi elements

Some GameFi projects incorporate elements of decentralized finance (DeFi), such as staking or yield farming. One example is Aavegotchi, where users “grow” their digital pets by staking Aave’s aTokens to them. “Grow” in this sense means to increase the market value of the Aavegotchi by developing specific traits that will help their characters in the game.

DAO governance

Some GameFi projects have decentralized governance via a DAO structure. For instance, Decentral Games is a DAO that builds games on the Polygon blockchain. However, DAO governance isn’t a defining feature, as many centralized companies are also developing P2E games.

GameFi Guilds are another type of DAO in the GameFi ecosystem and are inspired by the Gaming Guilds (gaming communities) popular with MMORPGs (Massively multiplayer online role-playing game, such as War of Warcraft and RuneScape). GameFi Guilds are a similar concept but with a financial element, and members may participate in shares of winnings or allow new members to borrow the assets needed to enter a game. Yield Guild Games is one example of a P2E Gaming Guild organized as a DAO.

Controversies and risks

P2E games have been the subject of some controversies in the past, and users should be aware of the risks involved.

In March 2022, Axie Infinity, which was among the most popular P2E titles at the time, suffered a major hacking incident where hackers stole over 170,000 ETH, worth close to $600 million at the time. The attackers managed to infiltrate the company behind the game, Sky Mavis, and used their access to attack the Ronin bridge, which bridges the Axie ecosystem to the Ethereum blockchain. The incident affected the popularity of the game, and Axie Infinity hasn’t been able to recover its previous popularity in an increasingly competitive GameFi landscape.

In April 2022, another game, WonderHero, was hacked for $300,000. In this instance, the game’s token lost so much value so quickly that the project was forced to suspend all services.

Such incidents can help illustrate the relative immaturity of the GameFi space, and cybercrime experts have warned that GameFi is a target for hackers.

GameFi projects could be subject to regulation, including fines or involuntary closures. If a project is the subject of regulatory action, there is no guarantee that users would be able to access their assets, particularly if front-end interfaces are disabled, and such assets would quickly become worthless without a game to support their utility.

Finally, it’s worth noting that there are many restrictions on the trading of GameFi tokens due to a combination of exchange policy and regulation.

GameFi and play-to-earn essentials

  • Play-to-earn (P2E) describes a blockchain-based segment of gaming where players can earn token-based rewards, either cryptocurrencies or NFTs
  • Play-to-earn games and the ecosystem around them are collectively known as GameFi
  • GameFi can incorporate other elements of blockchain and cryptocurrencies, such as DeFi or DAOs

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