While all categories of blockchain have been blazing hot in 2021, gaming took the top spot with nearly 13% of all investments.

With the seasons seemingly moving from DeFi to NFT and now to GameFi, the second half of the year was overtaken by huge gaming announcements and figures. For example, on August 6th, Axie Infinity generated $17 million in revenue, surpassing even Honor of Kings.

What makes GameFi so appealing, and what will happen once this initial burst of momentum wears off?

The term GameFi, short for Game Finance, was coined by Mary Ma in the 2019 Wuzhen World Blockchain Conference hosted by 8BTC, MixMarvel’s CSO, and refers to the integration of finance with gaming.

The primary means by which games generate their own financial ecosystems is via NFTs and liquidity mining. In this way, games become “Play to Earn”, or P2E in short.

Features that GameFi differs from traditional gaming:

Ownership of assets: In GameFi, through on-chain smart contracts, the game’s assets belong to the player rather than the developer.

Tradable assets in crypto markets: With the ownership of the assets, players can trade these assets, either NFT or tokens, in the open Crypto markets with other players.

Transparent data: All GameFi game codes are open source and transparent, and developers cannot simply change these codes. A player can also participate in-game upgrades and changes via a DAO, giving them a greater degree of participation.

Current Status of GameFi

Despite its promise, there are still several major problems most projects face in the GameFi industry. As an investor, you should assess the projects based on their likelihood of overcoming these challenges.

Small player base

There are roughly 3 billion traditional gamers, whereas the user base of GameFi is still only a fraction of DeFi’s total of 1.33 million. In the era of mobile gaming, on-chain games are predominantly based on the web, meaning it is unlikely to enter the mainstream until there are significant developments in mobile on-chain gaming.

Another reason that traditional gamers are not flocking to GameFi en masse is that it requires players, at this stage, to understand concepts such as cryptocurrency wallets, key phrases, and gas fees.

Congestion and high gas fees

Great games require frequent transactions, which puts a high demand on the network’s TPS (Transactions Per Second) and gas fees. The popularity of CryptoKitties in 2017 caused serious congestion on the Ethereum network, for example. One response to this has been to build out ad hoc infrastructure to support popular games, like Ethereum migrating Axie Infinity to a sidechain.

Poor playability

Even the most popular GameFi projects still look like traditional 3A games. In many cases, there is much room for improvement with playability—making the games purely money-making methods for many players rather than a fun activity that can generate some income.

This raises the question of whether integrating the money motive in games necessarily makes them less fun. If a particular game doesn’t generate enough income in the GameFi space, the player will leave to another. Therefore, this creates a cycle where developers are rewarded for focusing on the finance rather than the gaming aspect of a project.

One example of this is CryptoBlades, which saw a mass exodus of players in July after the game reduced its SKILL (the native token) rewards sending token prices plummeting. Hence, it takes longer than expected for players to recoup their initial investment, causing a more and more serious problem of players losing.

The same thing happened with Axie Infinity. In the game, the token Smooth Love Potion (SLP) is an important source of revenue for players to earn from the game. When the price of SLP fell, it led to a decrease in Axie Infinity’s revenue. Axie Infinity once helped people in countries like the Philippines to make a living at the beginning, but now players’ daily income from the game is less than the local minimu...