Exploring the DeFi components in GameFi

In 2018, the two main ways video game players can earn a living were through e-sports and live streaming — or perhaps a successful YouTube channel. But, thanks to the rise of blockchain technology, the financial aspect has never been more interwoven with the gaming industry. While most users are acquainted with one or two facets of financialization in gaming such as earning and cashing out rewards from completing game quests a la Axie Infinity, there are several other methods exist that have yet to be explored by most users in the cryptocurrency market’s flourishing new vertical called GameFi.

CryptoKitties in 2017 is the first known game to use blockchain technology, introduce nonfungible tokens (NFTs) and enable players to have a verifiable claim on their virtual assets. Then, in 2019, the introduction of an in-game currency called Smooth Love Potion (SLP) boosted Axie Infinity’s popularity and paved the way for other decentralized finance (DeFi) components to penetrate blockchain gaming. Such parallels that GameFi has with DeFi include staking, liquidity mining, NFT trading and NFT fractionalization.

Last year, the gaming subsector of the cryptocurrency market exploded which came on the heels of the NFT market boom. It even outperformed Bitcoin (BTC) and the DeFi sector back in December. While the uptrend has fizzled out in recent months, popular games like Axie Infinity, DeFi Kingdoms, Pegaxy, MOBOX and Bomb Crypto continue to rake millions per day in transaction volume.

Much of the excitement around gaming in 2021 also stems from an increase in venture capital interest. For instance, Solana Ventures and Lightspeed Venture Partners launched a $100 million GameFi ecosystem fund in November 2021. A month later, BNB Chain, formerly known as Binance Smart Chain (BSC), and Animoca Brands also established a $200 million fund dedicated to GameFi projects built on BSC. 

There are elements of DeFi in gaming that have attracted investors and players alike and these are discussed below.

The NFT component

As mentioned above, NFTs were initiated by CryptoKitties, which has provided players a way to ascribe value and ownership to certain assets in a game. Take Axie Infinity, for example. NFTs on this Ethereum-based video game serve as the game’s entry cost. To begin playing, users must have three “Axies,” which are the game’s characters acquired from other players through Axie Infinity’s marketplace.

Axies are NFTs and their prices vary depending on their rarity and utility. Players can earn from Axies by finding buyers to whom they can be sold at a profit. With other games such as Splinterlands, NFTs take on the form of trading cards whose market value is also determined by their rarity.

Fractionalization

The concept of NFTs and fractionalization are intertwined but fractional NFTs make games more accessible to everyone. Fractionalization is essentially a whole NFT divided into smaller fractions, providing claims of ownership to several people such as the case of Gustav Klimt’s painting The Kiss, whose digital version was sold as 10,000 fractional NFTs. Owners of fractionalized NFTs can then trade their assets on secondary markets and make money.

It is similar to real estate crowdfunding which, incidentally, is another growing use case of NFTs. With gaming, on the other hand, rare and expensive in-game assets could best be sold under a fractionalized NFT as it democratizes the ownership process.