In just five years, since the 2017 launch of CryptoKitties, GameFi has revolutionized the foundational concept of video gaming. With its novel play-to-earn (P2E) concept, GameFi empowers gamers to earn income by doing what they love — gaming.
Despite a five year history, this cryptocurrency market segment has only emerged on a wide-scale since 2020. Over these two years, its path has been tumultuous. The industry has seen a progressive series of developments and innovation and subsequently attracted inflows of new users, investment, and talent. Albeit, a broader 2022 bear market among cryptocurrencies and NFTs has challenged GameFi’s path forward. Projects with poor economic models operating solely on market “hype” have failed amidst the bear market, raising questions towards the long-term sustainability of GameFi.
With signs pointing in both directions, where does GameFi stand in 2023? This article will help the reader understand what GameFi is, how the industry has developed, and what opportunities and challenges lie ahead.
What Is GameFi?
GameFi, a combination of gaming and decentralized finance (“DeFi”), is a broad category of video gaming that features a play-to-earn model (“P2E”). Simply put, P2E enables gamers to earn income in various forms through blockchain-based gaming. To earn income, players typically farm or collect crypto-assets like NFTs through gameplay. Many games will feature a progression-based timeline, in which longer playtime will lead to player or in-game character development, which in turn enhances a gamer’s earning abilities.
The novelty of GameFi is that it has flipped the gaming industry on its head. Traditionally, video games were about driving revenue to the developers that made them. Developers would sell the game for a fee — or provide it for free and then offer in-game purchases for players to access add-on features. GameFi developers have revolutionized the economic model for gaming by swapping out “in-game purchases” for “non-fungible tokens (“NFTs”),” which in this case are typically characters, lands, weapons, or other in-game accessories. In these player-owned ecosystems, players are able to mint, purchase, and sell NFTs, which can be used to play the game and, in turn, earn more NFTs or cryptocurrency. By running these games on a blockchain, the blockchain also serves to verify players’ unique ownership of the items within the game.
GameFi Market Characteristics
GameFi is a rapidly innovating segment of the cryptocurrency market. While complex, its development hinges on the development of two components: a developer- and player-friendly blockchain and NFTs.
GameFi was enabled by the 2015 debut of the Ethereum blockchain. With the capability for developers to encode and deploy software directly on the blockchain, Ethereum created dApps, or decentralized apps. DApps offered developers an alternative to traditional applications, hosted on mobile phone operating systems or the internet. DApps offer the benefits of blockchain: resistance to censorship, immutability, and security.
Ethereum and similar blockchains also provided the technological foundation for non-fungible tokens, or NFTs. NFTs are digital assets that can only be held by a single owner at a time. Represented by a blockchain token, such as the ERC-721, they often represent a traditional digital media, such as an image, audio file, or video. Because each NFT is a unique token that only has a single owner, they often have inherent value due to their scarcity. In the context of GameFi, NFTs may take the form of in-game assets like characters, weapons, lands, clothes, etc.
The ability to run gaming dApps on secure blockchains allows gamers to take real ownership of gaming assets and sell their hard-earned NFTs on an open market to other players that may seek a particular in-game asset or more powerful items. These assets are tradeable for other assets and can be converted for cryptocurrency or real-world fiat money. This fundamental concept allowed for the creation of GameFi through early games like CryptoKitties, and, in turn, the popularity has led to significant innovation in blockchain ecosystems to support future development.
GameFi Market Vitals
Despite its relatively newcomer status among the broader cryptocurrency industry, GameFi has become incredibly popular, both among more mature crypto market participants and new adopters. In fact, GameFi accounts for the largest proportion of wallet activity among all dApp segments. According to DappRadar’s third quarter 2022 report, “gaming activity accounted for almost half of all blockchain activity tracked by DappRadar across 50 networks.” In September alone, there was a reported 912,000 unique active wallets (UAWs) associated with blockchain gaming.
The Industry Is Growing Quickly
Despite periods of laggard growth due to market turbulence, the GameFi market’s long-term trajectory has been explosive. Between January 2018 and February 2022, the total GameFi market cap increased from $0.48 billion to $22.04 billion, representing a compound annual growth rate (CAGR) of 180%. This value is a summary analysis of all 230 GameFi tokens listed on CoinGecko. Another analysis of 350 listed coins on Crypto.com yields an even higher market cap of $55 billion in the same period.
