Messari: Interpreting GameFi from the Historical Development and Future Trends of Games

Original Author: Jerry Sun, Source: Messari

(Note: GameFi is built on the current innovations driven by blockchain, primarily NFTs and DeFi. If you haven't read about either of these, I would recommend some overviews on Messari.)

Listen to the conversations at conferences, on calls, or in meeting rooms in the gaming industry, and you will find a recurring theme: GameFi.

It's not just us talking about it; executives like Andrew Wilson have also noticed this phenomenon. As the CEO of Electronic Arts, his job is to position his company at the forefront of breakthroughs—he describes the emerging aspects of cryptocurrency as "a significant part of the future development of our industry," and this is no coincidence.

So what is GameFi, and how will it affect gamers?

Well, if you're like billions of people around the world, you might be playing games or know someone who does. Overall, the time spent in these digital worlds is often seen as "wasted time," at least in a direct monetary sense. All the hours spent building the strongest armies, collecting the best items, or completing the hardest levels over and over again completely vanish once you leave the game.

Now, what if it weren't like that? What if you could keep what you built? Not just keep what you earned, but also sell it to others, lend it out, or showcase it? While this sounds like a dream, it is the promise of GameFi, which is why leaders like Wilson are excited about the next steps. GameFi sits under a new genre where the digital economy does not end with the shutdown of a game, blurring the lines between in-game resources and real-world assets. For you and billions of others around the world, it represents a paradigm shift, an opportunity to reclaim time and ownership back into the hands of ordinary players.

1. What Does the Financialization of Games Mean?

GameFi is a portmanteau of "game" and "finance," operating on blockchain networks, aiming to merge the fun of gaming with the financialization of in-game economies. Distributed ledger technology is crucial not only for helping players provide verifiable asset ownership but also for building trading markets both in and out of games.

In this new type of gaming, all objects are represented as tokens on the blockchain. Therefore, every sword, piece of armor, or plot of land can be owned by you or anyone else in the blockchain-based game. In other words, in blockchain-based games, every gamer is both a participant and an owner. While game types differ narratively, a recurring goal is to accumulate resources. Playing well can allow you to accumulate more in-game currency (often represented as fungible tokens) or in-game assets (clothes, land, items), represented as non-fungible tokens (NFTs). The key here is that once you earn assets, you can exchange them on the market for other cryptocurrencies—or fiat currencies like dollars—for disposable income.

The concept of play-to-earn (P2E) games is not new (more on this later), but other aspects of GameFi are quite novel. Broadly speaking, the combination of cryptocurrency primitives (i.e., token incentives, smart contracts, etc.) with gaming has opened up countless possibilities. By leveraging the composability of blockchain, where a token from one application can be transferred to another, game NFTs can be integrated both vertically and horizontally into the game content of game studios. An item from one game—such as digital clothing or accessories—can be incorporated into other games to build a vast world.

Beyond gaming, tokenized assets in games can also be used for other purposes. For example, owners of hard-to-obtain game items will be able to use NFTs to prove their ownership, opening doors for discounts for hardcore players or in-person events for certain levels of gamers. Additionally, highly sought-after NFTs can fetch high prices; it’s not unreasonable to imagine game NFTs selling for similar amounts. In these valuations, game NFTs can serve as collateral for DeFi lending protocols, lending to individuals who need in-game task items, becoming members of exclusive digital communities, or being repurposed in the real world. The potential of NFTs as financial assets earned through gaming is ripe for exploration but remains to be fully tapped.

2. A Brief History of Gaming and the Direction of Its Development

The opportunities surrounding GameFi are enticing, but before diving deeper, it's worth understanding why this matters. What is happening with GameFi is, in fact, a continuation of trends that have been unfolding for decades. Power is shifting from game studios to players. If we want to understand what this means, let's take a journey down memory lane.

Pay-to-Play (P2P): The First Video Games

Almost all early video games started with the same revenue model. Users paid to play games. The first games, like Pac-Man (left), allowed players to play a round or two before asking for more payment. This evolved into PC games like Call of Duty or World of Warcraft (right), which sold permanent licenses or recurring subscriptions. While the transactions were straightforward, users had little power. The most obvious improvement was offering more gameplay time in the form of content expansions.

Free-to-Play (F2P): Democratizing Access to Games

Starting in the late 1990s, free-to-play games eliminated the paywall to access games. Fans could download products, start playing without upfront costs, and then decide if they liked it enough to spend money. Companies generated revenue from this model through advertisements or premium add-ons.

One example of the latter is selling customizable appearance "skins." Skins provide almost no value beyond aesthetic appeal—they do not give buyers any competitive advantage—but enthusiastic fans have a high demand for them. For instance, game studio Riot Games became a multi-billion dollar company due to the sales of popular skins in its League of Legends series. Note the similarities between these skins and gamified NFTs.

Games from this era were significantly more accessible. Players could sample different games, choose the ones they liked, and purchase at will to support their favorite developers. Power began to slowly shift to the players.

From Play to Earn (P2E): A Way to Make Money

The low barrier to entry created conditions for the first "play-to-earn" games. Remember that "play-to-earn" is not a new idea? As early as 2000, some free games, like Diablo II and Runescape, featured active in-game item markets. Players earned gold by completing quests, used gold to buy weapons or armor, and then sold those items for real money to buyers who hadn’t done the same.

Source: Sal's Realm of Runescape

Of course, during this era, such transactions were never recognized by laws, tax authorities, or anyone else. Gamers were able to establish their own small digital economies in a corner of the internet, but it was easy to be scammed, making participants more akin to shady characters than bustling entrepreneurs operating within established ecosystem boundaries.

