GameFi Decrypted: How Does the Play-To-Earn Model Work?

Play-to-Earn Tokenomics

Recently, we took a deep dive into tokenomics and the most important factors that influence a project’s success within the cryptocurrency space.

Today, we will continue our journey to analyze how the GameFi sector uses the trending Play-to-Earn model to compete with the controversial Pay-to-Win (P2W) scheme utilized in the traditional video gaming industry.

To better understand our topic, we have also included a case study about Axie Infinity, a popular GameFi project that leverages Play-to-Earn to incentivize its users for active engagement on its platform.

What Is Play-To-Earn and How Is it Different From Other Gaming Business Models?

According to Statista, the global video gaming industry is expected to grow from 2020’s $155.89 billion to $268.81 billion by 2025, with an 11.51% compound annual growth rate (CAGR).

Taking this rapid development and the fact that there are over 3.2 billion gamers worldwide, it is safe to conclude that gaming is a lucrative market. Furthermore, large publishers are leveraging this excellent opportunity to boost their revenue with the controversial Pay-to-Win (P2W) and Free-to-Play (F2P) business models.

Unlike more traditional models, where companies sell a complete game with all its content at launch, with paid downloadable expansions released at a later date at times, F2P projects offer players free access to intellectual property (IP), but often that does not englobe all aspects of the gaming experience. As a result, those who want the full experience have to purchase in-game items from the publisher’s official store.

Of course, this can be done in a more consumer-friendly way. Here, developers only implement micro-transactions for cosmetic items (e.g., skins, avatar appearance) that do not impact gamers’ performance.

In other cases, publishers broaden the reach of micro-transactions to include performance-enhancing items as well, such as weapons, characters, skills, and XP boosts. Since those who buy these assets gain an unfair advantage over players who don’t spend a dime, this model is called “Pay-to-Win,” a highly disliked scheme in the video gaming industry.

Unlike F2P, P2W, and more traditional schemes, Play-to-Earn (P2E) is a model widely utilized in the GameFi sector and the broader cryptocurrency space that is designed to reward players for active participation and engagement.

Most Play-to-Earn games convert all or a part of their in-game items into NFTs, which users can either acquire via official or third-party marketplaces (like in the case of micro-transactions, but with more decentralization) or earn by actively playing the game, participating in events and lotteries, as well as completing challenges.

Players can utilize the non-fungible tokens they earned in the game or optionally sell them for a profit via the cryptocurrency market. In addition to NFTs, P2E games often feature token rewards in either the native coin or an in-game currency.

GameFi projects take things a bit further by combining the activities of the decentralized finance space with blockchain gaming solutions. Here, users can play the game of their choice, collect rewards, and use the coins and NFTs they earned to boost their revenue by, for example, staking non-fungibles or supplying a combination of tokens and in-game items to yield farming pools.

As a result of the Play-to-Earn business model and the earning opportunities in GameFi, many have leveraged blockchain-powered games to supplement or completely replace the salaries of their full-time jobs.

For example, breeding, raising, battling, and trading cute creatures in Axie Infinity have allowed citizens of developed nations to earn more than the average local salary. Such a scenario includes a small community in the Philippines that leveraged Axie Infinity’s P2E model to generate revenue even during pandemic lockdowns.

How Do Play-to-Earn Games Work in GameFi (Axie Infinity Case Study)?

Even if you are completely new to GameFi and the blockchain gaming world, what we have explored earlier should provide you with fundamental information about P2E solutions. Now, the question is: how do Play-to-Earn games work in reality?

To answer this question, we will introduce you to the exciting world of Axie Infinity, one of the most popular GameFi solutions out there that utilize the Play-to-Earn model.

Similar to the Pokémon universe, Axie Infinity is centered around cute and fascinating creatures called axies that players can collect. These pets have numerous abilities and functionalities within the Axie metaverse, as users can:

  • Collect them via trading, breeding, or other ways
  • Breed them to create new axies
  • Raise axies, morphing eggs to adult creatures
  • Participate in mini-games and tournaments as well as battle other players’ axies to receive token rewards
  • Trade axies on the marketplace to earn crypto or expand your collection with more creatures

As discussed in the previous section, in-game items in Play-to-Earn ecosystems are present in the form of blockchain-based NFTs. And this is exactly the case with Axie Infinity. In addition to axies, players can earn, own, and trade virtual land plots and land-related items via the project’s marketplace and third-party services.

While Axie Infinity is a P2E game, users have to purchase three axies to get started. To acquire more, players can either use the marketplace or spend the Smooth Love Potion (SLP) in-game currency (along with some AXS) to breed new creatures.

Featuring unique abilities based on their body parts, each axie falls into one of three classes (beast, aquatic, or bird). These two variables influence stats like health points, morale, skill, and speed, as well as how the creatures will perform during battle.

Axie Infinity has a turn-based battle system in which players have to eliminate all three axies within the enemy team to win. And this is the exact reason why you need three creatures to get started with playing the game, as you need one defender and two attackers for the battling mechanism.