The development of the industry has been supported by the rapid growth of its user base. Over the 11 month period between March 2021 and February 2022, the compound monthly growth rate (CMGR) of daily active users (DAUs) was 29%, which is an approximate 2000% annual increase in gamers. That period also saw DAUs leap from just 62,000 to a peak of 1.4 million.
While GameFi was one of the strongest segments in the crypto space going into 2022’s bear market, it did not come out unscathed. As total crypto market capitalization fell by 60% throughout the year, many early adopters lost interest in GameFi as their NFT and crypto assets lost value. In the first half of 2022, daily active wallet addresses interacting with GameFi dApps maintained an average above 1.3 million; however, these dropped to around 800,000 by July.
Still, die hard GameFi adopters continued to push the industry forward. Though finishing the year with fewer gamers than it started the year with, daily transaction volume increased from approximately 22.5 million to 23.5 million per day by year-end.
Gaming Blockchains Are Diversifying
The blockchains on which gamers spend their time has also diversified. After the initial release of CryptoKitties in 2017, most games were deployed and played on GameFi’s progenitor, Ethereum. Today, GameFi activity occurs across a myriad of blockchains, and Ethereum even falls outside of the top six blockchains by number of GameFi players. The blockchains that boast the most GameFi activity, in order, are Wax, Hive, Solana, EOS, BNB, and Polygon. Between January and July 2022, Wax and Hive laid claim to 90% of total GameFi transactions and nearly 50% of total active GameFi UAWs.
A clear trend has emerged in which gamers place a high emphasis on quality, low-cost ecosystems in which to play. For example, as of July 2022, Ethereum still has the second most GameFi protocols among all chains with 571 games. Yet, with significantly less games, Wax and Hive are the most popular in terms of UAWs and transaction volume.
Beyond the games themselves, players emphasize low gas fees, a secure operating history, and interoperability as key concerns when selecting a gaming blockchain. Hive for example, boasts free transactions with less than three second transaction times. Meanwhile, as of mid-January 2023, it took an average 27 GWEI and 12 seconds to complete a single transaction on the Ethereum network, which is the equivalent of $1–2 USDT in cost; however, during periods of network congestion, this figure can quickly spike to 150+ GWEI and take hours to sign a single transaction, which severely impacts playability — and profitability — of Ethereum-based P2E games.
Investment Totals Are Growing
To support the development of this industry, financial participants have also deployed large amounts of investment capital. Despite the daunting crypto winter, investment into gaming projects increased by 84% year-over-year in 2022, jumping from $2.9 to $5.4 billion. Though this was lower than expected, GameFi investments (inclusive of blockchain-based metaverse investments) received 24% of all blockchain industry investments in 2022, the highest among all blockchain sub-market segments.
There are many reasons why investors have devoted incredible resources to GameFi. The main consensus, however, is that there is significant opportunity and potential in this emerging sector of crypto. After having been popularized only within the last two years, GameFi has still managed to become the most popular crypto market segment in terms of UAWs.
Investors see GameFi as a powerful disruptor. As the forefront of Web3, it has the potential to disrupt industry in the same way that Web2 did in the early 2000s. Though, similarly, the novel concept of GameFi has the power to disrupt our lives. Arianna Simpson, a General Partner at Andreesen Horowitz, wrote the following about the powerful opportunity with GameFi, “Right now there is a largely untapped economic opportunity in emerging markets to provide jobs by building a virtual economy in the digital world. The way we define a “job” is quickly evolving because of crypto and gaming, and we think we’re just starting to glimpse what’s possible in this realm.”
Future Outlook for GameFi
Future growth projections for GameFi are optimistic. According to estimates from Naavik and BITKRAFT Ventures, the blockchain gaming market will see a CAGR of 100% over the next three years, ultimately reaching a market cap of $50 billion in 2025.
