A beginner's guide to the GameFi ecosystem
What is GameFi?
The gaming industry is tapping into the power of Web3 and brings together gaming and finance under what is now coined as GameFi. GameFi is a system where gamers and creators can accrue value in cryptocurrencies and nonfungible tokens (NFTs) for themselves through gameplay. These games are often hosted within virtual spaces called metaverses.
In a decentralized GameFi ecosystem, the platform offers the ability for gamers and creators to engage. Creators have the liberty to develop immersive games and engagement mechanisms, and gamers oblige. The value created in the form of “in-game tokens” and NFTs is distributed across stakeholders through robust economic models referred to as tokenomics.
A common term and model used by GameFi platforms is play-to-earn (P2E). Axie Infinity was the first firm to deploy P2E at scale with some success. The model works in the following fashion.
A gamer buys an NFT to use the platform, plays the game and wins gaming tokens. These gaming tokens can be converted into Bitcoin (BTC), Ethereum (ETH), fiat currency or stablecoins. NFTs used to play the games can be upgraded as the players get better at the game. These NFTs can be sold on NFT marketplaces for a higher price as they are now upgraded.
GameFi projects scale their gamers’ base through the P2E model and that builds the supply side for the tokens. On the other side, they also develop the demand side (burning mechanisms) for the tokens by introducing “in-game” marketplaces. These marketplaces sell in-game assets like weapons, vehicles and props.
As the supply and demand for the gaming token scale sustainably, the platform achieves network effects. This sets off a self-reinforcing virtuous cycle in motion and can be identified as a functional GameFi ecosystem.
While P2E was just the first Web3 economic model to have gained traction within GameFi, this model has been perhaps far too focused on building a gamers' base, which is considered the supply side of GameFi. However, the demand side that keeps the economy balanced hasn’t scaled fast enough, resulting in the emergence of other economic models within GameFi.
For instance, “play-and-earn” platforms have started to put gaming experience ahead of earnings. They hypothesize that it is the gaming experience that would keep gamer retention high. Earnings from the gameplay should be perceived as a nice add-on by the gamers.
These models are still being tested and tweaked for scalability and sustainability. As GameFi platforms have shown some success, this ecosystem has started to see new players emerge as support systems. These players often focus on the specific functions needed to keep the GameFi ecosystem healthy.
This article will expand on the key stakeholders of the GameFi ecosystem and their value addition to this space.
If you are a GameFi enthusiast, an understanding of the GameFi landscape would help you navigate the ecosystem better. Some of these players often have overlapping functions, yet identify themselves with primarily one function.
What do we need for GameFi to get started? Games. Game studios are in the business of creating games. They use technologies such as Unity or Unreal Engine, have creative minds developing the user experience, and developers then bring them to life on screen.
GameFi platforms like Sandbox (SAND) and Axie Infinity (AXS) generally have this capability in-house. GameFi organizations thrive on creating engaging gaming experiences and their game development capability must be second to none.
Games can be published as standalone apps or as parts of a metaverse. Metaverses are virtual worlds where participants can come together, play games, attend events, do some shopping and immerse themselves in the experience. Many GameFi platforms are part of a metaverse to ensure user retention.
The relationship between the metaverse and GameFi must be well established for the GameFi economic model to work. GameFi draws in the gaming crowd for the experience, and the metaverse makes them spend using the gaming/ecosystem tokens.
*Please note that the above distinctions are broad generalizations and are subjective to implementations and execution strategies.
Imagine playing a racing game with your adrenaline pumping. You win the game and as a result, a big pot of tokens. You come out of the game and see a Formula 1 brand’s merchandise or a Formula 1 superstar’s merchandise. The experience would make you click “buy.” You have earned the tokens and spent part of it on the economy.
If games attract and acquire users, the metaverse helps generate revenues from them through various experiences. Sandbox and Bullieverse are examples of metaverses that offer games. Decentraland (MANA) is a metaverse that allows users to explore several real estate features and events but does not offer games to its metaverse participants.
Most consumer business models need a distribution network of some sort. Gaming guilds are platforms that act as the distribution network for GameFi platforms. Why are they needed for P2E to function and what is their role?
As P2E platforms started to scale, the NFTs that gamers needed to play the game became expensive. For a player in Indonesia or the Philippines, which are key markets for P2E, $200 spent on a NFT to play a game is a big investment. Gaming guilds solve this affordability issue through a scholar and NFT renting model.
Guilds buy NFTs from the GameFi platforms and rent them out to the gamers (scholars). Scholars play the P2E games and share the spoils with the guilds as rent. Guilds make their return on investment (ROI) over time by renting the NFTs they bought.
Guilds started emerging in the GameFi ecosystem less than a year ago. They have improved their ROIs by being selective about the gamers to whom they rent NFTs. Guilds run scholarship programs to onboard scholars. These programs generate better ROIs for the guilds as trained scholars generally earn higher from efficient gameplay. Yield Guild Games, Merit Circle and Avocado DAO are a few well-known guilds.
NFT renting platforms
Guilds accumulate NFTs and rent them out to scholars. However, this renting process, itself, can be automated and provided as a software-as-a-service (SaaS) for games that, in turn, can offer to rent to their NFT holders. Some firms are focusing on building this SaaS capability.
Providing a renting function is an add-on benefit for NFT holders of GameFi platforms for the passive income generated. Yet, the NFT holder has the risk that their NFT will not be rented out. This demand risk is a business opportunity. Platforms now provide a fixed return for NFT holders and assume the risk of renting it out (or not).
In this model, however, the NFT holder will receive less income through the platform than through renting it out themselves. Yet, the risk of not having any rental income for a period of time is mitigated by a fixed return offered. These models are also evolving into DeFi value propositions for NFT holders.
Due to the emergence of many GameFi platforms over the past year, gamers have needed aggregation and curation services to pick and choose the best gaming experiences. Gaming marketplaces scan the landscape, pick the best games after testing them and feature them on their platform.
Their role is to try and bridge the gap between Web2 and Web3 gamers by providing a helping hand. Some of them have taken a holistic approach by offering to be an NFT marketplace alongside a game marketplace and curation engine. Rainmaker Games is an example of a GameFi marketplace.
Launchpads support young GameFi platforms in growing and thriving in the ecosystem. GameFi projects are chosen based on certain criteria, and they are provided an environment in which to create and execute their vision and strategy. Launchpads also support GameFi startups in finding good investors and scaling from there. This is similar to the incubator and accelerator models in the Web2 startup world.
Future of GameFi
We have discussed several stakeholders and their roles in the GameFi ecosystem. Due to the pace at which this space evolves, we will inevitably see new models or variations of the current models emerge soon. GameFi stakeholders are already exploring a few other use cases.
For instance, some platforms offer the ability to identify the right price for an NFT mint. Others initially started as guilds, but have tweaked or pivoted their model to become a marketplace of games.
This space is fast evolving and experiments are being run on a grand scale. This article has described the key players who make up the GameFi ecosystem. Apart from these players, there are investors, influencers, exchanges and market makers. These stakeholders add value across the broader Web3 landscape.