Institutional Perspective | “Sustainable” GameFi

Axie Infinity

What is GameFi?

GameFi is the combination of the terms Game + Finance, which is inspired by DeFi (Decentralized Finance). The actual content of GameFi is far more than Game+Finance — Gaming as the medium, Finance is just an element empowered by blockchain. And therefore GameFi can also be called “Blockchain Games”, i.e. “Games built on blockchain which often contains one or more of the following attributes:

1. Tokens are originally from the game

2. NFTs as the key assets

3. Authentication for game access relying on a digital wallet (like Metamask)

4. Earning tradable tokens or NFTs as rewards in the game

Like traditional games, GameFi could also be classified as games with essential elements such as game players, rules, categories, and content. The major differences between traditional games and GameFi are:

1. Traditional game assets are relatively non-transferable, and GameFi’s assets (tokens/NFTs) can usually be freely circulated and traded

2. Traditional games require a set of accounts native to the specific game, while GameFi uses a general wallet for authentication

3. Traditional game data is opaque, while all GameFi contracts and on-chain activities must be transparent

4. Traditional game companies have a difficult to raise (equity) in early rounds for the public, while GameFi can raise early funding by launching token and NFT

5. Traditional games have poor equity liquidity and limited post-investment management. On the contrary, GameFi’s governance ensures high liquidity and effective post-investment management, as tokens are circulated freely and owners of said tokens are entitled to participate in the governance of the project.

Based on the above, GameFi operates differently compared to traditional games. For example, Axie Infinitely, which is popular in Southeast Asia, has provided many players with income far exceeding local wages with the P2E model (a model that is not new); “Metaverse land sales” also drew great traction to Sandbox, attracting well-known partners such as Nike.

At present, well-known projects in the GameFi field include:

1. Axie Infinity: A turn-based game that was a pioneer in the GameFi industry. Today, this game has launched its own chain Ronin for reducing gas costs and developing more projects.

2. Sandbox: The leader of the concept of Metaverse land sales, Nike, JJ Lin and many other topical characters and companies have purchased their land

3. Immutable X/God Unchained: TCG game, backed by well-known investors

4. Mini Royale: FPS web game with on-chain characteristics, backed by well-known investors

5. Mir4: A GameFi project run by a Korean-based gaming company. In essence, Mir4 is a traditional MMO migrated into the blockchain, which has a huge fanbase

6. Big time / Phantom Galaxies: GameFi projects aim to be 3A games, backed the well-known investors

Waves after waves of GameFi projects ushered in a huge bull market at the end of 2021 and came to an end as the time came to December. The tokens and NFTs of many projects depreciated substantially. Poor gaming experience also leads to stagnated user acquisition. Even the leader, Axie Infinity, saw a plummet in its token price. “Tokenomics” is considered the most critical factor that determines the quality of a project. There has been a long-term discussion around “How to evaluate the quality of the GameFi Tokenomics”.

How to evaluate the quality of the Tokenomics

Axie Infinity’s Tokenomics

Almost all the revenue of game products comes from the purchase behavior of players, and there are two motivations which influence the players’ purchase behavior: “Consumption” and “Investment”. For “consumption” behavior, players pay for the intention of getting non-monetary rewards. These rewards are mainly based on the in-game experience, such as the sense of triumph/satisfaction in the game and the fun of competition. For “investment” behavior, players pay for the intention of getting monetary returns. Players can get tokens and NFTs that can be sold into fiat currency and even get a return in currency directly.

In actuality, players will have one of the above incentives or have both simultaneously. Players with the only motivation of “Consumption” can be called “Spenders”, where their goal is to get the best gaming experience by spending money. In the case of “Investment”-based players, they are the “Earners”, who see getting monetizable in-game rewards as the primary goal. The majority of the players, however, lay somewhere in between “Consumption” and “Investment”. In other words, they are willing to spend in exchange for a better gaming experience while motivated by the return of their in-game activities, regardless of the ROI.