It will take significant funding to achieve this level of growth. In 2022, the industry saw the development of numerous large funds that point to a positive investment outlook ahead. Andreesen Horowitz, an American venture capital fund, launched a $600 million gaming startup fund in May 2022. Immutable X, a blockchain platform that simplifies NFT trading, launched a $500 million investment fund in June to support developers and accelerate Web3 adoption. In the same month, Solana Ventures, in partnership with the Solana Foundation, announced a $100 million fund to support South Korean GameFi and DeFi developers. Last, in July and September, Animoca Brands respectively raised $75 million and $110 million in funds to further the metaverse. The fund will support strategic acquisitions, investments, product development, and more in order to enhance their vision of an open metaverse with true ownership of one’s digital assets.
Yet, industry funding has been severely impacted by the bear market. Investment in 2022 slowed to a trickle towards the end of the year, with less than $1 billion in new funding in December 2022. Still, large funding events that occurred in 2022, such as those of Andreesen Horowitz, Immutable X, Animoca Brands, and Solana, point to a generally optimistic outlook in the years ahead.
With massive investment and strong growth projections for the GameFi industry, there are several areas within the market that are poised to boom. We’ll cover a few, below.
The Metaverse Is Taking Shape
A key opportunity for future development in the industry is its fusion with the metaverse. The metaverse is a virtual reality in which users can interact with a computer-generated environment alongside other real-world users. The metaverse blends major technologies, including the internet, virtual reality (“VR”), augmented reality (“AR”), digital assets, and more to create a real-time 3D-rendered world or simulation in which many elements of the real world can be recreated, such as individual identities, objects, histories, payments, and accomplishments.
In GameFi, the metaverse is being implemented across games to allow gamers to connect and interact, as well as to allow players to earn income through new high potential channels. The metaverse takes the concept of NFTs one step further than its general P2E counterparts. In metaverse-based games, players can strap on a virtual reality headset to see and interact with their characters, avatars, objects, and other NFTs to collect in-game assets in a real-time simulation.
The metaverse, given its numerous uses outside of GameFi, is its own growth engine and can help to boost GameFi’s long-term popularity and growth along the way. On its own, the metaverse industry reached a market size of $47 billion in 2022 and is expected to grow by 39% annually to reach a $678 billion market cap in 2030. The fusion of these industries will also help GameFi tap into growing metaverse-focused investment funds; for example, in 2022, the metaverse segment of the crypto industry received a substantial $1.82 billion in investments. The sky is the limit for the future potential of GameFi, and investors remain prepared to support its development. To substantiate this, look no further than Animoca Brands’ recent announcement to launch a $2 billion fund to support the metaverse industry in 2023.
Traditional Game Developers Are Joining GameFi
The P2E gaming model has attracted many traditional gamers to switch over to GameFi games. This has, in turn, challenged traditional game developers. To keep their market share, many traditional game developers are testing the waters in GameFi. These firms have market-tested ability to develop popular games and have amassed large resources. As such, their participation in GameFi will help bring traditional structure and know-how to develop the nascent industry.
For example, last year, Ubisoft, the French gaming giant, announced a partnership with The HBAR Foundation to focus on the intersection of gaming and blockchain. As a part of this partnership, Ubisoft launched a Hedera-dedicated track within its in-house Ubisoft Entrepreneurs Lab. This program will identify promising projects on the Hedera chain and support them with financial investment, training workshops, and developer support.
Other large gaming giants, such as Tencent and Electronic Arts (EA), have also begun their foray into GameFi, though to lesser extents. The CEO of EA was quoted, calling GameFi “the future of our industry.” He went on to explain, “I think that in the context of the games we create and the live services that we offer, collectible digital content is going to play a meaningful part in our future.” While EA has yet to sponsor or create official GameFi titles, it publicly published a number of blockchain or NFT focused job postings as early as 2021.
GameFi developers have struggled to mix work and play, with many popular titles failing after initial hype due to poor playability or unsuccessful organic marketing campaigns. GameFi developers are becoming aware of this conflict, such as those at Decentral Games, who said, “A lot of the hype has settled down, but the games that still have active user bases have stayed alive for a reason. They are actually really fun to play.” This is the core opportunity for traditional gaming developers to propel GameFi. Given their successful track records and long operating history, large traditional developers like Ubisoft and EA have built world-renowned and globally loved franchises like Apex Legends, FIFA, Assassin’s Creed, etc. With 6,000 and 20,000 global developers respectively, EA and Ubisoft have the power and resources to create blockbuster hits in the GameFi space, making it a more sustainable industry based on playability, not just quick hype.