Interestingly, players can not only battle with other users but also with non-player characters (NPCs), which will allow them to earn AXS and SLP.

Unlike a traditional game, Axie Infinity is based on the Ethereum blockchain (with integration with the Ronin sidechain to achieve lower gas fees for transactions). The blockchain game is also owned and governed by its users instead of a company. However, it’s important to mention that developer Sky Mavis holds around 20% of the native AXS tokens and has the majority vote until October 2023 to prevent malicious parties from disrupting the GameFi solution’s ecosystem.

In addition to governance, Axie Infinity’s AXS token features the following functionalities:

  • Stake AXS to earn a passive income on your coins
  • Get AXS rewards for voting on governance decisions, playing the game, and participating in various activities (e.g., tournaments)
  • Breed axies by paying a combination of AXS and SLP
  • Settle various payments within the Axie Infinity universe (although WETH is utilized as the medium of exchange on the marketplace instead of AXS)

As you can see, AXS plays an important role in the Axie Infinity ecosystem. And due to its wide range of functionalities and the high demand for the game, the cryptocurrency has recorded excellent gains so far.

In addition to featuring an all-time ROI of nearly 50,000% (as of January 20, 2022), AXS surged from $0.59 on January 1, 2021 to $93.3 by the end of the year, growing its value by 158 times during last year.

How Do GameFi Projects Make Money With P2E?

As illustrated with Axie Infinity’s example in the last section, users can not only enjoy a Pokémon-like gaming experience but also have multiple opportunities to earn coins. Now, the question is: how do GameFi solutions make money with the Play-to-Earn model?

Interestingly, while Play-to-Earn offers gamers the chance to earn money, it’s also a lucrative business model that can generate good revenue for GameFi projects through various methods and channels, such as marketplace fees, land sales, and branded NFT collections.

For example, between January 26, 2021, and January 20, 2022, Axie Infinity generated $1.3 billion through marketplace fees and breeding costs alone. According to Token Terminal, Axie’s 365-day performance allowed the blockchain gaming project to achieve the second rank among the most profitable dApps (and even blockchains), behind Ethereum’s $5.8 billion and just ahead of Filecoin’s nearly $1.3 billion.

However, it’s important to mention that since Axie Infinity is managed by its community, all its revenue goes to the community treasury that is controlled by AXS holders.

But how do GameFi projects make money via Play-to-Earn?

1. Marketplace Fees

Since Play-to-Earn games feature tokenized in-game items in the form of NFTs, users are free to trade their assets on any marketplace that supports the project’s token standard.

However, while players have the option to utilize third-party platforms (e.g., OpenSea), GameFi projects usually operate their own marketplaces where users can conveniently buy and sell their in-game items without moving their assets to other solutions (or wallets).

For that reason, the official marketplaces of blockchain gaming solutions are usually where the majority of the transactions take place for a certain franchise’s in-game assets.

In exchange for the extra convenience offered – and, of course, to generate an income-, Play-to-Earn solutions usually take a cut from the transactions that go through their own marketplaces, despite the fact that there are a very limited number of direct in-game sales between the project and its users or none at all.

In the case of Axie Infinity, the project charges a 4.25% marketplace fee that sellers have to pay to the community treasury each time after they successfully sell an item.

To date, marketplace fees accounted for about 12.5% of the treasury’s income, making it the project’s second-highest revenue source. And, since new players have to purchase three axies from the marketplace to get started, we expect it to continue playing an important (or an even more significant) role in Axie Infinity’s finances.

While Play-to-Earn games seek to offer a way for gamers to earn money without necessarily spending a dime, it’s not uncommon for GameFi projects to require users to pay fees to complete a core in-game action.

This is a bit similar to how the Pay-to-Win model works for gamers: you can play the game for free, but you have to spend money on in-game items to achieve the best performance or to experience all the features.

However, the major difference between Play-to-Win and Play-to-Earn in this field is that the latter offers the opportunity for users to earn money that could cover the costs of a specific action, thus giving them a chance to earn back the money they invested into the game. 

As a result, while this offers an excellent revenue source for the protocol, the GameFi project can still remain committed to the core principles of the Play-to-Earn model.

While three axies are enough for users to start playing, participate in tournaments, and battle non-player characters (NPCs) and other players in Axie Infinity, breeding is an important feature that allows the community to expand their collection by adding new creatures.

Since breeding comes at a cost and accounts for most of the project’s revenue, all the AXS spent on breeding goes to the community treasury.

As of January 20, Axie Infinity collected over $1.1 billion in breeding costs, which is nearly 85% of all the revenue the project has made since its launch.

3. Land Sales

Just like in the real world, virtual land in blockchain games and decentralized metaverses are among the most valuable items individuals and organizations can hold. For that reason, they usually cost a lot. At the same time, since virtual land is sold directly to buyers by the gaming franchise, the majority of the generated revenue goes to the community treasury.

