GameFi is revolutionizing the global NFT market. Here’s how crypto regulations could shape it

Tthe intersection of gaming and finance in an environment driven by the use of blockchain, non-fungible tokens (NFT) and smart contracts is often referred to as GameFi.

According to the Metaverse Awareness Survey, 40% of respondents said they are “interested in pursuing a mix of both ‘play’ and ‘earn’ aspects of the metaverse. While 11% said they were more interested in earning, and 49% said they were only interested in playing.

Another interesting finding of the survey was that more than half (53%) of respondents said they would happily work in virtual game worlds if they were able to earn digital currency from their labor.

Axie Infinity – a blockchain-based online video game that uses non-fungible tokens to collect monsters, or ‘Axies’, to compete against other players – has emerged as a major source of income in the Philippines and globally professional gamers as well as digital content creators have been known to earn quite a bit, given the lack of this skill set.

In traditional game environments, players usually do not have the ability to own the assets in the game. With GameFi, however, tokens related to blockchain-based games blur the line between in-game resources and real-world assets.

In such a gaming environment, users can acquire NFTs or crypto-assets to participate and accumulate resources while playing the game, whether it is in-game currency or in-game assets. These, like all other digital assets, can then be stored in a digital asset wallet or traded in a secondary market.

Within the gaming world, game finance or GameFi gives rise to NFT marketplaces for the sale of recorded assets such as hard-to-obtain in-game weapons and props for real money or to exchange them with another player providing decency and proof of ownership to the game winner.

These weapons can also be rented and leased to other players for a fee, and the items won in one game can be incorporated into other games.

Outside of the gaming world, GameFi NFTs can be used as a guarantor for DeFi lending protocols and are allowed for staking, liquidity mining and yield farming.

A growing number of NFT games are establishing an on-chain metaverse by selling virtual lands as NFTs and are successfully integrated with cryptocurrencies, thus providing real-world interoperability for the value of their time spent in-game.

Depending on the trajectory, GameFi tokens can be used for ownership, speculative trading, or could even pave the way for more decentralized metaverse that may not be owned by one large corporation.

Below is a snapshot of the GameFi ecosystem.

GameFi thrives on team expansion and game development user acquisition. Additionally, like initial coin offerings (ICOs) or an initial public offering (IPO), GameFi initiatives raise funds through initial decentralized exchange offerings (IDOs) funded by venture capitalists.

Most of these consist of various token allocation rounds consisting of public and private funding with adequate offerings for marketing, gaming incentives and ecosystem development.

Another mechanism for raising funds for blockchain games is the initial gaming offering (IGO), which gives players timely access to games while helping developers raise more money for the game project.

Once the games are functional, GameFi projects create their own tokens and game rules around them, either through a utility or governance token that also needs to be earned, creating a revenue model for GameFi.

GameFi can be based on one token and the same token can be used to purchase game avatars through their utility function as well as distribute rewards to players through their governance function, which gives token holders the right to propose and vote on future improvements, game policies, etc.

Some games may have separate tokens for in-app purchases and distribution of rewards, while some may also operate a three-token economy with another token for incentives.

Since most of these games operate on the Ethereum blockchain, a player must deposit ether or convert fiat money into the cryptocurrency to participate in the game. Ethereum’s scalability limitations lead many GameFi initiatives to create their own separate sidechains.

In addition, fees collected in these games may end up in decentralized autonomous organization (DAO) treasuries and transferred to DeFi strategies.

Currently, there are no specific rules surrounding GameFi, as there is ambiguity over who will regulate GameFi – primarily due to its unique features, business mode and overlap with existing regulatory frameworks.

Here are the key regulatory concerns surrounding GameFi:

According to the proposed draft, any token invested with “an expectation of profit” will likely be classified as a security, as will any project that stimulates the liquidity pools that will affect the DeFi ecosystem as well as GameFi projects.

This is because, for example, if a GameFi token is used to purchase special access rights in a blockchain-based game with the intention of later realizing revenue from it or profiting from it, it is likely to be classified as a security and may attract the proposed regulations.

Similarly, in Korea, Article 32 (7) of Korea’s Game Industry Promotion Law clearly prohibits making a business to convert game products into money or mediate such conversion or buyback of tangible and intangible results that indirectly limit the distribution and growth of game-to-earn games in the country.

Some jurisdictions in the United States prohibit gambling, including sweepstakes, which is performed quite frequently by players in the GameFi ecosystem.

GameFi may also face limitations due to its reliance on virtual currency businesses such as crypto wallets, exchanges and trading of tokens which may themselves be regulated or prohibited.

On the other hand, many countries have introduced taxes on the transfer of virtual digital assets. Therefore, GameFi participants may be required to pay taxes when making in-app purchases, receiving in-game rewards, or when converting/transferring their tokens.

Although there has been a lot of interest in GameFi up until last year, the crypto winter and many other factors seem to have slowed its growth.

According to Cointelegraph: “The number of users interacting with Axie Infinity fell from a peak of 744,190 on November 26, 2021P, according to blockchain data compiled by DappRadar, to 35,420 on August 20, 2022 – a 95% decline. DFK [DeFi Kingdoms] players, meanwhile, fell by 85%, from a peak of 36,670 in December 2021 to 5,290 as of August 2022″.

That said, the total market cap for GameFi was estimated to be $55.38 billion as of February 11, 2022 and over a four-year period from January 1, 2018 to January 1, 2022, the compound annual growth rate (CAGR) of the total The GameFi market cap was 180%, according to a report from Crypto.com.

Overall, there are certain shortcomings of traditional gaming that blockchain technology solves perfectly.

However, we need to be aware of how the regulation around cryptocurrency evolves and how regulators decide to shape the regulation around virtual digital assets that can guide the innovation in GameFi.