The basic description of finance during our formative years of crypto always included the shell economy. Not the current corporate climate, the literal shell economy as described in Nick Szabo’s origins of money literature; it’s also Michael Saylor’s pitch for the reader to buy BTC at 50,000 USD. But the shell economy was a building block that would later lead to more sophisticated financial instruments and the basis for national economies. This is the current meta of crypto: creating (and recreating) financial primitives to foster more sophisticated and abstracted ways to pwn noobs.
GameFi is ownership through decentralized finance in gaming and is the natural progression in this shell economy evolution tree. Shortly after decentralized peer-to-peer e-cash came the computer programs on the blockchain that created DeFi as we know it. The trustless financial primitives such as staking, liquidity mining, and simple token trading created an environment that was ostensibly a game, high stakes and zero-sum as it were.
But the reader isn’t here for the blood sport, the reader is here for non-fungible tokens (NFTs), kitties and virtual land referred to as GameFi.
The essential primitives that make up the decentralized game are threefold and obvious: a protocol, the NFT, and tokens. There isn’t a large difference between DeFi and GameFi besides the art direction of commodities. Spreadsheets between DeFi and GameFi don’t differ much; green is good and therefore we toil to maintain it. Red is bad and therefore we scheme to mitigate it.
The simplest way to differentiate DeFi and GameFi: DeFi is unfettered finance whereas GameFi is rock-paper-scissor finance.
That isn’t to say there can’t be economic advancements or phenomena that can arise from participating in these gamed economies. There is an aspect of gaming that pwning noobs in real life doesn’t provide. We read books, watch films, and listen to music; the reader aspires to escape the realities of life. The emotions and wisdom are shared between the author and consumer, but the stakes remain for the in-story character to bear. Having said that, the real breakthrough of GameFi is the merging of the real world and metaverse stakes. If you lose in the game, you lose in real life.
To understand GameFi one only needs a casual understanding of the non-fungible token or the NFT. An NFT is a token standard on a blockchain where the supply of tokens is one. One distinct token is to be transacted across the blockchain. The reader either owns the token or doesn’t. The advent of NFTs, namely the ones used on the Ethereum Virtual Machine, allowed the user’s asset to attach tangible value to an asset that a bag of tokens does not easily have. There is a stark difference between the reader’s cat and a room with one thousand cats in the reader’s house, namely the smell and noise.
With NFTs taking the space by storm in the form of generative art pieces to be used as profile pictures (PFPS) there wasn’t much else to be done besides buying, selling, and watching number-go-up. The NFT did exist as a separate entity to the user and processed almost life-like attributes. They could look cool; they allowed the user to express themselves, but could they love? Through the power of mathematics, the answer is an ambiguous yes.
CryptoKitties on the Ethereum blockchain was the first mainstream success in GameFi. Cat NFTs that could be bought, sold, and BRED together. Each CryptoKitty, like the real-life we aspire to escape, possess genetic attributes of varying rarity. This was not a new concept in NFTs and that was the basis of the generative art-form, but the innovation came from creating genetic lineage through breeding; The non-fungibility of tokens was being realized through the creation of brand-new cats through cryptographically secured coitus.
So, it was now established that NFTs could love but could they hate? Through the power of mathematics, the answer is a resounding… Axie Infinity. Though the cynic would ask: Which ideas can we shoehorn onto the blockchain? The team at Axie Infinity did no such thing and asked: How can we innovate the pet breeding space?
Axie Infinity is the next iteration of the pet-based game. If CryptoKities is Tomagotchi then Axie Infinity is Pokemon. For some people, it is not enough to just breed their NFTs, but they also wanted to fight other people’s NFTs. Why does anyone breed anything? Axie’s could now be bought, sold, bred, and FOUGHT. They possessed genetic attributes like the CryptoKitty but they also possessed class attributes with certain class advantages and disadvantages between them in combat.
There is another aspect of the NFT token standard to explore: if one can own a virtual pet, one could own digital land. This is an interesting aspect of the NFT as physical land deeds might be the holy grail of NFT development. The next best thing is owning digital land in games like Decentraland or Sandbox which are other natural iterations of the GameFi space. They are the Minecraft’s and Roblox’s of GameFi.
Decentraland (MANA/USDT) and Sandbox allow users to buy, sell and use the land to their liking in a similar fashion to Second Life (pls stop, not that way). These are both player-driven economies using a toolbox of assets to dress up avatars and use the land the user owns to create an experience for visitors. If it isn’t bolted down, it can be sold for the game’s native token.
Though GameFi is exploding in popularity and there’s no indication of slowing down, this isn’t one of those articles that will list the next moon token. The games described above are great and required A LOT of hard work to create, they generally follow a formula of taking an existing game and putting it on a blockchain.
Before this article devolves into a criticism of this derivative space, it is wise to note the goal of GameFi: sovereign ownership of gaming assets and creating an internet of gaming money. Games rise and fall every day in America, but they can be rebuilt with composable economies. Look for those two properties in the next big GameFi project if nothing else.
Though sovereign ownership in gaming is an admirable and necessary goal, there are troubling trends that render the GameFi space unsustainable. This criticism is not meant to break down the space but is meant to add a rose tint to GameFi and make it more than a sea of game clones.
This new economy is driven by three types of people: The whale, the person born during social media, and everyone else. I may be an old fart in this space, but I am not ignorant. The slings and arrows of the old internet shaped me and in turn, shaped the way I view gaming economies. It certainly wasn’t to tokenize the world, far from it.
Blockchain as a technology is innovative, not as a way to leverage mathematics and computing power to transfer value between games. An immutable protocol and ledger give a game an overlooked property because it is inherent in the structure; Blockchain is a powerful anti-cheat. Internet gaming has been plagued with people hacking their gaming clients to gain an unfair and hilarious advantage in their respective game. In turn, gaming companies’ budgets have been plagued with the ever-increasing costs of the cat and mouse chase of anti-cheat technology. Not only does securing a game with a protocol like Ethereum make it impossible to cheat the creation of assets or tokens but so does the economy: Known stolen assets are effectively blacklisted.
GameFi can only be as pure as the foundation the game is built on. A token economy won’t improve a bad game design. Does GameFi just recreate games forever?
This is one of the troubling trends in GameFi: the asset is king in GameFi. There is currently no way of securing modern gameplay mechanics on the blockchain. Core physical mechanics of games like First Person Shooters or Racing are only possible to secure by the blockchain in the distant future, so they are outsourced to the user’s GPU and CPU. This is not the current goal of GameFi but it is important to account for if GameFi is to evolve. How can an asset be properly valued if its value is being constantly defaced on the client-side or by dilution of users across bad games that pay well?
The economy should come second to the engine, frankly. There is a protocol attempting to tackle this problem, though not necessarily for GameFi. The Render Network looks to provide companies a way to provide GPU power to render projects on the blockchain rather than in-house hardware. This is more meant for the creative industry but there are many stable geniuses working in crypto who are capable of hacking together something for gaming. Though Render Network was shown at Solana Breakpoint in Lisbon last year and like any project announcement in crypto, we will have to wait for the results.
For GameFi to keep from stagnating, developers need to look past economics and market cap. Value capture is good for the common pump-and-dump and is indeed good for the crypto game, but not in the long term. The GameFi developer must heed the events of history if it is to sustain itself in a trustless, decentralized manner and not devolve into a jungle of token flinging and chest-thumping.