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GameFi & The P2E Economy
The video game industry is one of the biggest industries today. With the global pandemic and people just sitting at home, video games became a scapegoat for many. If people weren’t watching Netflix or reading a book, they would go gaming, whether PC, consoles or even mobile. Thanks to Web3, the industry is witnessing a renaissance and is completely changing the rules.
In the startup world, we’ve read numerous articles and tweets about how gamification is the way to monetisation. Interestingly, a diametrically opposite approach has been adopted by Web3, which is trying to monetise games, not for the gaming studios, but the players. The conventional business model is like a one-way street with money only flowing to the businesses. The rise of NFT and blockchain is changing these power dynamics and giving rise to newer models where experience and the player are at the centre of innovation.
Gaming models have seen a rather exciting trajectory. Here’s how they’ve evolved over the years:
Pay to Play - P2P is a policy of paying a fee for playing a game. For years, this has been the go-to model for many massively multiplayer online role-playing games(MMORPGs) such as World of Warcraft or League of Legends. Users pay a certain fee to maintain their accounts and occasionally make in-game purchases. Examples include players’ skins and weapons in WoW and LoL games.
Free to Play - F2P games can be downloaded/installed and played for free. However, most free-to-play games include a marketplace where players who want extra perks can pay for skills, in-game weapons, boosts and things alike. But it’s important to note that fees are not necessary. In most cases, players get to enjoy the game using only base materials, and they are never required to purchase an item to advance in the game.
Play to Earn - Play-to-earn is a business model where users get to play a game and earn cryptocurrency while doing it. The idea here is to give gamers ownership over certain in-game assets and increase their value by playing the game actively. By participating in the in-game economy, players create value for other players in the ecosystem and the developers. In turn – they receive a reward in the form of potentially appreciating in-game assets. These assets can be absolutely anything ranging from appealing characters with variable scarcity to a specific type of cryptocurrencies.
Seeing through the hype
P2E games have received much attention in some developing economies, with the Philippines being the flag bearer and Brazil, Vietnam, and Cambodia catching up as players’ discovery and interest slowly increase. A reason that play-to-earn crypto gaming is getting popular in such countries might be the communal culture where information and trends can spread very quickly. Filipinos have traditionally been early adopters to many social networks and platforms like Facebook, and the pandemic has been distressing. People are finding new ways to engage themselves and, if possible, at all make some money out of such engagement.
But all this hype around P2E wasn’t because of its novelty or the kind of revolution it seems to bring to the gaming model. In the Philippines, like in several other nations, the pandemic led to lockdowns rendering millions jobless and open to earning money through gaming. As the unemployment rate fluctuates, the NFT game Axie Infinity has enjoyed massive popularity.
Axie Infinity is undoubtedly the most popular play-to-earn game in the crypto world. It’s inspired by some popular games such as Pokémon and Tamagotchi. Players can collect, breed, raise, battle, and even trade token-based creatures, which are, of course, called Axies.
These creatures can all take various forms, and there are currently over 500 different available body parts, including reptile and plant parts, bugs, birds, beasts, aquatics, and so forth. The parts classify in four different rarity scales: common, rare, ultra-rare, and legendary.
Every single Axie is a non-fungible token (NFT), and it has different attributes and strengths. Users can spend time and effort upgrading their Axis and trade them for cryptocurrencies on a dedicated marketplace. The earnings of a player will vary based on the price of SLP when they’re selling.
Its Vietnamese developer, Sky Mavis, reported that 29,000 of the 70,000 downloads of the game in April this year came from the Philippines. The in-game pets, called Axies, could be used to battle other players to earn SLPs (in-game currency), which are then swapped for cryptocurrencies like Ethereum and converted to pesos via Coins.ph.
This phenomenon has become so huge that players have been making several times the wages they previously earned. With this money, they’re buying homes and providing for others. This has caught a lot of media attention. So much so that the Philippine Bureau of Internal Revenue (BIR) announced that Axie Infinity players must register to pay taxes — something that has been met with confusion by players and dismay by the guilds that manage teams and take a cut of their earnings.
Following the BIR’s press release, Axie Infinity developer Sky Mavis released a statement saying it was open to “working with physical nations (governments) on a path forward that encourages innovation and empowers gamers.”
The catch with P2E games is that they’re not free to play. These games require some initial investment in the form of the players buying in-game characters or attributes that lets the player enter the game. To get started in Axie Infinity, players need to obtain 3 Axie Infinity characters.
In the earlier days of the game, the average Axie was selling for under $10. With the game’s rapid growth and the broader NFT rally, the average Axie is now selling for nearly $500. Small value transactions are the key to monetisation models, and here they were to be bought by paying in cryptocurrency (mostly Ether). The bull market, which coincided with rising gas costs and DeFi summer on Ethereum, got in the way and inflated the cost of playing disproportionately.
