How GameFi increases the value of digital assets with blockchain

EA’s FIFA soccer video game series was always a sore thumb when I was younger. I would love to play the game, collect players and build a great team. But every year Electronic Arts (EA) would release a new edition and all my progress would become almost worthless. All the other players would migrate to the latest version, and the marketplace and matchups of the older versions would be abandoned, making the game unplayable. EA, the company behind the game, had full control over in-game assets and could prioritize selling new titles over letting users continue to progress. This problem is one tackled by a new movement called GameFi.

The GameFi movement

GameFi, or financial gaming, incorporates blockchain-based assets, such as NFTs and cryptocurrencies, into video games. At the core of GameFi is having complete ownership over the assets you earn in the game, be it virtual property, skins, weapons or in-game currencies, all powered by the blockchain, which the game company cannot dictate.

Ownership of an external database like blockchain also means portability: users can earn assets in the game, and sell or exchange them outside the platform. This means that GameFi games do not maintain a tight closed-loop economy and players can earn real money based on their activities. This is the play-to-earn, or P2E, model common in many GameFi applications.

The development of GameFi apps

Axie Infinity is the first notable example of GameFi. Created in 2018, the game is based on the Ethereum network where the in-game pets, called Axies, were represented by NFTs. Players can complete daily missions and battle Axies to earn a crypto token called AXS, which can be traded for real money on external platforms, such as Coinbase. Users can also trade Axies or even lend them out to earn passive income.

Since the launch of Axie Infinity, many other GameFi apps have appeared, most of them based on the Binance or Solana blockchains, which have a cheaper gas price and higher transactions per second (TPS) than Ethereum. According to Binance, as of March 2022, there are more than 1,400 blockchain games listed in DappRadar across a variety of chains.

Problems with GameFi

However, GameFi has also faced major setbacks. Axie Infinity saw its user base drop to just 750,000 active players, a big drop from its peak of 2.7 million in 2021 after it faced a massive $600 million hack. Many users have also questioned the power dynamics and in-game economy that Sky Mavis, the studio behind Axie, put in place. This highlights some issues with GameFi.

First, there is the need to balance players and profiteers, buyers and sellers, in a process of designing economics that is far removed from traditional game creation. A report by ChainPlay mentioned that “58% of investors worldwide stated that ‘Poor in-game economy design’ is the main reason for falling GameFi profits in the last six months.”

Second, many users have complained about the studio’s prioritization of profit over fun, which is the outcome games should have.

Finally, in-game assets can only be turned into real money if they are valuable elsewhere. This is a reminder that inclusion in external markets and chains means volatility. Even if the game is well designed, other externalities can dilute your ROI, making GameFi a poor candidate for generating a steady income to make a living.

One solution to these problems is to consider alternative models, such as play-to-own or P2O. Instead of profiting directly from the game, users can prove sovereign ownership of assets through the blockchain, trade with others and be sure that their progress can be transferred to other ecosystems. This model includes many of the benefits of P2E, but without the hyper-funding that destroys many GameFi projects today.

Balances fun and economy

As NFTs and crypto continue to proliferate, more gaming companies with better reputations and more funding will consider adding an element of GameFi to their offerings. In general, this is a good thing – users will benefit from a more open digital economy with more permeable borders. However, the studios must maintain a fine balance between fun and economy, carefully designing their in-game economy.

Some studios have taken sides in the debate between fun and economics, afraid of tainting the game with the negative connotations of these new technologies. For example, Mojang banned NFTs from Minecraft after P2E servers like Critterz grew in popularity. After the ban, many users, including young people and those in developing countries with fewer job opportunities, lost thousands of dollars in assets and saw their only income stream disappear.

This is a painful reminder that the applications surrounding digital assets, however decentralized they may be, are still controlled by corporations. Without the proper legal framework, NFTs and cryptocurrencies are just fancy versions of tightly controlled in-game assets.

Final thoughts

There will always be games without financial aspects. The principles of what makes a good game do not change. But GameFi isn’t going away either. Axie Infinity, Critterz, Decentraland and others are extremely early examples. Over time, studios will produce better experiences that manage to balance fun and profit more effectively.

As consumer adoption of AR and VR increases, we’ll likely see GameFi-like applications emerge in the Metaverse. Digital assets will become the new foundation of a virtual world, and new sources of income will emerge from unexpected places. What may seem like a game today may become a job tomorrow!

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