GameFi is revolutionizing the global NFT market. This is how crypto regulations could shape it

TThe intersection of gaming and finance in an environment powered by the use of blockchain, non-fungible tokens (NFTs) and smart contracts is often referred to as GameFi.

According to the Metaverse Awareness Survey, 40% of respondents said they are “interested in pursuing a mix of play and earn aspects of the Metaverse.” While 11% said they are more interested in making money and 49% said they are only interested in gaming.

Another interesting result of the survey was that more than half (53%) of the respondents stated that they would like to work in virtual gaming worlds if they could earn digital currency from their work.

Axie Infinity – a blockchain-based online video game that uses non-fungible tokens to collect monsters or “axies” to compete against other players – has become a major revenue generator for professional gamers and digital content in the Philippines and worldwide Developers are known to earn quite a salary given the scarcity of these skills.

In traditional gaming environments, players typically do not have the ability to own the in-game assets. However, at GameFi, tokens related to blockchain-based games blur the line between in-game resources and real-world assets.

In such gaming environment, users can purchase NFTs or crypto assets for participation and resource gathering while playing the game, be it in-game currency or in-game assets. Like all other digital assets, these can then be stored in a digital asset wallet or traded on a secondary market.

What are GameFi tokens used for?

In the gaming world, Game Finance or GameFi is creating NFT marketplaces for selling game-in assets, such as the game wins.

These weapons can also be leased and loaned to other players for a fee, and items won in one game can be incorporated into other games.

Outside of the gaming world, GameFi NFTs can be used as collateral for DeFi lending protocols and are eligible for staking, liquidity mining, and yield farming.

More and more NFT games are establishing an on-chain metaverse by selling virtual lands as NFTs and successfully integrating with cryptocurrencies, giving them real-world interoperability for the value of their in-game time.

Depending on their trajectory, GameFi tokens can be used for ownership or speculative trading, or even pave the way for more decentralized metaverses that may not be owned by a major corporation.

Below is a snapshot of the GameFi ecosystem.

The emergence of the GameFi ecosystem. Image: Messari

How are GameFi initiatives funded?

GameFi thrives on team expansion and attracting users to game development. Additionally, GameFi initiatives, such as Initial Coin Offerings (ICOs) or an Initial Public Offering (IPO), raise funds through initial decentralized exchange offerings (IDOs) funded by venture capitalists.

Most of these consist of various token allocation rounds consisting of public and private funding with reasonable provisions for marketing, game incentives and ecosystem development.

Another mechanism for raising funds for blockchain games is the Initial Gaming Offering (IGO), which provides gamers with timely access to games while helping developers raise more funds for the game project.

Once games are operational, GameFi projects create their own tokens and game rules around them, either through a utility or a governance token that also needs to be earned to create a revenue model for GameFi.

GameFi can be token based and the same token can be used to buy gaming avatars through their utility feature and distribute rewards to players through their governance feature which gives token owners the right to propose future improvements and game policies and vote on it, etc.

Some games may have separate tokens for in-app purchases and reward distribution, while others may also operate a three-token economy with a different token for incentives.

Since most of these games run on the Ethereum blockchain, a player needs to wager ether or convert fiat money to the cryptocurrency in order to participate in the game. The limitations of Ethereum’s scalability mean that many GameFi initiatives create their own separate sidechains.

Additionally, the fees collected in these games can end up in the treasuries of decentralized autonomous organizations (DAO) and be transferred to DeFi strategies.

Are GameFi initiatives regulated?

There are currently no specific regulations for GameFi due to ambiguity as to who should regulate GameFi – mainly due to its unique characteristics, way of doing business and its overlap with existing regulatory frameworks.

Here are the top regulatory concerns surrounding GameFi:

The nature of GameFi tokens

According to the proposed blueprint, any token invested with “earnings expectation” will likely be classified as collateral, as well as any projects that stimulate liquidity pools that will impact the DeFi ecosystem as well as GameFi projects.

Because if a GameFi token is used, for example, to buy special access rights in a blockchain-based game with the intention of later generating income or profit from it, then it can probably be classified as a security and attract the proposed regulations .

Marketing and promotion of GameFi

Similarly, Article 32(7) of the Gambling Industry Promotion Law of Korea clearly prohibits doing business of converting gambling products into money or arranging such conversion or repurchase of tangible and intangible results, which indirectly affects the dissemination and the Growth of play-to-earn games in the country.

Overlapping with regulations surrounding gambling

Some US jurisdictions prohibit gambling, including sweepstakes, which is fairly common practice for gamers in the GameFi ecosystem.

GameFi may also be subject to restrictions as it relies on virtual currency businesses such as crypto wallets, exchanges and token trading, which may themselves be regulated or banned.

On the other hand, many countries have introduced a tax on the transfer of virtual digital assets. Therefore, GameFi participants may have to pay taxes when making in-app purchases, receiving in-game tokens, or when converting/transferring their tokens.

The future of GameFi?

While there was a lot of interest in GameFi until last year, the crypto winter and many other factors appear to have slowed growth.

According to Cointelegraph: “The number of users interacting with Axie Infinity fell from a peak of 744,190 on November 26, 2021P, according to blockchain data aggregated by DappRadar, to 35,420 on August 20, 2022 – a 95% drop. DFK [DeFi Kingdoms] Players, meanwhile, fell 85% from a peak of 36,670 in December 2021 to 5,290 in August 2022.”

However, the total GameFi market capitalization as of February 11, 2022 and over a four-year period from January 1, 2018 to January 1, 2022 was estimated at $55.38 billion, the compound annual growth rate (CAGR) of all GameFi market cap was 180%, according to a Crypto.com report.

Naavik and BITKRAFT Ventures also estimated that the blockchain gaming market will grow at a CAGR of 100%, from $1.5 billion in 2021 to $50 billion in 2025.

Overall, there are certain shortcomings of traditional gambling that blockchain technology solves perfectly.

However, we need to be mindful of how regulations around cryptocurrency are evolving and how regulators decide to shape regulations around virtual digital assets that can guide innovation within GameFi.

Pooja Singh is CFA Senior expert for the financial sectorIMF

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