GameFi

The Perfect Symbiosis of Blockchain,

Tokens, DeFi, and NFTs?**

Juliane Proelss, * Stéphane Sévigny, † and Denis Schweizer ‡

Abstract

GameFi is a portmanteau of “game” and “finance.” The concept involves blockchain

games that offer economic incentives to play, otherwise known as play-to-earn (P2E)
games. We explain in detail how GameFi and traditional games differ, and carve out
the unique value proposition of GameFi. We explain how the mechanics of
blockchain games influence the social facet of P2E games, how guilds and clans
function as profit sharing organizations. We also show how GameFi leverages
different elements of the crypto space: Tokens, DeFi, and NFTs. Lastly, we discuss
in detail the challenges of GameFi.

This Version: December 31, 2022

Keywords Blockchain, Cryptocurrency, DAO, DeFi, Gamification, GameFi, Metaverse, NFT,
Play-to-Earn (P2E), Web3
JEL Classification G17, G23, P18, Q41

*
Concordia University, Associate Professor of Finance, John Molson School of Business, 1455 de Maisonneuve Blvd.
West, Montreal, QC H3G 1M8, Canada, Phone: +1 514-848-2424, ext. 2242, Fax: +1-514-848-4500, e-mail:
[email protected].
†
PhD Candidate in Finance, John Molson School of Business, 1455 de Maisonneuve Blvd. West, Montreal, QC H3G
1M8, Canada, e-mail: [email protected].
‡
Concordia University, Full Professor of Finance, John Molson School of Business Building, 1450 Rue Guy, Montreal,
Quebec, Canada H3G 1M8, Phone: +1 514-848-2424, ext. 2926, Fax: +1-514-848-4500, e-mail:
[email protected].

** Acknowledgments: We thank Paul P. Momtaz, Christian Koziol, and Larisa Yarovaya, as well as participants at the
Crypto Research Conference (Durham, UK), for many helpful comments and suggestions. Juliane Proelss and
Denis Schweizer gratefully acknowledge the financial support provided through the Jacques Ménard – BMO Centre
for Capital Markets, and the Desjardins Centre for Innovation and Financing at Concordia University.

Electronic copy available at: https://ssrn.com/abstract=4316073

 GameFi
The Perfect Symbiosis of Blockchain,
Tokens, DeFi, and NFTs?

Abstract

GameFi is a portmanteau of “game” and “finance.” The concept involves blockchain

games that offer economic incentives to play, otherwise known as play-to-earn (P2E)
games. We explain in detail how GameFi and traditional games differ, and carve out
the unique value proposition of GameFi. We explain how the mechanics of
blockchain games influence the social facet of P2E games, how guilds and clans
function as profit sharing organizations. We also show how GameFi leverages
different elements of the crypto space: Tokens, DeFi, and NFTs. Lastly, we discuss
in detail the challenges of GameFi.

This Version: December 31, 2022

Keywords Blockchain, Cryptocurrency, DAO, DeFi, Gamification, GameFi, Metaverse, NFT,
Play-to-Earn (P2E), Web3
JEL Classification G17, G23, P18, Q41

Electronic copy available at: https://ssrn.com/abstract=4316073

1. Introduction

As a response to mounting financial crises, Satoshi Nakamoto’s (2009) white paper introduced

Bitcoin, a digital peer-to-peer monetary system. This innovation brought true digital scarcity with

the invention of blockchain technology, a shared, decentralized ledger without a central governing

entity that allows for immutable trustless transactions (Corbet et al., 2019). Decentralized

blockchains provide users with true ownership of their native digital assets, and the ability to

transact with them freely and with finality.

The functionality of blockchains expanded with the invention of smart contracts, which allow

programming of blockchain native currencies (see Buterin, 2014). Smart contracts are addresses

on the blockchain with programmed conditions imposed on those who choose to interact with them.

These contracts are fully transparent and can be freely audited, so that individuals can conduct

complex transactions without the need for trusted intermediaries. Using smart contracts, traditional

financial (TradFi) activities can be replicated online and without any central authority. This is

known as decentralized finance (DeFi) (see Harvey et al., 2021). DeFi transactions occur on Web

3.0 decentralized applications (dApps) and include such activities as asset swaps (e.g., Ethereum

to U.S. dollars (ETH/USD)) that provide liquidity and lending and borrowing services.

Within these activities, the majority of fees generated are distributed to peers that facilitate

the transaction (e.g., liquidity providers). The balance is kept by the platform that provides the

interface. The most commonly used assets in DeFi are fungible tokens, which represent a form of

currency. However, in 2021, non-fungible tokens (NFTs) have also gained wide acceptance. Note

that each token equals a digital unit of value that represents an asset or utility. Unlike coins, tokens

do not have their own blockchains. They are issued on top of existing networks. Furthermore, they

are not mined in the process of transaction validation, but are instead minted.

