Despite accounting for billions of dollars in spending each year, in-game items and currencies have long been devoid of real-world value.
The GameFi movement is working to fix this major oversight.
But what value can be created when we merge video games with decentralized financial technology?
GameFi is short for game finance. It’s a way of thinking about the intersections of value that can exist when applying the benefits of decentralized technology to the world of gaming.
Since the early days of crypto adoption, the idea of finding a way to combine decentralized technology with video game experiences has remained popular.
Back in 2018, this came to a head when Fred Wilson’s VC firm, Union Square Ventures, gave millions in funding to CryptoKitties: one of the very first public-facing instances of GameFi.
At the time, Fred Wilson justified the investment in a blog post.
“Digital collectibles are one of many amazing things that blockchains enable that literally could not be done before this technology emerged,” he wrote. “We also think digital collectibles and all of the games they enable will be one of the, if not the first, big consumer use cases for blockchain technologies.”
In many ways, the intersection of gaming and decentralized finance is a no-brainer.
After all, video game currencies can be thought of as an early prototype—albeit a very limited one—of the digital currencies that we have today.
Take massively multiplayer online games (MMOs) as an example. Searching the name of an MMO followed by a phrase like “buy gold” presents you with a range of websites on which you can trade fiat currency for an in-game currency that players perceive to have value.
While this often occurs in violation of a game’s terms of service, this is nonetheless a massively profitable industry. Within it, people conduct virtual labor by playing games to earn and then sell a “virtual currency”. Some game publishers have even built their business practices around encouraging this.
According to The New Yorker, people now spend more than $80 billion USD a year on virtual goods sold in video games.
But unlike cryptocurrencies, the value of virtual currencies and goods is severely limited in a way that is unfair to everyone other than the game’s publisher.
To understand how GameFi addresses this issue, we need to understand what decentralized finance has to offer.
DeFi is the decentralized finance industry. It is a juggernaut that encompasses everything from cryptocurrencies to the use of blockchain technology to enable decentralized financial platforms.
The core value of DeFi lies in the fact that it is decentralized; there is no single person or entity in control. Rather, the platform is governed by the users themselves.
This is handled through transparent and auditable software that allow trustless exchange to occur between peers in a network. In a decentralized system, the aim is for power to be distributed fairly.
This serves in stark contrast to traditional finance, where intermediaries such as banks and financial platforms are in control.
In other words, where DeFi attempts to give power to the many, traditional finance only gives power to the top few.
Today, thanks to the popularity of cryptocurrencies, decentralized applications (dApps), and other DeFi platforms, decentralized finance is widely recognized. The landscape accounts for billions of dollars in value each year.
Long before the DeFi industry became the juggernaut that it is today, visionaries identified that one of its primary use cases could involve revolutionizing the gaming industry.
While players have collectively spent billions of dollars buying in-game goods and currencies each year, the fact is that these “currencies” have traditionally been disconnected from real-world value.
The main reason why in-game currencies like gold in World of Warcraft and InterStellar Kredit in EVE Online, for example, are not considered to be true virtual currencies is because they exist entirely within a game.
Worse still, players do not actually own their items or in-game currencies.
At any given point in time, the publisher of a game can instantly render all of your in-game holdings null—regardless of how much time you spent earning them or what they mean to you.
Game publishers could revoke your items, suspend your account, shut down their servers, make an item untradable, and/or inadvertently tank the value of in-game assets.
In fact, most games will actually ban you for trying to “cash out” should you ever choose to sell your in-game currency for real-world currency.
GameFi addresses this issue by introducing video games to the core benefit of DeFi: decentralization.
By leveraging blockchain technology in the same way that cryptocurrencies and NFTs do, games can allow their users to actually own their in-game items.
When tied to a distributed ledger, in-game items become immutable and can also be easily traded for real-world value. In some instances, a player can even take their items with them between different games and online worlds.
When considered in the context of players spending over $80 billion dollars a year on in-game items, GameFi means allowing that value to connect back into the real world.
As a result, GameFi has massive implications for both gaming and the broader DeFi landscape.
The term “GameFi” still has a long way to go when it comes to enjoying the same recognition as DeFi. As shown by Google Trends, “GameFi” currently represents only a small portion of the landscape’s search interest.
Further education about the value of GameFi could address the term’s relative lack of popularity. In turn, this could allow the wider public to better understand what GameFi has to offer.
Beyond reconnecting a significant sum of value back into the world of finance, GameFi also allows significant opportunities for platforms to incentivize users. For instance, GameFi can mean giving players a way to earn real-world money in exchange for interacting with online platforms.
It can also incentivize communities to create assets for games and virtual worlds. Thanks to blockchain technology, their authorship can always be noted and they can be paid for the digital creations they sell.
Further, it’s no secret that playing video games is a massively popular activity across many demographics. As a whole, the industry accounted for $347 billion USD in value last year.
As a small-yet-notable portion of the games within this industry make use of the benefits of decentralized technology, previously unreached members of the public can be introduced to the true value of DeFi at the same time.
This means that DeFI and GameFi share an incredibly symbiotic relationship. Decentralization can help gamers have ownership of their virtual items and create a bridge between game economies and real-world finance. At the same time, GameFi can create new pathways for introducing the public to the DeFi movement.
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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.
Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.