What distinguishes current P2E is not just the complexity of the market. It’s also about the degree of autonomy you have over your assets. Actions are not confined to what game studios allow. If an operator goes bankrupt or shuts down its servers, you do not lose the assets you have built. This is why digital ledgers and NFT tokenization are important; they allow you to own assets on your terms.

The Future of Gaming: GameFi + Blockchain

All of this brings us to the critical question of the present: If GameFi has immense potential, what do today's GameFi games look like?

For those accustomed to game engines on desktops or consoles, the answer may be disappointing. As blockchain gaming is still in its infancy, the first generation of GameFi primarily consists of simple card-based games (issued in the form of NFTs) where players use their collectibles to battle each other. Think of something akin to Pokémon. Winning battles and completing objectives are ways for users to collect resources in these games. Popular games of this generation include Axie Infinity, Alien Worlds, Sorare, Gods Unchained, and more.

Among these games, Axie Infinity is seen as the current leader. In 2021, user numbers surged. Residents of the Philippines even played the game for income due to pandemic restrictions. Some people earned more from Axie Infinity than they did from their previous jobs, so they now make a living playing games. An award-winning documentary short titled "P2E: NFT Gaming in the Philippines" actually shares this phenomenon.

While the growth in users signifies interest in GameFi, developers must find a way to address high network costs. Currently, expensive transaction fees and slow processing times on blockchains hinder the ability to replicate top games on desktops and consoles, but ongoing network scaling experiments should alleviate these challenges over time. Alternative blockchains aimed at NFTs are also being launched to accommodate larger transaction volumes. Future games are expected to incorporate advanced gameplay once scalability is achieved, making them more appealing. Next-generation games like Star Atlas and Illuvium have already raised millions in venture capital to achieve these goals.

3. The World of GameFi

The potential of GameFi lies in the adjustment of incentive mechanisms. Players who own their game assets may become more engaged, loyal, and better at managing their favorite games. To achieve this, there are numerous startups and protocols supporting players, developers, and game studios. Here are some services adding value to the nascent GameFi ecosystem, from player engagement to developer relationships.

Player Guilds

As communities drive the onboarding of new players, one challenge is the upfront investment required to start. For example, the cost of purchasing Axies in Axie Infinity can reach hundreds of dollars. This fee is unaffordable for many players. In the long run, this is a problem that game designers need to address through the internal economy of the game. In the meantime, capital pools have formed in gaming guilds that help beginners fund their initial costs in exchange for revenue-sharing agreements. We can think of them as income-sharing agreements for coding boot camps, but for gaming instead of software engineering jobs.

GameFi Aggregators

The function of GameFi aggregators is to provide a platform for game-related content. Players can explore existing and upcoming games across multiple blockchain networks. Aggregators will also allow them to manage their NFTs in games, track earnings, and showcase mini-games. The idea is to create a one-stop shop for all tokens, game releases, promotions, and more. If all goes well, aggregators will have the opportunity to expand into other NFT realms outside of gaming, such as art collectibles and music royalties.

Initial Game Offerings (IGO) Launchpad

Launchpads are platforms designed to facilitate IGOs, which are fundraising events conducted through crowd sales. IGOs often occur when a project team needs funding to launch a game. Investors provide funds to finance the game's development in exchange for discounts or special features before the game's release. Participation in launch platforms requires certification under U.S. regulations.

NFT Blockchains

The pioneer of blockchain gaming, CryptoKitties, discovered that when the trading of the game's NFTs began to account for over 20% of all traffic on Ethereum in 2017, activity on the network became extremely congested. Competitors have also taken this lesson to heart. Today, multiple blockchains support NFTs, bringing the so-called blockchain wars to GameFi. Games exist or are planned to exist on default networks like Ethereum, as well as various other general-purpose and NFT-specific blockchains.

Developer Tools

Automating parts of the development process helps game studios get to market faster. Savvy entrepreneurs have recognized this demand and are now providing successful tools for developers. These tools include application programming interfaces (APIs), software development kits (SDKs), payment platforms, and general infrastructure services. Most parties involved in developer tools are centralized startups backed by venture capital.

Game Studios

Game studios are the final piece of the GameFi ecosystem. In a recent study conducted in the U.S. and the U.K., 58% of the 197 surveyed video game developers announced plans to use blockchain in future games. Among the same group, 47% have already begun incorporating NFTs into their projects. Early trendsetters are setting the tone for blockchain gaming, but comprehensive community development work is just beginning. This is something to watch in the coming years.

4. Elevating Gaming to New Heights

Characters in games need to level up continuously, and so does GameFi. Fortunately, there are two major trends favoring the ecosystem.

The first is the growing interest surrounding gaming. The rise of esports and live streaming has been a recent development over the past decade, solidifying gaming as a source of entertainment and a legitimate profession. Popular games are now competing with traditional sports, something many thought unimaginable just twenty years ago. Particularly, cryptocurrency gaming has seen a surge in interest. Compared to other NFT sub-theories, the amount of investment in gaming is the highest, highlighting a shift in venture capital focus as investors begin to seize opportunities in this space.

The second trend is the continued adoption of cryptocurrencies. GameFi is one of several pillars that simultaneously onboard new users into cryptocurrency. Combined with DeFi, NFTs, Web3, and other areas, an increase in overall blockchain activity in the coming years seems likely. Jumping from one vertical to another is quite common, meaning GameFi could benefit.

So, what does the future of GameFi ultimately look like? Predictions are speculative, but interesting activities and developments are accelerating. The opportunity to own assets freely, earn from games, and connect with a broader community is widely regarded as compelling features presented in this new cryptocurrency vertical. While the future is uncertain, one thing is clear: so far, the sentiment among participants—industry executives, game studios, investors, and gamers themselves—seems quite optimistic.