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 NFTs can represent ownership (see Fairfield, 2021; Yousaf and Yarovaya, 2022) of any type

of item, ranging from digital art or images (such as the popular collected called Bored Apes), to

concert tickets, to real estate in the metaverse (see Chohan, 2021). The novelty is that digital assets

with fully unique characteristics and value are tokenized. But each NFT is unique, and tied to a

specific digital asset that is non-fungible in nature (unlike Bitcoin or USD).

NFTs originated in 2013, when Meni Rosenfeld (currently Chairman of the Israeli Bitcoin

Association) introduced the concept of colored coins. The idea was to tie real world assets to

Bitcoin as a way to authenticate ownership (see Rosenfeld, 2013). Although colored coins were

never implemented, they led to the release of the Rare Pepes memes in 2016 on the Ethereum

blockchain (see www.rarepepes.com).

In 2017, Larva Labs created CryptoPunks, the first of many series of randomly generated

unique character images (see www.cryptopunks.app). Series like CryptoPunks use randomly

selected defining characteristics, such as background, face, hair, hats, and accessories, to create a

collection of unique characters (there are 10,000 CryptoPunks). This collection inspired the ERC-

721 data standard that now powers most digital art and collectibles on the Ethereum network.

Owning these types of NFTs offers access to events, physical items, and various DeFi utilities.

Also in 2017, by leveraging NFT technology, Dapper Labs released the first official

blockchain game on Ethereum, CryptoKitties. It took the world of crypto by storm (see Jiang and

Liu, 2021, and www.cryptokitties.co). In this game, players purchase, breed, and trade virtual cats

that, like CryptoPunks, have unique defining visual characteristics of varying rarity. The game’s

popularity exploded, clogging the Ethereum network and accounting for about 25% of all traffic.

Regular transactions were delayed for days. Since then, multiple blockchain-based games of

various genres have been developed, such as Gods Unchained (see https://godsunchained.com),

which is comparable to ActiVision’s Hearthstone, and Axie Infinity (see https://axieinfinity.com),

inspired by Pokémon.
2

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 Blockchain-based games typically use crypto assets in two ways. They tokenize in-game items

as NFTs, and they use fungible tokens as in-game currency. Traditional online games are

considered “walled gardens,” where the in-game items, characters, and currencies exist on

developers’ servers. Consequently, users have no ownership rights to their accounts or content, and

items and in-game currencies are limited to that specific game. As such, players trade their time

and effort to grow their accounts, but gain nothing of lasting value. And, if they switch games, or

if the developer shuts down the servers, all is lost.

In blockchain-based games, the digital assets exist outside the game, and can be sold,

transferred into another game, or used in certain DeFi transactions. Thus, building a game around

blockchain technology redefines the incentive models for both players and developers. This has

the potential to revolutionize what is already one of the fastest growing industries.

GameFi is a term that merges “gaming” and “finance,” and can be defined as the convergence

of three markets: Gaming, DeFi, and NFTs (see Figure 1). Each of these components is significant,

and growing rapidly. The gaming industry at large, including PC games, console games,

social/casual gaming, and video games, generated approximately $200 billion in revenue in 2022.

And the number of players increased during COVID-19 lockdowns from about 2.6 billion to 3.1

billion. 1 Astonishing growth was also seen in the DeFi segment, which grew from about a $1

billion market capitalization 2 before the pandemic, to an all-time high of about $200 billion in

November 2021, before dropping significantly to $60 billion by the end of 2022. 3

1
See https://www.weforum.org/agenda/2022/07/gaming-pandemic-lockdowns-pwc-growth/.
2
Market capitalization is the sum of all market capitalizations for all DeFi projects. We calculate the market
capitalization of a DeFi project by multiplying the native DeFi token price, which is related to the respective DeFi
project, by the number of tokens in circulation.
3
See https://insidebitcoins.com/cryptocurrency-price/defi-market-cap-prediction.

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 We observed a similar pattern with the NFT market. It grew from almost no daily volume to

a peak monthly volume of about $5 billion in January 2022. However, it also declined by the end

of the year, to about $600 million in December 2022. 4

GameFi refers to games that are play-to-earn (or P2E), where players can earn crypto-asset

tokens (fungible and non-fungible) through gameplay. Players can sell the fungible tokens or NFTs

via exchanges or marketplaces for fiat currencies (such as USD), or use them on DeFi protocols to,

e.g., rent NFTs. Therefore, tokenizing in-game assets into NFTs serves as a way to bridge games

and DeFi, allowing for unique opportunities (such as creating yield-generating in-game assets).

This type of structure maximizes value for players, rather than extracting value from players (see

Hays et al., 2022). Unlike traditional gaming, effort and time is exchanged for entertainment as

well as ownership of digital assets, which is a new P2E model.

– Figure 1 about here –

The unique benefits and opportunities of GameFi, however, are only made possible by the

synergistic nature of its elements. The gaming aspect has a low barrier to entry and provides

entertainment, which drives new players and creates a marketplace while acting as a gateway to

crypto-assets. The NFTs act as securities that facilitate the monetization of certain game mechanics

while creating new revenue streams for developers via royalties from NFT transactions.