Cross-Chain Infrastructure Is the Future
As the industry grows in popularity, new developers and gamers are drawn into GameFi. Though GameFi began with Ethereum, the surrounding blockchain ecosystem has inherently grown to support the burgeoning community. By offering different features, such as better fee structures, faster transaction times, or a more secure platform, various blockchains compete for developers and users. Today, there are fifteen major blockchains supporting GameFi. This includes well-known blockchains like Polygon, Solana, and BNB Chain, but it also contains secondary up-and-comers like Harmony, Ronin, Moonbeam, and Celo.
As communities grow across varying blockchains, a unique opportunity for cross-chain infrastructure emerges. Kyoko, a cross-chain NFT lending marketplace, is at the forefront of this opportunity. In the third quarter of 2022, Kyoko released the world’s first cross-chain asset lending platform. Kyoko’s cross-chain asset lending platform (CCAL) allows lenders to list in-game assets across different blockchains on a single platform, while Guilds and players can borrow their desired NFTs to enter new games at a fraction of the cost.
Without such developments, players will have a hard time moving in-game NFT assets from one game to another, due to blockchain interoperability issues. As such, gamers will often have no choice but to stick with the games and blockchains on which they began, as their invested resources cannot be easily transferred. Stronger cross-chain infrastructure platforms like Kyoko will increase liquidity among digital assets and encourage gamers to invest more resources across different games.
GameFi Asset Lending Increases Market Opportunity
Asset lending is another opportunity within the GameFi space to maximize capital efficiency. Asset lending refers to the process by which players rent in-game NFT assets, like lands, characters, or weapons to other players. This allows the borrower to access necessary resources to play games at a substantially lower rental cost basis, and it allows lenders to make money from unused resources.
This opportunity is still underdeveloped across NFT segments. According to Dune Analytics, NFTs available-for-rent on the reNFT platform have only been rented a total of 312 times. However, GameFi, whose NFTs provide practical utility, are capable of pushing this opportunity forward.
GameFi asset lending will allow players to enter into new games at a fraction of the cost; however, it also unlocks a significant opportunity for GameFi Guilds. Historically, it required significant amounts of investment to purchase the in-game assets required to build a scholarship program for a new P2E game. However, GameFi asset lending will allow Guilds to expand their scholarship program offerings to a much more accessible level by only having to pay the interest on asset rentals as opposed to the upfront cost of asset purchases. Additionally, it will allow Guilds to capitalize on under-used or idle in-game assets by renting inventory for periods of inactivity.
Projects Are Built on Hype vs. Tokenomics
A key challenge that has appeared in 2022 is the impact of cyclical downturns in the crypto market, which has exposed weak projects with poor tokenonomic models and playability. Though, in the long-term, weeding out weaker projects will support a healthier ecosystem, losing hard-earned financial resources on a weak project may create hesitancy among players to invest time and resources into other games.
StepN, a popular GameFi game and innovator of the move-to-earn (M2E) segment, is a prime example of overblown hype in the sector. Although the game is still operating and could see a comeback, the game’s tokens, GST and GMT, saw an 80% drop in value from all-time-highs during 2022. In one particular month, June 2022, GST dropped by more than 90%. Just a few months earlier, the entry cost to the game was typically upwards of $1,000. Players and Guilds who invested in the game at the wrong time lost significant amounts of money. Over this period, the stream of new users were significantly impacted and slowed from an average of 18,000 per month to 13,000 shortly thereafter.
According to users, the key issue with StepN was the tokenomics, or token economics, model. Projecting rapid long-term user growth, the project paid out rather large rewards to users that would complete their daily walks or runs, the key task of the game. As hype surrounded the project, the cost to join the game rose rapidly, at some points up to $1,000 for the required digital “sneakers.” As such, the game became too costly to join, and the flow of new users began to slow. Additionally, with an unlimited supply of its native token, GST, there was no scarcity to drive long term value and the token supply was considered overinflated. With the combination of these poor tokenomics factors, the token was quickly traded into a death spiral on the secondary market.
