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What Is GameFi & How Does It Work? Crypto Gaming Explained

Read all you need to know about the crypto gaming world and how GameFi works.

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Key Takeaways:
  • GameFi refers to the growing sector of play-to-earn blockchain games that offer economic incentives to players.
  • Players can earn rewards in the form of crypto assets and NFTs by completing tasks, battling other players and progressing through the different levels of the game.  
  • GameFi protocols allow players to transfer their earned assets to cryptocurrency exchanges or NFT marketplaces to be sold or traded. 

The bull market of 2021 gave rise to a new sector in the cryptocurrency market known as GameFi, a fusion of gaming and finance made possible by play-to-earn games like Axie Infinity. 

By appealing to the widespread love of gaming and including the opportunity to make money while having fun, GameFi has emerged as one of the fastest growing sectors in the crypto ecosystem that has begun to give the traditional gaming industry a run for its money. 

GameFi has been rapidly taking over the traditional gaming industry since the rise of Axie Infinity. It attracts gamers by offering them an opportunity to make money while having fun. What is GameFi, and how is it different from the video games we’re familiar with?

What is GameFi?

As has become custom in crypto, GameFi is a fusion of the words game and finance to create a new sector fit for Web 3.0 and the rise of the Metaverse. In a general sense, GameFi refers to the growing field of play-to-earn blockchain games that offer economic incentives to attract players. 

This new sector of the market enables developers to create virtual gaming environments hosted on blockchain networks that utilize cryptocurrencies and nonfungible tokens (NFTs) to provide gamers with a novel way to do what they have always enjoyed doing while also earning a living in the process. 

Players can earn in-game rewards by completing tasks, battling other players, or progressing through the different levels. Once assets and NFTs have been earned, players can continue to use them in gameplay or transfer them outside of the host game to be traded on crypto exchanges and NFT marketplaces

How does GameFi work?

Rewards in GameFi typically come in the form of cryptocurrencies or in-game assets like virtual land, weapons, costumes or avatars. For most games, these in-game assets are NFTs that are hosted on the blockchain and can be traded on NFT marketplaces. In some cases, in-game assets need to be converted into an NFT before they can be traded or sold. 

As is the case in traditional gaming, many of the in-game assets in GameFi provide certain benefits to players and help them to earn additional rewards. Other items serve a more cosmetic purpose and have no impact on the gameplay or earnings, but they can add value to the sale price of the NFT they are attached to when it is sold in the open market. 

Various methods for players to earn rewards in crypto gaming include completing predetermined tasks, battling other players or acquiring a plot of digital land to build monetized structures on. Some games also offer passive income opportunities that don’t require direct gameplay such as staking or lending gaming assets to other players for a commission. 

The play-to-earn model

As mentioned in the intro, play-to-earn (P2E) gaming has emerged as the backbone of the GameFi sector and a challenger to the traditional pay-to-play model adopted by traditional video games. 

Rather than requiring players to pay an upfront fee just to access a game that offers no financial reward, P2E games often allow users to play for free and earn their way to a better gaming experience and a little side income. Instead of the crypto gaming company controlling the ownership of in-game assets, P2E puts ownership in the hands of the users while also offering them opportunities to make money.  

It’s important to note that each game and the model they employ are different, so it's important for users to practice due diligence and make sure they understand how a cryptocurrency game works before getting involved with any P2E game. 

Another reason to thoroughly vet a project before getting involved is that some games do require an upfront investment in an NFT or crypto asset that enables gameplay, so it's important to understand any risks involved before engaging with such a project. 

DeFi applications in GameFi

The finance (Fi) part of GameFi gets its origins from the DeFi products that are commonly found on GameFi projects such as staking, liquidity mining and yield farming. These features help incentivize players to keep earned assets and in-game tokens within the protocols ecosystem by allowing them to earn rewards, unlock exclusive items or access new gaming levels. 

On top of helping to incentivize gameplay and keep the value within the community, integrating DeFi elements also helps make crypto gaming more decentralized. Some GameFi projects incorporate Decentralized autonomous organizations (DAOs) that allow token holders in the community to participate in the decision-making process and vote for future updates to the protocol. 

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