The DeFi protocols also act as a decentralized gamification of financial services, providing

GameFi players with an entirely new dimension to monetize their in-game assets. Besides simply

selling in-game currency fungible tokens, the key to P2E are the NFTs. They connect the game and

its community with decentralized financial services, such as “staking” and lending/borrowing.

4
See https://www.cryptoslam.io/nftglobal.

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 As previously highlighted, the integration of these technologies into games permits many

unique monetization strategies (see Figure 2). Traditionally, games generated revenue from pay-

to-play (P2P) or free-to-play (F2P) models. They used advertisements, in-game purchases,

subscriptions, and data monetization with the F2P, or the newer and rapidly growing “freemium”

model. In 2021, for example of the $200 billion generated in revenue, mobile F2P contributed about

38% ($75.6 billion). In these games, players have access to the game for free, but can accelerate

their progress, purchase more powerful items, or customize their look by paying for items, avatars,

or hard in-game currencies. Steady revenue is generated from average players, but most “freemium”

games depend on players known as “whales,” who spend large amounts of funds. Whales are

players that take gaming to the next level, seeking completion, optimization/ranking, and/or

recognition from the community.

For example, in Diablo Immortal, a recent mobile game, players have spent up to $100,000 to

optimize avatars. 5 The P2E model, in contrast, provides developers with new avenues for

fundraising and monetization. Investors may speculate on a game’s success and popularity, and

can inject capital into the gaming environment without playing the game, by purchasing in-game

currency tokens or NFTs. This raises the market capitalization of the in-game currency, and can

lead to steady revenues via royalties from NFT transactions. We note that developers have raised

enormous sums of capital with the initial issuance of in-game currency tokens, as well as by the

sales of virtual plots of land, such as in Sandbox, where one plot alone sold for $4.3 million USD. 6

– Figure 2 about here –

5
See https://www.forbes.com/sites/paultassi/2022/08/07/diablo-immortal-player-spends-100k-to-max-his-character-
now-too-powerful-to-matchmake/?sh=ed84b58df5c4.
6
See https://www.wsj.com/articles/metaverse-real-estate-piles-up-record-sales-in-sandbox-and-other-virtual-realms-
11638268380.

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 Integrating crypto-assets into video games comes quite naturally, because they are already

digital in nature. Moreover, crypto-assets also usually feature some form of in-game currency and

an economic model. Integrating blockchain technology permits the further monetization of various

elements, such as converting an in-game item into a tradable NFT. From a player perspective,

interest is heightened from the actual ownership of items, or progress earned for time and effort

invested, which can also be brought to market. Selling in-game items was previously very complex,

and not always possible. Therefore, the rise of tokenized items and currencies allows for a smoother,

safer, and more liquid secondary market.

Some research has noted the benefits to players in developing countries, who have been able

to earn a living via non-professional gaming with P2E games (see De Jesus et al., 2022). Game

developers are incentivized by the monetization mechanics. Not only do they draw adoption and

engagement, but developers benefit by taking a percentage of every in-game transaction. From a

community perspective, innovative DeFi products are being created for further monetization and

profit maximization.

Since GameFi is the nexus of three rapidly growing industries, it has itself experienced

exponential growth. Even during the depths of the 2022 crypto bear market, venture capital activity

was increasing in this sector, from $874 million in 2021 to $2.4 billion in 2022 (including

investment in the metaverse and other gaming projects). Therefore, as an important emerging sector

with the potential to disrupt large industries, it is essential to better understand the history,

underlying mechanisms, challenges, and expected trajectory.

Our paper contributes to the existing literature on DeFi and NFTs. The first set of papers focus

on identifying price dynamics in the NFT market, as well as the appropriate financial and

econometric models. Kireyev and Lin (2021) and Kong and Lin (2021) focus on valuation models

for two of the most successful and popular NFT collections, CryptoKitties and CryptoPunks.

Goldberg et al. (2021) and Dowling (2022) are interested in pricing factors for digital land in
6

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Decentraland. Kräussl, and Tugnetti (2022) provide an overview of the models used for pricing

NFTs. Nadini et al. (2021) expand their focus from single NFT collections to NFT transactions on

OpenSea, the world's first and largest web3 marketplace for NFTs and crypto collectibles. The NFT

universe is diverse, and Borri, Liu, and Tsyvinski (2022) analyze various categories independently

by creating indices. Oh et al. (2022) assess NFT investment returns, while White, Wilkoff, and

Yildiz (2022) show how NFT returns react to NFT-related news.

Our results contribute to this literature by illustrating how NFTs can be embedded in the

gaming ecosystem and intersect with DeFi applications. Furthermore, we find that NFTs are a key

component for the new play-to-earn functionality of gaming.

The remainder of this paper is organized as follows. Section 2 describes the evolution of

GameFi, and section 3 discusses GameFi in the context of Axie Infinity, a popular game in the

space. Section 4 explains the concept of guilds, which is illustrated in section 5 with the example

of Yield Guild Games, the leading blockchain guild. GameFi industry challenges are discussed

further in section 6. Section 7 concludes.