Though StepN’s death spiral has since reversed and the token has gained momentum in recent months, many users have been scared off for good. This case and many others have set an example that hype is not enough to support sustainable GameFi development. Projects like StepN need to consider two main factors: tokenomic sustainability and playability. The tokenomics system, just like a real economy, must be supported by organic activity and offer sustainable rewards; after all, an uncapped token supply and unsustainable gains for early adopters should raise eyebrows. If the game is not enjoyable enough that adopters are willing to forego unrealistic returns to simply enjoy playing the game, then the long term outlook for the title is even more bleak.
The Cost of Entry Is Sky-High
The case of StepN sheds light on another key challenge of GameFi: the high cost of entry. Many play-to-earn games require the purchase or minting of NFTs before playing, and, as these games grow in popularity and new players fight for entry-level assets, so too does the cost to play.
Popular play-to-earn game Axie Infinity, for example, requires new players to have at least three different Axies to begin playing. Axies are Pokemon-esque character NFTs in the Axie universe, and they are typically purchased or bred by players. While they could be acquired for little-to-no cost in the early days of the game, due to Axie Infinity’s popularity, new players were expected to pay upwards of $350 for a starting team at the height of its popularity in 2021. Today, after a large-scale hack and nearly a year of bear market conditions, players should still expect to pay around $110 to form an average team, or even more for stronger Axies.
A popular solution to this is the Scholarship program offered by Guilds. Scholarship programs are a model in which a player community use their pooled resources to acquire NFT assets and then rent them to new players. This is a profit sharing model: new players benefit through accessing NFTs at a cheaper rental rate, but are then required to split their gaming rewards with the Guild. Generally, it is a 70/20/10 split: 10% is paid to the Guild as “rent,” 20% to the community managers, and 70% to the individual scholars. Still, even the largest Guilds do not offer untapped opportunity to play any game that players desire. Guilds function as a business and most do not have the resources required to offer players access to more than a handful of games. Yield Guild Games (YGG), for example, is the largest guild and only offers a catalog of 30 games.
Gaming Assets Are Isolated
The last key challenge to GameFi’s success is cross-chain interoperability. In traditional gaming, there is no risk to put one game down and pick up another.
However, in GameFi, players have devoted time and resources into developing assets, of which the value may be hard to liquidate. P2E games have yet to reach interoperability, and the blockchains that host these games are largely independent of each other. Today, there are over fifteen major blockchains supporting GameFi, and many more up-and-coming chains. Transferring NFTs across gaming blockchains is not typically feasible, which leads to inefficient siloed in-game assets. As such, gamers are often limited to games on the particular blockchain that they initially focused on.
The concept of scaling blockchains, or layer 2 solutions, has become a routine discussion amongst the crypto and GameFi communities. While some chains with outright interoperability exist, like Cosmos, Polkadot, and Avalanche, most of these lie outside of the GameFi space. Instead, originators of GameFi, like Ethereum, require add-on, or “layer 2 solutions,” to allow different blockchain networks to communicate with each other. Some, like Nir Hemo at Algorand, believe that interoperability through layer 2 solutions is part of the bottleneck to mass adoption, and was quoted saying “I think the mass adoption will come [heavily] from gaming…especially if we foster what I spoke of before: interoperability between games and in-game monetization via NFTs.”
Projects that offer solutions to interoperability challenges, such as those like the cross-chain asset lending platform offered by Kyoko, aim to address this issue and make the GameFi ecosystem more efficient for all industry stakeholders.
Kyoko Solves Industry Challenges
Kyoko’s cross-chain asset lending platform aims to solve the persistent issues challenging the GameFi market, including the rising cost of entry and siloed in-game assets across different blockchains, for both Guilds and players.
Cross-Chain Asset Lending (CCAL)
As mentioned above, Guilds and players need a way to transfer their investment from one game to another — regardless of host blockchain. Otherwise, players will end up with siloed in-game assets that have limited ROI and are difficult to convert into liquidity and transaction volume across the industry.