Now the game's co-founders say that they’re working on an update where each newly onboarded player will get a free starter set of Axies and learn about the game before making an economic decision. So, there is a smooth transition between awareness and activation, and while it’s heartening to see people wanting to take many steps to play the game, it’s essential for the ecosystem.
The Solution? Gaming Guilds.
As per Wikipedia, “A guild is an association of artisans and merchants who oversee the practice of their craft/trade in a particular area. The earliest types of guild formed as organisations of tradesmen, belonging to: a professional association, a trade union, a cartel, and/or a secret society.”
In the gaming world, a guild is something close to a DAO, or on some days, they are a DAO but for play-to-earn games. Their model is a mix of a holding company and cab-aggregator. Just as Berkshire Hathaway or BYJUS is a holding company for several businesses, guilds essentially hold play-to-earn gaming assets. The concept of an aggregator kicks in when the players who want to play are connected with games via these guilds.
Guilds lend expensive NFTs with zero downside risk to players without asking them to lock any upfront capital through their ‘scholarship program’. For example, a "scholar" in Axie Infinity is a player with access to NFTs on a lease to play without spending the $1,000 needed to acquire them. A manager is the individual deciding who to give these NFT leases to.
Every day hundreds of players post applications through the Axie Infinity Discord server. A typical application has the applicant’s name, age, nationality, marital status, a list of their devices, and internet connection quality. Many resumes include cover letters that focus on their expertise in other games and why they want to earn money playing the game. Once they are handed over the axis to play and start earning, they surrender a portion (usually ~30%) of their winnings but retain the majority.
These guilds are a mix of player support and a game distribution platform. They’re economically sound in the sense that they have their own tokens, assets and a part of the overall earnings going into the treasury. Popular guilds like Yield Guild Games(YGG) and GuildFi have their own tokens to decentralise the decision-making process of choosing games that the guild would invest in by purchasing in-game assets and providing its network of players. The industry had previously witnessed the misuse of guilds when community managers were paid to promote particular games by game studios. Guilds like YGG are the talk of the town because of the innovation they’re bringing in. In April 2021, Axie Infinity launched its own Ethereum sidechain - Ronin. Axie Infinity's users increased exponentially after this -- from 38K DAUs in April to 2.4M in just a span of a few weeks.
This thread by Darryl Wang, senior investment analyst at crypto investment firm DeFinance Capital explains the excitement about gaming guilds:
On an a16z podcast Jeffery Zirlin, co-founder of the Vietnam based company Sky Mavix that operates Axie Infinity, talked about how Ronin has facilitated the scholarship model.
He said, “It allowed for the proliferation of the scholarship model, because there are a lot of transactions that are involved in running a scholarship program. So, breeding Axies, sending Axies to different accounts so that they can be distributed to scholars, claiming in-game rewards, these are all transactions on a blockchain that on Ethereum would cost a lot and, oftentimes, take a while, whereas on Ronin, these have all become very cheap, free up until now, and much faster.”
YGG is also adopting a portfolio management point of view by incorporating sub-DAOs in representing different games. These DAOs would be independent of other subDAO and would only be accountable to a central DAO, i.e., YGG itself. This would optimise returns and eliminate the chances of the economics of a game being influenced due to some unrelated activity in some other game.
Guilds have become a steaming pot of gaming talent and will also serve as a launchpad for games that tap into their strong distribution by partnering with them. The players are incentivised to play, and the managers earn through scouting and training scholars.
Gaming has come a long way, and the inclusion of NFT and the opportunity to earn for the players and the studio makes it even more enjoyable. But as we’ve noted in our previous articles, decentralisation works on a spectrum. While the gameplay and its results might have adopted the trait, the game is still very centralised.
The studio developers still have the means to influence the game’s economy through multiple means of adjusting the rate and frequency of in-game items.
Here ia a primer on the in-game items in Axie Infinity that control the whole economy of it:
AXS is its core governance token
SLP, the asset earned by players and used to breed new Axies
NFTs are needed to assemble 3-axie teams to participate in Axie’s Play-to-earn system.
ETH has been flowing into the Axie economy due to the high demand for Axie NFTs. Increased demand for Axie NFTs has led to rising Axie NFT prices. Higher NFT prices have made breeding more profitable. Breeding requires fees paid in SLP & AXS, leading to a rise in token prices. With rising SLP prices, playing becomes more profitable, encouraging others to join.
Winning Axie Infinity battles and quests yields SLP, inflating the SLP supply. And since breeding is priced in SLP, an additional supply of SLP equates to cheaper breeding fees to create new Axie NFTs, inflating Axie NFT supply. These dynamics could impact NFT market prices, which may directly affect the economics of players. Due to the lower returns on investment, gamers that play the game just for commercial purposes start exiting the game entirely.
Credits: Joel John and JX - Decentralised.co
GameFi is the trojan horse that’s encouraging crypto adoption. It’s like a weather report for the next DeFi summer. The potential is much more significant, as the play-to-earn model means that many gamers will receive crypto assets for the first time. This is widely regarded as ‘GameFi’ - the intersection of gaming and finance.