2. Evolution of GameFi

GameFi made its debut with CryptoKitties, which was released on November 23, 2017, and

largely flew under the radar. On December 2, 2017, the “genesis” Kitty, with identifier #1, sold for

247 ETH, which at the time exceeded $100,000 USD. This transaction was publicized, and drew

large crowds of speculators who were hoping to breed and flip Kitties. According to an analysis of

addresses tied to CryptoKitty transactions by Jiang and Liu (2021), activity peaked only eight days

later on December 10, 2017, and has steadily declined since. The authors attribute the sharp decline

to four specific reasons: Imbalance in the supply and demand of kitties; loss of profit in kitty trading;

increase in the gap between rich and poor players; and limitations of the blockchain infrastructure.

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 Thus, until 2021, when a variety of blockchain-based games were released, they saw only

limited success. The highly anticipated Gods Unchained, a digital trading card game not unlike

Magic The Gathering and Hearthstone, was released in March 2021. In January 2022, the developer

Immutable X reported having created over 13 million Gods Unchained NFTs, which generated $25

million worth of NFT trading volume over 65,000 unique user accounts.

Although that growth was impressive when compared to CryptoKitties, Gods Unchained’s

popularity and activity were ultimately dwarfed next to those of Axie Infinity. Released in 2018,

Axie Infinity experienced explosive growth in 2021, from a market cap of $29.6 million on January

1, to its peak of $10.5 billion on November 7. In February 2021, to help combat the prohibitively

high gas fees (transaction costs) of the Ethereum blockchain, Axie Infinity released its side chain,

Ronin. The reduced transaction costs greatly improved the game’s economics and value

proposition, which led to a boom in volume and deposited balances that has far exceeded

expectations. 7

Since November 2021, however, the crypto markets have been in a downturn. According to

CoinGecko, Smooth Love Potion (SLP), Axie Infinity’s in-game currency (SLP), saw a 99%

decline to $0.00256 USD (on December 18, 2022) from its peak of $0.3645 USD (on May 1, 2021).

Axie has also seen a drastic crash in its floor price, which once fetched $340 USD per NFT, but is

now at $6 USD. 8

The crash in both NFT and SLP token value has significantly decreased the economic

incentives of playing Axie Infinity, which has consequently led to an important drop in new and

existing user activity. However, to increase player engagement, they recently introduced land plots

and expanded the playable universe. This added utility and new ways for players to interact and

earn. The addition of digital land has had a particularly strong reception, with one plot of land

7
See https://explorer.roninchain.com.
8
See https://blockworks.co/axie-infinity-active-users-nft-prices-continue-to-decline-after-bridge-reopening/.

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selling for $2.3 million, and the collection has generated $4 billion in total sales. 9

The challenge now for P2E games such as Axie Infinity is their dependence on attracting new

users. When economic conditions deteriorate, those of the game do also, which decreases player

incentives and consequently activity. This is an important finding, that players are there to earn,

not solely for entertainment. Although all blockchain-based games are currently experiencing

lower engagement, development to solve these challenges and grow GameFi is accelerating.

There are many existing blockchain games, and each is unique in gameplay and mechanics,

but most have some core similarities. Thus, to better understand the mechanisms tying GameFi’s

elements together (gaming, DeFi and NFTs), the economic incentives driving the P2E model, and

the challenges facing the industry, we discuss in-depth a specific blockchain game. We choose to

study Axie Infinity, which is the most successful project to date from both a financial and a player

activity perspective

3. Case Study: Axie Infinity

Launched in 2018, Axie Infinity’s developers sought to expose people to crypto and web3 by

using gameplay. To this end, they built a game where players and developers would collaborate

through aligned financial incentives. Originally on the Ethereum blockchain, Axie Infinity

switched to its own dedicated Ronin blockchain in order to eliminate gas fees. At its peak in 2021,

Axie Infinity had 2.8 million daily active players (10 million total), and $3.6 billion USD of NFTs

traded on their in-house marketplace, with an Axie (playable digital pet NFT) selling for up to

$820,000. The game features a two-currency model: the in-game currency, known as Smooth Love

Potion (SLP), and a governance token, known as Axie Infinity Shards (AXS). The game is a digital

pet universe where players use fantasy creatures known as Axies, similar to the popular game

Pokémon. Axies have four main attributes, determined by the combination of six body parts and

9
See https://research.cointelegraph.com/reports/detail/gamefi-can-blockchain-based-gaming-redefine-the-industry.

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the class of the Axie, making each one unique. With these creatures, players can play solo in

adventure mode, to earn items and experience used to upgrade their Axies, in PvP Arena Battles to

win Smooth Love Potions, and through Breeding to make new Axies by reinvesting SLP and AXS.

Following private investments, the Axie Infinity project raised capital in 2020 like any other

non-Bitcoin crypto project, via an initial private and public sale of a portion of the total supply of

270 million (see Figure 3). Axie Infinity retained important portions of the total supply in order to

finance certain aspects, such as the Community Treasury and the P2E portion.