Still, NFT lending is in its early stages. While there exist lending protocols that aim to tackle NFT renting issues, such as reNFT, IQ Protocol, and Rentable, these platforms generally focus more on overall NFT lending like NFT art, music, and other categories unrelated to GameFi.
The use case for NFT lending in the general industry is yet to be developed. This has severely hampered its adoption; for example, in total, reNFT has seen just over 300 NFTs lent historically on its platform. This is understandable, as renting NFT artwork does not unlock any utility nor pass ownership onto the borrower. It provides little tangible value to the borrower.
However, GameFi is well poised to push this development forward, as NFT lending on-chain and cross-chain will allow new gamers and Guilds to both effectively lower the cost of entry into new games, as well as unlock games on varying blockchains to explore.
Kyoko’s cross-chain asset lending platform is at the forefront of this challenge. The CCAL platform allows lenders to list game assets across different blockchains on a singular platform. Borrowers can come to the Kyoko cross-chain asset lending platform to find the in-game asset they desire, while lenders can list their assets on the lending platform and customize the lending requirements according to market values. Once a borrower and a lender strike an agreement, the Kyoko platform will issue a smart contract that automatically exchanges assets and executes the transaction.
CCAL: A Solution for a Real World Challenge
To understand how the platform operates, consider the following example. Alex has one Thetan Legendary Hero with a current value of 1 BNB. He does not plan to continue using the Thetan Legendary Hero to earn income in the next month. However, he does not want to sell it, and estimates that the price of his asset will not exceed 1.5 BNB in the next month.
In this situation, Alex can list to rent out his Thetan Legendary Hero. He specifies the lending requirements, including a cash deposit requirement of 1.5 BNB, an interest rate of 12% APY, and a rental term of one month. Interest repayments will be charged when the borrower returns the hero.
Meanwhile, Bob’s Guild wants to extend to Thetan Arena, but does not want to bear the risk of price fluctuations for Heroes. So, Bob can come to Kyoko and find Alex’s asset listing. He deposits an initial 1.5 BNB to borrow the Hero, and will be required to pay interest on the Hero at the time of return. The Hero will be returned and interest paid in full after the one month lending period; otherwise, the 1.5 BNB will be liquidated and transferred to Alex.
The determination of the Hero’s value of 1.5 BNB is completed by Alex, or the lender, and is determined by two parts. The first is the market price of the NFT, or in this case 1 BNB. Second is the margin of safety set by Alex, which accounts for the risk of future NFT price increases, or in this case 0.5 BNB.
In this arrangement, Kyoko’s cross-chain asset lending platform allowed Alex to earn interest on his unused asset, while Bob was able to enter the Thetan Arena P2E ecosystem for just 1% of the sticker price to purchase a new Hero. The lender was able to monetize his unused game assets while the new player was able to play a new game and earn income more easily — and cheaply — than otherwise possible.
GameFi Will Endure On…
In the two years since GameFi’s emergence, the industry has endured a series of volatile ups-and-downs. Early winners, like Axie Infinity, have emerged, and over-hyped bubbles, like StepN, have been exposed. Developers have learned key lessons, such as the importance of playability and sustainable tokenomic systems, and users have highlighted key challenges to the road ahead, such as the high cost of entry and siloed in-game assets.
Though, behind this rollercoaster of information, one key takeaway is most clear: GameFi is poised for long-term future growth. Despite facing a challenging crypto winter, GameFi claimed more than 51% of all blockchain industry usage in September 2022, making it the most popular blockchain market segment. Investors have endured the harsh winter by raising large funds, and they are staunchly prepared to support the industry’s development. Because of this, projects that stand ready to tackle the industry’s challenges, like Kyoko, are well-positioned to benefit from the sky-high opportunities that lay ahead.
Kyoko addresses the most challenging issues in Web3. Kyoko’s cross-chain asset lending platform solves the persistent issues limiting the GameFi market, including the rising cost of entry and siloed in-game assets across different blockchains. Kyoko’s P2P NFT lending platform expands inclusivity and access to liquidity for NFT projects and holders through its decentralized fixed-rate NFT lending protocol. The $KYOKO token launched in April 2022.
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