While most GameFi solutions can be played without purchasing any land, virtual real estate equips players with more abilities, resources, and benefits.

For example, while virtual real estate plots grant a decent amount of resources, unique items can be gained when a player achieves certain challenges. Subsequently, the more a character levels up, the more potential it has to generate revenue for the owners. Another way to earn money from virtual real estate lands is by renting them out in exchange for a monthly fee.

Crypto projects can also leverage this opportunity to buy huge chunks of land and display their logos on the map. This enables them to advertise their solutions to players while generating a steady source of revenue through land rental. 

Similar to metaverse projects like The Sandbox, Axie Infinity has also implemented virtual land to boost its sales and expand its virtual universe with more features and activities. As a result, players can purchase land in the axie homeworld of Lunacia to access additional benefits such as resources that regularly spawn in nodes and also the ability to host user-generated content.

According to the Axie Infinity whitepaper, land sales have generated about $15 million so far (4,500 ETH), with a plot of virtual land in the project’s metaverse selling for a whopping $2.3 million (550 ETH) in one instance.

4. Direct NFT Sales

As mentioned earlier, most of the asset sales on GameFi platforms,such as NFTs, take place between users. However, that doesn’t mean that Play-to-Earn projects can’t launch their own NFT collections, which they usually sell directly to their customers to generate an additional revenue source.

For direct NFT sales, projects often create very rare, limited-edition collections to make them even more attractive to users. At the same time, blockchain gaming startups can leverage this opportunity to acquire some capital to develop their products in their early stages.

Just like in previous cases, Axie Infinity serves as an excellent example here as well. In April 2018, the project held a presale in which it sold 3,112 special “Origin” axies to contributors, raising a little over $500,000 USD during the event. Furthermore, Axie sells land chests to its users, with each treasure box including one plot of land, a chance to gain unique genesis land, and various in-game items.

5. Game Sales and Subscriptions

In most cases, Play-to-Earn solutions start out with a limited number of games on their platforms. Created by their core teams, players can usually play these games for free, which is a good way to build a decent user base in the first few months after launch.

Later on, especially if they plan to create full-fledged metaverses, projects may introduce the necessary tools, services, and features for user-generated content. This can range from user-created NFTs and mods to complete games released by a professional development team. Most importantly, in addition to offering it for free, this type of content can be sold for a full price or a subscription fee.

Like in the case of popular video gaming platforms, GameFi projects will likely take a cut from these transactions to boost their revenue.

Axie Infinity is currently developing its own metaverse with the option to host user-generated content in the future. While the project’s plans are currently unclear regarding its revenue model in this field, it will be interesting to see what role the games, mods, and in-game items created by users play in the Play-to-Earn solution’s new ecosystem.

6. Crowdsales and VC Funding

Whether a team is building an NFT, a DeFi platform, an exchange, or another crypto service, the startup likely needs some capital that would allow it to finish the development, launch its product, and attract a decent user base. And this is also the case with GameFi initiatives.

To acquire this capital, GameFi startups can hold public crowdsales (e.g., ICOs, IEOs, IDOs) and private fundraising rounds targeting mostly VCs. Of course, while they can host multiple rounds and collect a significant amount of funds, this won’t provide the project with a continuous flow of revenue (like the ones we discussed earlier).

In the case of Axie Infinity, the project raised over $860,000 in a private sale and an additional $3 million from individual contributors through a public sale.

7. Partnerships and Other Revenue Sources

In addition to the methods we have listed above, there are many other ways for GameFi projects to make money via the Play-to-Earn model.

One of them is by striking partnerships with other crypto projects, and also with larger businesses outside of the industry. While these collaborations provide great opportunities, there are even better ones lined up for GameFi projects that feature DeFi activities like yield farming – the companies can launch dedicated liquidity pools for their partners.

Axie Infinity even lists advertising and sponsorships as additional resources that can be leveraged to acquire capital in the future. The GameFi team has struck deals with prominent projects like Maker, AAVE, and Kyber to hold experimental token drop events.

Play-To-Earn: The Gaming Business Model Rewarding Both GameFi Projects and Their Users

Play-to-Earn is an exciting business model within the video gaming industry that has the potential to compete with traditional schemes, such as Free-to-Play or Pay-to-Win.

By leveraging NFTs and utilizing tokenized in-game items and currencies to reward active engagement and participation, P2E provides a unique gaming experience for users as well as the ability to generate revenue by empowering them to earn and trade digital assets.

At the same time, Play-to-Earn also has great potential for publishers and developers. In addition to directing NFT sales, P2E empowers GameFi solutions with a wide range of revenue sources even without operating the centralized marketplaces of video gaming giants.

Play-to-Earn projects like Axie Infinity build decentralized metaverses through which they generate profit from user activity, such as NFT transactions, axie breeding, and virtual land auctions. While this enables the community to earn real-world money, it also allows GameFi solutions to remain profitable and fund the future development of the ecosystem.

Read our other posts in the GameFi series:


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