– Figure 3 about here –

The Community Treasury is used to finance future game development. Although initially

under the control of Sky Mavis, it is shifting to AXS holders as supply is issued. Treasury funds

are replenished with spent AXS tokens, and a flat 4.25% commission from all marketplace

transactions. The P2E tokens are awarded to players for various activities within the Axie Infinity

ecosystem, such as participating and winning in Arena, winning tournaments, interacting and

tending to their plots of land, using the Axie Infinity marketplace, breeding Axies, and for future,

currently unannounced, features. Therefore, by playing, players can earn items, Axies, in-game

currency (SLP), and AXS governance tokens.

The in-game mechanics combine to create a fully functioning in-game P2E economy (see

Figure 4). First, individuals who wish to play must inject capital into their Ronin wallets using

either the Binance integration or the Ethereum bridge. From there, they visit the marketplace on

the Axie Infinity website (web3), and acquire at least three Axies (the minimum for gameplay). By

using the Axies, they can play the game, and participate in Arena battles to win AXS and SLP

rewards. With these tokens, players may then either cash out, by selling them on the Katana

Exchange, or reinvest by using the tokens to perform in-game activities, such as breeding more

Axies. Although there are nuances and complexities to the in-game mechanics, the simplified

model in Table 4 generally summarizes the economic options.

10

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 – Figure 4 about here –

Similarly to many mobile games, player daily activity is limited by Energy points, which are

generated daily based on the amount of Axies owned (60 energy max with 20 Axies). Participation

in Arena battles costs players one energy point. Depending on their Matchmaking Rating (MMR),

which is a value rating in-game skill level, players earn between one to fourteen SLP tokens per

win. Therefore, players could theoretically earn up to 840 SLP per day, which in May 2021 was

approximately $180 USD.

With this earning potential, Axie Infinity attracted a large player base from developing

countries, with a particularly large concentration from the Philippines. Unfortunately, during the

2021 sharp price increases in the cryptocurrency market, players originally faced a high barrier to

entry. Acquiring the minimum of three Axies to play (twenty to maximize earning potential) cost

up to hundreds of thousands of dollars. However, because players own their NFTs, and could

interact with smart contracts via DeFi protocols, a multitude of interesting solutions were

developed.

One solution is the Scholarship Program, which is an agreement between two parties, the

Scholarship Manager (Player A) and the Scholar (Player B) (see Figure 5). Scholarship managers

are individuals who have accumulated a team of Axies and seek to monetize idle Axies; scholars

are individuals who lack the resources to acquire the initial three Axies. By using smart contracts,

managers can lend out teams of Axies to scholars in exchange for a percentage of earned tokens,

with a minimum quota per period (monthly or weekly). Through these programs and DeFi, NFT

owners can generate a yield on their assets, while players (who are disproportionately in developing

countries) have the opportunity to earn a living wage by playing. Because of the earning potential,

the demand for scholarships became so high that managers developed selection processes.

– Figure 5 about here –

11

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 In sum, Axie Infinity provides an excellent example of the mechanics of GameFi. Players are

able to earn in-game currency SLP, governance currency AXS, and Axie NFTs via gameplay (P2E).

These can be sold at popular cryptocurrency exchanges such as Binance, and ultimately exchanged

into fiat currencies. Besides monetizing their efforts via the sale of fungible tokens, players can

further monetize their gameplay activities by leveraging their NFTs and DeFi protocols. Using

smart contracts from DeFi, players that own Axies can begin to earn a yield on their NFT assets

via Scholarships. As such, players can benefit from an environment that maximizes their value,

while developers benefit from new, steady income streams.

4. Blockchain Gaming Guilds

While the concept of social gaming dates back to Atari, with the advent of digitization and the

Internet, social gaming has evolved dramatically. With the emergence of online gaming

experiences in the early 2000s, and massively multiplayer online role-playing game (MMORPGs),

such as World of Warcraft (WoW), players not only assume the role of a character, but can team

up within communities called guilds or clans. This quickly built social and democratic structures

within these early virtual worlds to coordinate around shared goals or quests and share in the spoils

of victory.

The same underlying social principles can be applied to blockchain gaming and P2E

ecosystems, where gaming communities worldwide can come together to complete tasks or quests,

and earn rewards in the form of tokens or NFTs. However, because resources hold real monetary

value, P2E gaming guilds tend to be operated much more professionally. One benefit of guilds is

they allow new users to start playing crypto games without a capital investment. Guild members,

or managers, give scholarships to new members, essentially renting out their NFTs, in the form of,

e.g., items such as weapons.

12

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 Technically, a blockchain gaming guild can be defined as “a collection or group of gamers

formed around playing, progressing in, sharing resources and monetizing blockchain based

games.” They are typically structured as so-called decentralized autonomous organizations (DAOs)

that work together to collectively acquire, manage, use, and monetize assets from blockchain games.

