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What is GameFi – How it works, drawbacks and potential for the future

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NFT, Metaverse and DeFi (decentralized finance) have been very trendy in the cryptocurrency industry for quite some time. All of these sectors gained the biggest community and support in both 2020 and 2021. Despite a price slump that the cryptocurrency markets see now, these three sectors are alive and well.

Well alive, one can even say that they are starting to evolve into a very interesting new subsector of the cryptocurrency space – GameFi. GameFi unites all of these subsectors, with addition of the P2E (play-to-earn) subsector, to bring unique experience mainly to gamers.

What is GameFi?

GameFi, as the name suggests, is the combination of “game” and “finance” and refers to what we call gamified finance. Gamified finance is a confluence of gamification, decentralized finance (DeFi), NFTs (non-fungible tokens), play to earn model (P2E) and to some level even Metaverse, however this is inferior to the previous three as Metaverse is not as important in GameFi as of yet.

More specifically, GameFi enables the players of online games to earn NFTs, NFT rewards or different cryptocurrencies to capitalize on their game time. Sometimes and in some specific instances the players can even earn when they are offline through different scholarship programmes, during which they lend their NFTs like in-game avatars or tools, to other players, who then use them when playing.

The use of NFTs in this case is not random at all. NFTs provide gamers with true ownership rights for their items or characters. Moreover, whether those are avatars, buildings or weapons, these assets are usually created in a limited supply, making NFTs a way to prove the scarcity thanks to verifiability on blockchain. This then allows the players to sell NFTs to buyers, who can make sure they are buying what they want and not some kind of fake item.

In this sense, anything that the players use in game, from avatars, to skins, tools, weapons or land can be thought of as a unique NFT that the player can benefit from. Once they own it, they have the property and ownership rights for it due to the NFT and blockchain guarantee. Thanks to this, the players are able to capitalise on their playing hours not only with some worthless in-game tokens, but through different cryptocurrencies and NFTs, which can be then sold for other cryptocurrencies or even fiat money.   

Thus, these games offer an economic incentive for their players. While that often can be indirect, changing any NFT or cryptocurrency earned in the game to fiat money is immensely easier than it is with the in-game tokens now. This new concept therefore combines fun and entertainment of playing with earning potential, which definitely pleases the players and gaming experts.

How does GameFi work?

Typically, the players will gain or earn the in-game rewards represented by the NFTs through various options. Most of them are somehow connected to the in-game tasks and activities such as battling other players, progressing through various levels, building structures or maintaining land. All of these tasks, and many others, can be seen in the GameFi games which can range from simple lottery-based games to fully-fledged MMOPRGs (massively multiplayer online role-playing games).

All the in-game assets, from clothes to avatars, can in most GameFi projects be sold directly in the game itself. Moreover, there are emerging marketplaces, where these types of NFTs are being sold or bought, essentially creating a new type of an economy on its own. Thanks to these, the players are able to earn real money for their game time, which, in places such as Venezuela or Indonesia can even exceed the minimum monthly wage in the country, making it more promising to play-and-earn than to work.

Additionally, GameFi also offers a chance to earn some form of passive income, as we have stated previously. This is usually in the form of lending of avatars that the player is not using at that time. Most of the time, the player that is lending does not even need to be online, making this a perfect passive income opportunity. There are some staking options available as well, however those are usually specific to the given game, cryptocurrency or token.

It also needs to be stated that while some GameFi projects might decide to function with one token, others have chosen to have two, sometimes even three tokens native to the platform. These have usually different functions, however, two of them stand out.

Firstly, the tokens are used as utility tokens, for transacting value around the in-game economy, buying and selling items etc. Secondly, these tokens can be thought of also as governance tokens, as most of the GameFi projects aim for decentralization, which means that they are represented, or aim to be represented, by a DAO (Decentralized Autonomous Organisation). In this case, the governance tokens thus signal to the DAO team members what the players and holders of the token want to do with the future of the project, where they want it to go or how they want it to improve.  

