What Is GameFi?

GameFi — a portmanteau of “game” and “finance” — involves blockchain games that offer economic incentives to play them, otherwise known as play-to-earn games.

Typically, players can earn in-game rewards by completing tasks, battling other players or progressing through various game levels. Many of the play-to-earn games on the scene right now rely heavily on what game designers call a grinding mechanic, in which players have to spend lots of time doing repetitive tasks within a game to advance or unlock prizes — or, in this case, crypto tokens.

Rewards also come by way of in-game assets like virtual land, avatars, weapons or costumes (also known as skins). In most cases, these assets are non-fungible tokens, or NFTs, which essentially serve as a “virtual deed” conveying ownership of a piece of digital art or media file. Like cryptocurrency, NFTs run on the blockchain, meaning they can be taken out of a game and traded or sold on a marketplace.

Each game has its own model and game economy. But, for the most part, these digital assets provide some sort of monetary benefit to its players — whether that be because they won a fight and earned crypto, sold an NFT they bought in-game or charged fellow players rent for staying on their virtual land. For instance, popular titles like Decentraland and The Sandbox focus on virtual land ownership, allowing players to purchase digital pieces of real estate, develop them, then charge other players to stay there.

Some play-to-earn games even let players generate passive income without playing the game at all through liquidity mining or lending their gaming assets to other players. Introducing abilities like these not only decentralizes the game even more, but it allows players to influence the development of the actual game via DAOs.

For example, Decentraland players get voting power on in-game organizational policies based on the total number of relevant assets they have in their wallet connected to the DAO. These include tokens, or MANA, “names” (which allow users to trade tokens), and parcels of virtual land. The idea is that, the more MANA, names and land a player has, the greater their personal stake is in the game, thus earning them more of an influence within the DAO.

Of course, the tokenomics — or supply and demand of a particular cryptocurrency — vary depending on the game. But most of the studios making these games are raising capital through token sales. How these tokens are allocated, how they’re unlocked and whether they’re finite or not varies. And many of these games are built on Ethereum, Solana and Polygon, which is a layer 2 chain on top of Ethereum that offers faster and cheaper token transactions.

“When you talk about the infrastructure here, it’s really around the type of blockchain you’re building upon,” Patel said. “Many of these play-to-earn games are almost virtual economies in and of themselves.”