Operated outside specific games, guilds gravitate toward the games with the most attractive

incentive models. In this genre, as noted earlier, that is Axie Infinity, because it developed and

popularized the P2E GameFi as well as guild economies.

Axie Infinity also helped build this new genre by focusing on the infrastructure necessary for

gamers to enjoy the benefits of advanced blockchain-powered gameplay, while also profiting

economically. The idea and infrastructure to implement scholarships led to the development of

blockchain gaming guilds, because most new players could not afford the minimum purchase to be

successful at the games. 10 The high prices for essential items limited access for many gaming

communities.

Traditional gaming is usually free-to-play (F2P), but can be enhanced through

microtransactions to improve the gaming experience and success rate (commonly referred to as

pay-to-win). In contrast to traditional gaming communities, designed as groups of players who

routinely play together on a free-to-play basis, blockchain gaming guilds democratize the process

of generating revenue via gameplay and take the concept of online entertainment and

monetarization.

However, it is not only the players who can benefit from these blockchain gaming guilds, the

Managers can also maximize the utility and revenue generation of their NFT portfolios by securely

lending them to Scholars. As such, in-game avatars such as Axies can serve as yield-generating

speculative assets. Blockchain gaming guilds provide both Managers and Scholars with a variety

10
The most expensive Axie NFT sold was named “Crypto-Kitty.” It garnered 1,500 ETH (= $170,000 at the time).

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of additional opportunities in the play-to-earn ecosystem, by allowing them to gain exposure to

some of the latest gaming projects, such as parcels of land, which otherwise would not be possible.

This helps diversify income streams from play-to-earn gaming, and can increase expected revenues.

This is because blockchain gaming guilds often have first access to e.g. digital land and early access

to games opening up a spectrum of opportunities not being available elsewhere. Furthermore, most

blockchain gaming guilds are structured as DAOs, and can also gain considerable influence over

the game design by using their collective voting power to help ensure the longevity and profitability

of the games.

5. Case Study: Yield Guild Games

In the following section, we describe the organization and design of blockchain gaming guilds

through the example of Yield Guild Games (YGG). This was one of the earliest and largest guilds

by market capitalization ($150 million), discord members (~80,000), and partnered games (#38 as

of August 2022). The majority of other blockchain gaming guilds are organized similarly. YYG’s

initial proof of concept dates to 2018, when gaming industry veteran Gabby Dizon began lending

out his Axie NFTs to other players who did not have the means to purchase them. By late 2020, it

became clear that Axie Infinity had created an employment model that could help players in the

Philippines generate additional revenue streams while enjoying gameplay. As a result, YYG was

co-founded by Gabby Dizon and Beryl Li October 2020, and its primary objective was to introduce

as many people as possible to the play-to-earn revolution spearheaded by Axie Infinity.

YGG’s Whitepaper and Splinterlands SubDAOs Litepaper outline the initial project roadmap

and goals driving the guild, which include 1) maximization of the value of NFTs used in virtual

worlds and blockchain-based games, 2) building a global community of P2E gamers who play

competitively to collect in-game rewards, 3) producing revenue through the rental or sale of YGG’s

NFT assets for a markup, and 4) allowing the community to participate in the DAO by passing

proposals and voting, and 5) coordinating research and development for gamers in the DAO to
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arbitrage on yield generation by being competitive in metaverse-related games (see YGG, 2021a,

2021b). Put differently, the goal of the guild is to implement a business model aiming at generating

real world monetary value, by supporting the emerging digital economy through the earning,

buying, selling and renting out NFTs to players. For achieving the outlined goals, YGG is organized

as a DAO, which is subdivided into its Treasury, Vaults, and SubDAOs.

The main role of YGG’s Treasury is to oversee the management of assets to maximize the

value returned to the YGG DAO over time (see YGG, 2021a, p. 9). The Treasury performs multiple

economic activities, including 1) purchase of assets in the form of cryptocurrencies, virtual assets

in the metaverse, simple agreement for future tokens (SAFT), in-game tokens, NFTs to contribute

to the development of metaverse economies, 2) arbitrage farms to maximize yields, provide

guidance in economic events such as debt and interest payments, acquisition of assets including

any buybacks and future fundraising rounds, 3) performing financial operations such as accounting,

audits, reporting and tax.

Vaults are connected to the Treasury and consist of various guild functions and investments

with the aim to provide dividends to the Treasury, such as lending and borrowing, yield farming

tokens, staking tokens, NFT and other asset loan outs, purchases and sales (see YGG, 2021a, p.