“Consumption” is the primary liquidity fiat currency provider for the game, while “Investment” shares a portion of the revenue from the game developers. Picture the GameFi project as a pool with the water inlet and outlet pipes turned on simultaneously. If the water outflow rate is faster than the water inflow rate, the pool will dry up. Although it is a simple depiction of the model, this example captures the essence of most failed Gamefi’s economy.

When in-game assets (tokens, NFTs or others) can be freely circulated, the two form a relationship similar to “national currency and foreign exchange reserves’. If a country’s foreign exchange reserves continue to decline or the domestic currency is over-issued, the domestic currency is very likely to depreciate. In GameFi, most in-game tokens are traded on DEX (very few are listed on CEX). Since DEX uses AMM, the reduction of token liquidity will inevitably devalue the game tokens.

When the “Earners” in the game always earn more than the “Spenders” put in, the token liquidity in the DEX pool will decrease, and the game assets, settled in fiat currency, will depreciate until the price drops to zero. In a game with zero asset price, the acquisition of any in-game NFTs is almost free, and it is difficult for game developers to obtain income from in-game NFTs.

Therefore, we need only one measurement to evaluate the quality of GameFi’s Tokenomics: Can the game maintain the stability of the number of fiat currencies in the system? This measurement can also be understood as: Are there enough “Spenders” willing to consume in games?

A good Tokenomic model ensures the sustainability of GameFi, and sustainability is a prerequisite for a medium-term investment portfolio(holding for more than 3 to 6 months). Considering the rounds and holding time of institutional investors when involving the GameFi industry. It is highly recommended to choose a project with better Tokenomics.

Strategy: How to allocate investment in GameFi

Venture capitals which focus on the traditional game industry usually adopt a strategy of “allocate the investment by game genres”. And the game’s genres usually determine the overall framework of Tokenomics. Therefore, we give out some recommended game genres for the GameFi investment, which categories are advantageous in Tokenomics.

Recommended genres

The game’s original numerical system is suitable for direct change to tokenomics.

1. SLG: Notable works include Clash of Kings, etc. The core gameplay lies in the attack and defense of forces. The competitiveness of this model will general irrational consumption impulses.

2. TCG: Major players include Hearthstone, etc. The core gameplay lies in card collection, exchange and battle. There is a demand for collection and a win/lose mentality, ensuring in-game economic stability

3. Gambling: poker, mahjong, blackjack, etc., the algorithm on-chain is open and transparent, having a win/lose mentality, ensuring in-game economic stability

4. MMO: The representative works include Mir4, having an established Earner-Spender model


Neutral genres

The game’s original numerical system is not suitable for direct change to tokenomics. The team’s improvement of the system reflects the team’s understanding and insights of the game genres and blockchain.

1. MOBA: Notable works include the Honor of the Kings, LOL, etc. Although there is also a win/lose mentality, this feature is more likely to lead players to enter the prisoner’s dilemma, and the entire game is only played by professional players

2. FPS category: Notable works include CS:GO, etc. The reason for a neutral rating is the same as above

3. RPG category: Notable works include Final Fantasy, Red Dead Redemption, etc., which focuses on content consumption, and direct tokenomics adoption is of little significance

4. Ultra-casual: Notable works include: Doodle jump, Fruit Ninja, Farmville, etc.. Revenue is mainly based on advertising, so current typical tokenomics is not suitable

Final Fantasy VII

Other dimensions: team composition, project management experience, distribution resources

This article discusses the impact of tokenomics on GameFi development and suggests some ways to evaluate tokenomics. Meanwhile, we believe that generic NFT, gaming guilds, UGC and other aspects are also important drivers for the development of the GameFi industry.

As more and more creative innovators join the GameFi industry, there will be more changes happening in the future. If you want to share other ideas about GameFi with the author of the article, or have plans to startup, please contact the author @0xCherrize . We are more than happy to share thoughts with like-minded people.

If you want to go fast, go alone. If you want to go far, go together.