As gaming economies become more elaborate, they will serve as testing grounds for DeFi protocols across practices like lending protocols, decentralised exchanges, synthetic assets and on-chain derivatives. The key will be to invest in the Fi part of GameFi because a single game’s lifetime could be short, but the Fi is essentially tech infrastructure that will last much longer.
A good indicator can be treasury reports published by YGG with an elaborate disclosure of how they’ve diversified their asset portfolio and are earning yield across a range of protocols. This includes the amount of farming yield locked in with DeXs and core DeFi holdings across wallets.
Popular P2E games
Apart from Axie Infinity, here are a few play-to-earn games that are seeing traction lately:
Alien Worlds - According to DappRadar, Alien Worlds, is one of the biggest dapps. It lives on the Ethereum, WAX and Binance Smart Chain blockchains, is a metaverse spread over seven planets and at its core is the concept of not one but six competing DAOs. The game uses non-fungible tokens and inhabitants mine for the game’s cryptocurrency trilium, much like the game currency AXS from the popular Axie Infinity game. Both currencies can then be exchanged for fiat. The goal is planetary mastery through staking and accessing higher-value features.
Splinterlands - This is a collectable card trading game that lets players earn cryptocurrency rewards by fulfilling in-game achievements, such as winning skill-based matches and player-versus-player (PvP) game modes.
Farmers World - It is an NFT-based farming game that allows players to purchase farming tools, in-game resources, lands, etc., to grow their farms and earn reward tokens. It also offers free-to-play mechanics beyond the usual P2E system. Built on the WAX blockchain, the game has seen significant growth lately. Farmers World requires users to own a specific NFT to participate. Additionally, players can earn rewards by battling other farmers while waiting for their harvest to complete.
Illuvium - The blockchain-based role-playing game (RPG) features 3D characters and monsters. Players can earn tokens by mining, harvesting, performing quests, and going head-to-head with other players. It is set for a beta launch in December 2021.
Plants Vs Undead - The multiplayer tower defence game lets players own their plants as NFTs. Plant Vs. Undead is a free to play mobile game that follows the play-to-earn mechanism. In Brazil, Plant vs Undead has gained significant popularity as it allows its players to earn rewards without paying any fee.
Major gaming studios like Epic Games and Zynga have shown their support to NFT gaming. The latter even hired a Vice President of Blockchain to incorporate the technology, but there hasn’t been much development.
Recently, Valve Software, which operates the massive gaming platform Steam, added a rule barring games that use blockchain technologies or allow users to exchange cryptocurrencies or NFTs. This rule appeared on its “What you shouldn’t publish on Steam” onboarding list for developers.
A deduction might be that Steam played a role in eliminating physical game stores and bought distribution rights to the players; with the emergence of micro-economies and NFT styled in-game items, the intermediary (Steam) might change.
Since we’ve touched the apprehension about crypto games, analysts like Wayne Zhao think that crypto games are still essentially in the shadow of Ponzi, i.e. they need new players to enter to pay for the early players. Making money is all the new players want, and keeping the game in a profitable state requires the price of the game's token to keep increasing to keep the cycle going.
GameFi in India
As per exchanges, around 20 million people hold crypto assets with about $10bn locked in. The opportunity for gaming in the country is vast.
What’s somewhat unique is the approach. The attempt by devs here is to onboard players by introducing them to something they’ve familiar with, i.e., sports fantasy gaming—projects like Rage.Fans and Oneto11 are trying to introduce sports-based NFT and tokenisation to the existing world of sports fantasy gaming. Not just this, they’re also working on other genres where the same model can be replicated.
Conversely, Zionverse - a metaverse gaming project being developed by Indian game studio Totality Corp., is trying to capitalise on India’s rich heritage of mythology and are introducing limited edition NFTs with artworks of such figurines. What makes them a hot sell is that they’re playable and have in-game use in the large metaverse project they’re developing.
Future of Gaming
The P2E concept is part of a rapidly expanding but complex virtual world called the Metaverse — a community of shared virtual reality that simulates the physical world where users can share experiences, workplaces, ideas, and trade items using NFTs.
Much capital has flown into purchasing pieces of land in games like Decentraland and the Sandbox. Virtual land is the top new commodity in the virtual space. This land can be used to host games, create housing, build multiplayer experiences, and every piece of land will have its own micro-economy. An unfair but watered down explanation of these games would be Roblox and Minecraft but on the blockchain.
As more such games gain prominence, land-owners will need people to manage, develop and build on top of them, helping a broader set of skill sets like designers to enter the space.
The Metaverse is dynamic and offers users many possibilities, including interoperability where a player can transfer assets between different games, win tournaments, exchange assets and sell rare collectables for huge sums. This would not just change the future of gaming but would also change the trajectory of gaming as a career.
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