20). Put differently, each Vault represents a token rewards program for specific activities. To be

able to claim dividends or rewards for a specific activity of a Vault, investors need to stake (locking

up) YGG’s native token in the respective Vault they want rewards from. Each Vault will have

specific rules such that it can stipulate a lock-in period and/or a rewards escrow or vesting period

in some cases. This is different to traditional DeFi protocols which allow token holders staking

their tokens to accrue yield at interest rate, which vary depending on supply and demand or

allocating tokens to a liquidity pool. In contrast, the rewards paid out to stakers in YGG’s Vaults

depend on the respective Vaults’ economic success, which is ex ante unknown. For example one

of the Vaults is dedicated to generate revenue from breeding and selling Axie NFTs whereas
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another Vault is dedicated to the distribution of revenue acquired from NFT rentals. These token

rewards generated from gameplay (breeding and selling Axie NFTs) or NFT lending are distributed

to guild members according to the portion of tokens staked by each individual guild member and

the amount of revenue generated by the source assigned to the respective Vault. This means that

guild members have the option to actively invest in different revenue stream where they see the

best financial opportunity or in a diversified basket of all its yield generating activities (“super

index vault”) instead of receiving a fixed rate.

The guilds’ SubDAOs can be regarded as miniature economies interacting with the larger all-

inclusive economy, which is the DAO itself, like subsidiaries of a parent company. A YGG

SubDAO is a specialized portion of a guild's main DAO and is dedicated to a specific game or

activity, for example a SubDAO is exclusively dedicated to players of League of Kingdoms and

another SubDAO to players of Axie Infinity etc. Members of a specific SubDAO, dedicated to, e.g.,

Axie Infinity, play and work together, with the aim of generating and increasing income from

various activities. The more successful the members of a SubDAO are the more financial resources

are available to them to better equip and strengthen their in-game characteristics, which increases

the likelihood of generating additional income. This structure of a DAO and subordinate SubDAOs

facilitates the specialization of the respective SubDAOs.

6. Challenges

Although P2E games have led to interesting developments, and offer both players and

developers unique opportunities, they are not without challenges. In their current state, most are

not economically sustainable. We next illustrate the P2E challenges, using again the example of

Axie Infinity.

In order for players to sustainably generate income via gameplay, positive net cash inflows

are required. This occurs naturally during periods of price appreciations in the cryptocurrency

market, when speculators inject capital by acquiring tokens. Otherwise, similarly to multi-level
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marketing businesses, the game is dependent on new players purchasing in-game creatures (Axies)

from older players. When the influx of new players slows or decreases, the game’s balanced

economic model is endangered, and the likelihood of failing increases (see Figure 6).

– Figure 6 about here –

Early signs are a decline in trading volume in in-game Axies, because of a decline in new

players who must acquire at least three Axies in order to begin to play (see Figure 7). Consequently,

this can lead to a decline in Axie prices due to oversupply. The situation is exacerbated by the fact

that there is no alternative for removing Axies from circulation, other than not putting them up for

sale. However, if players exit the game, it is in their interest to try to sell their Axie NFTs.

– Figure 7 about here –

This leads to another imbalance in the economic model, where the incentives to breed new

Axies are severely diminished (see Figure 8). Since breeding is the mechanism by which to burn

or reinvest SLP, and remove it from circulation, players are instead incentivized to cash out their

SLP. The resulting downward price pressure imbalances SLP inflation further.

– Figure 8 about here –

The second major challenge Axie Infinity faces, as well as other P2E games, is inflation of

the in-game currency (see Figure 9). For Axie, SLP is key to the game’s economic model and a

change in player behavior can imbalance the supply of the token leading to substantial inflation of

its circulating supply. There are three ways to earn SLP in-game, but only one way to burn it, which

is breeding new Axies. If interest in breeding diminishes, the currency supply will naturally inflate.

Because SLP has no supply cap, this can lead to drastic drops in price, and further exacerbate the

problem.

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 Another contributor of inflation is tied to the game’s popularity in developing countries. It has

been reported by Sky Mavis, the parent company of Axie Infinity, that about one-third of active

players are from the Philippines. Since many of these players are using Axie Infinity to generate a

living wage, they have a strong incentive to cash out their SLP.

– Figure 9 about here –

Furthermore, many P2E games have been found to be rather elementary, and lacking in

entertainment value when compared to regular games. This is reflected in the steady decline of

active players since the beginning of the 2022 decline in cryptocurrency prices across the board,

including AXS, SLP, and Axie floor prices (see again Figure 6). This clearly suggests that players

were primarily playing to earn income, rather than for entertainment. This is contrary to traditional

games, where players are eager to pay for playing because they enjoy the entertainment and

intensity of the game as well as the social interactions.

Relatedly, there are increasing occurrences of blockchain game projects that overpromise in

trailers, demos, and general communications about overall quality, while subsequently

underdelivering. One example is Pixelmon, a project that raised $70 million from its NFT sale (up

to 3 ETH per mint, or ~$9,200 USD at the time), and subsequently revealed in-game art falling

short of expectations (see Figure 10). The user backlash was so severe the project expunged all

traces of the original reveal from its website and Twitter account (see Figure 11). 11 This type of

outcome leaves customers’ expectations unmet, and foments disappointment and frustration, which

can negatively impact the credibility of GameFi and its mainstream adoption.

