GameFi

GameFi, a blend of "game" and "finance", refers to video games built on blockchain technology in which players can earn cryptocurrency and own in-game items as tokens. Characters, land, weapons and other items are usually issued as non-fungible tokens, while rewards and in-game currencies are fungible tokens that can be traded on exchanges. Because these assets can be sold outside the game, time spent playing can, in principle, produce income.

The sector grew rapidly in 2021 under the banner of "play-to-earn", led by Axie Infinity, and then contracted sharply in 2022 as token prices fell and player numbers dropped. GameFi overlaps with decentralized finance, since many games include staking, lending or liquidity features, and with the wider idea of the metaverse. Its supporters see it as a shift in who owns digital goods; its critics see unsustainable token economies.

In most online games, anything a player wins or buys stays locked inside the game, and the game company can change or delete it. GameFi games try to change that. The sword or creature a player earns is recorded on a blockchain as something they own, and they can sell it to another player for real money, like trading collectible cards.

Some games also pay players in their own tokens for winning battles or finishing tasks. That sounds like getting paid to play, but those tokens are only worth what other people will pay for them. When new players stop arriving, prices can fall fast and the "earnings" can shrink to very little.

• Ownership of items. In-game assets are tokens held in the player's Web3 wallet, so they can be traded on marketplaces and, in some cases, used across games.
• Token rewards. Players earn fungible tokens for activities; these tokens can be spent in the game or sold, and are often paired with a separate governance token.
• Upfront assets. Many games require players to buy NFTs before they can start, which creates a barrier to entry and early demand for those items.
• DeFi features. Staking, yield programmes and liquidity pools are often built in, linking gameplay to financial returns.

Most GameFi titles run on networks with low fees or on purpose-built chains, because frequent small transactions would be costly on busier blockchains. Some studios have launched games through an initial game offering to raise funds by selling tokens or items before release.

Axie Infinity, developed by the Vietnamese studio Sky Mavis, became the best-known example in 2021. Players bred and battled creatures called Axies and earned a token called Smooth Love Potion. Earnings for a time exceeded local wages in some countries, especially the Philippines, and "scholarship" schemes appeared in which owners lent Axies to players in exchange for a share of their rewards.

The model depended on a steady flow of new players buying assets. When growth slowed, the reward token's price fell heavily, cutting earnings. In March 2022, the Ronin blockchain bridge used by Axie was hacked and assets worth more than 600 million dollars at the time were stolen; US authorities later attributed the attack to the Lazarus Group, linked to North Korea. Other 2022 trends, such as move-to-earn apps that paid users to walk or run, followed a similar rise and fall.

• Unsustainable economies. When rewards are funded mainly by new entrants, token economies can resemble a Ponzi scheme, even if not designed as one.
• Price volatility. Earnings and item values swing with crypto markets, and players can lose money on assets bought to start playing.
• Weak gameplay. Many critics and game developers argue that early titles put financial mechanics ahead of fun, so players left once profits fell.
• Security. Bridges, wallets and marketplaces have been targets for hackers, and fake games have been used to distribute malware or run rug pulls.
• Regulation. Depending on design, in-game tokens may raise questions under securities, gambling, consumer protection and tax rules, which vary widely between countries.

After the downturn, many studios moved away from "play-to-earn" towards "play-and-own" or "play-to-own", stressing ownership and gameplay over income. Larger traditional game companies have experimented cautiously with blockchain items, while some have rejected NFTs after player backlash. The sector's future depends on whether games can attract players for their entertainment value rather than for expected financial returns. Nothing here is investment advice.

• Federal Bureau of Investigation: press releases