Play to Earn vs Pay to Play

All of this is allowed thanks to the Play-to-Earn model (P2E), which is an improvement over the traditional Pay-to-Play model that is common with the vast majority of games. In this model, players first need to pay before they are playing. In P2E however, the players can earn rewards while they are playing, making the overall experience potentially much more enjoyable as well as affordable.

It needs to be mentioned that some of the GameFi projects require some form of an investment upfront, such as a purchase of an avatar or an NFT, this is not a case for all of them. Yet, even if it was, the doubts of buying these avatars or items are easily erased by the potential rewards and winnings, making the Play-to-Earn model superior over the Pay-to-Play.

Getting started with GameFi

While getting started with GameFi is not somehow a difficult process, people need to make sure to follow some steps in the right order. First of all, everyone starting with GameFi needs to have a crypto wallet, preferably something like MetaMask or Trust Wallet. Secondly, the users would then want to connect their wallet directly to the game they are planning to play.

They would need to make sure that they can comply with all the requirements to play the given game. In some cases, this means that the players would need to hold some tokens or cryptocurrencies in their wallet, or some NFTs connected to the game before they are actually allowed to play. Most of these can be obtained at NFT marketplaces quite easily.

What are the drawbacks of GameFi?

Yet, as we have briefly described above, not everything is peachy when it comes to GameFi projects. There are definitely some drawbacks that need to be considered before anyone enters this world. One of the bigger hurdles that seem to be very important is the maturity of the overall sector. Just like with NFTs, DeFi or Metaverse, GameFi itself is an extremely young subsector of cryptocurrencies that needs its time.

Only thanks to time, this sector can mature enough so that it can become more efficient or even more secure. Security is a big problem of GameFi, as can be easily portrayed by the 600-million-dollar hack of Axie Infinity, one of the biggest GameFi projects of all.

Tracy Spaight, gaming industry veteran has for example stated:

“There are lots of Ponzi schemes, pyramid schemes, rug pulls, scams. This space needs to mature so that we can move beyond it and do more real building. The promise is enormous, but so much plumbing has to be built.”

Moreover, Spaight also pointed out another problem of the current state of the GameFi industry, which is the simplicity and monotony of the games. While he believes that time will improve that, as of now, the games can get very tedious, laborious or just boring pretty quickly.

Others for instance also added that while the GameFi projects are diversifying when it comes to platforms and blockchains they are built upon, the majority of them are still built mainly on Ethereum. With extremely high transaction fees and a less than ideal scalability, this can be a problem for the future unless it gets solved either through migration to other blockchains or thanks to implementation of Ethereum 2.0 Merge.

Additionally, as was previously mentioned, some of the GameFi projects need an upfront “investment” or purchase of the in-game characters. While these might be okay for some, others might struggle with buying these NFTs, rejecting the game before even playing.

Future of GameFi

While no one knows what the future holds for any of the cryptocurrency subsectors, or anything else for that matter, some of the biggest companies, not only in the cryptocurrency world, but also in the finance world, have spoken very fondly about the prospects and the future of this sector.

These were for instance Morgan Stanley, which believes that the NFT world, Metaverse and the GameFi world will create an environment that will have a potential revenue value of 56 billion dollars by the year 2030. Grayscale was more optimistic and stated that by the year 2025, the Metaverse games and GameFi sector as such can see their combined value rise to more than 400 billion dollars.

The latest research by DappRadar that occurred in March of this year showed that there are approximately 1 400 blockchain games built on top of platforms such as Ethereum, Solana, Polygon, Binance Smart Chain, Harmony and countless others. That same research revealed that it turns out that all of this is on an upward trajectory, which can quickly lead to an exponential growth, if the popularity of P2E and GameFi delivers on its promises.

Conclusion

GameFi is one of the newest concepts that has recently gained attention in the cryptocurrency world. While some of the P2E games have been around for some time, GameFi has gained some form only recently, which also shows that it needs more time to flourish. If it delivers on the potential that it has, GameFi can become very important in the future of online video gaming. However, if the scams and Ponzi schemes prevail, this world can quickly become frowned upon.

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