– Figure 10 and 11 about here –

11
See https://www.coindesk.com/markets/2022/02/28/pixelmon-nft-reveal-disappoints-with-hilariously-ugly-art/
and https://www.cnet.com/personal-finance/people-spent-9k-on-pixelmon-nfts-then-they-saw-the-art/.

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 When comparing the developers’ roadmaps and timeline against the development time and

budget of recent gaming projects it is easy to see why GameFi projects underdeliver. For example,

Pixelmon followed a standard development and release schedule, first by publishing a litepaper

detailing the project, its ambitions, and the following roadmap (see Figure 12). Similarly to other

crypto-asset projects, Pixelmon’s team followed the common formula of releasing a whitepaper,

creating excitement through a highly ambitious teaser trailer, raising funds for development with

an NFT sale, and then beginning development. Promising “the largest and highest quality game the

NFT space has ever seen,” 12 before raising the necessary capital to begin development, and then

expecting to complete the entire project within the same year, is unrealistic. This expected timeline

contrasts starkly with that of a top-tier game, Genshin Impact. It required two years of development,

with a team of 700, and a budget of $100 million USD. 13 As such, it is important that projects set

realistic, achievable expectations.

– Figure 12 about here –

In sum, current blockchain games are overly focused on economic incentive models, and

underfocused on actual game design. The game tokenomics also need to avoid self-reinforcing

cycles that can lead to high volatility. Such volatility can result in a death spiral. Expanding on

gameplay and creating multiple burn mechanisms that have actual utility for players can help break

these cycles, and even render tokens deflationary. Although GameFi does present exciting

opportunities, and the space is evolving rapidly, it is critical for the long-term success of the

industry that it mature and learn to set realistic expectations.

12
See https://pixelmon.club/adventure.
13
See https://in.ign.com/genshin-impact/174069/news/genshin-impact-set-to-become-most-expensive-game-of-all-
time.

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7. Conclusion

GameFi and gaming guilds have become one of the most promising avenues in the digital

asset space. Replacing in-game currencies with crypto-assets, and creating NFTs from in-game

assets, is literally a game changer. Shifting from a structure that maximizes the extraction of value

from players, to maximizing value for players, has proven to be a recipe for success if done right.

Players are now rewarded for time and effort invested with assets they own and can trade.

Gamers always valued these types of in-game assets, but were generally unable to safely

transact with peers. These changes also provide opportunities for game developers to collect

royalties on every NFT transaction, which can lead to interesting new business models. Lastly, the

ability to use NFTs outside the actual game, and to interact with smart contracts (using DeFi), has

led to imaginative solutions to in-game hurdles.

However, the hype about blockchain gaming, guilds, and in-game NFT have pushed prices to

unsustainable levels from a financial perspective. While guilds helped democratize access, and

enable gaming communities to participate in these games, future success in monetary terms

depends on the overall success of their partnered games. If a particular blockchain game fails, or

the demand for its NFT assets is suddenly reduced, a guild's SubDAO dedicated to the monetization

of that game's assets will inevitably suffer. This, by default, may affect the performance of its

superordinate DAO. This essentially means that the primary economic drivers ensuring the success

of gaming guilds are inherently connected to the success of the blockchain gaming industry and its

native tokens as a whole. However, blockchain gaming guilds have the advantage to diversify its

NFT investments across different games and gain exclusive early access to the most prominent

games on the scene ultimately increasing its value proposition.

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 Furthermore, the sharp decline in cryptocurrency prices in 2022 also left a mark in blockchain

gaming activity, which suggests their success is largely tied to the earning potential when playing.

Current blockchain games have been designed with economic incentives first and entertainment

and game quality second. For more enduring success, it may be important for industry developers

to shift perspectives and avoid misleading players with overly ambitious roadmaps. However,

continued heavy investment of venture capital in the sector during the bear market signals that

many market participants still see potential beyond the challenges GameFi and blockchain based

games face.

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Figure 1: Illustration of GameFi

Figure 2: The Evolution of Gaming Monetization

Figure 3: Axie Infinity Shards (AXS) Release Schedule

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Figure 4: In-Game Economic Model (Simplified)

Figure 1: Scholarship Program

Figure 6: Net Change in Axie Holders (Daily)

The graph shows the daily change of in-game Axie creature holders and is produced by using on-chain data compiled
from the Ronin Network, an Ethereum-linked sidechain.

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Figure 7: Axie Sales Volume
The graph shows the daily sales volume in USD of the in-game Axie creatures. Data is obtained from the Axie Infinity
Marketplace (https://app.axieinfinity.com/marketplace/).

Figure 8: New Daily Axies

The graph shows number of newly created in-game Axie creatures on a daily basis and is produced by using on-chain
data compiled from the Ronin Network, an Ethereum-linked sidechain.

Figure 9: Circulating SLP Supply

The graph shows the number of SLP token in circulation and is produced by using data from Messari
(https://messari.io/asset/smooth-love-potion/chart/sply-circ).

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Figure 10: Under-delivered Artwork Release

Figure 11: Deleted Posts

Figure 12: Pixelmon Roadmap 1.0

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