What Is GameFi, and How to Earn Passive Income by Playing Games?

GameFi merges the immersive worlds of gaming with DeFi, offering a unique opportunity to earn real-world value through gameplay and participation in virtual economies. Find out how to be a part of GameFi and earn cryptocurrencies or NFTs in crypto games by participating in competitions, trading in-game assets, or contributing to game ecosystems.

How does having fun and earning from it sound to you? Interesting right? Yeah! What we couldn't wrap our heads around as a possibility many years ago is now an astonishing reality living with us today — all thanks to blockchain technology.

The advent of blockchain technology and the subsequent discoveries in its real-life applications have entirely changed the realities in different economic sectors and redefined how the future looks and what is possible.

GameFi remains the most dominant sector in the dApp ecosystem, as per DappRadar’s Q3 2023 report on the State of Blockchain Gaming. According to the report, Web3 gaming and metaverse projects have attracted investments worth $2.9 billion in 2023.

Gaming dominates the dApp ecosystem globally | Source: DappRadar

In this article, we'll dive deeply into a concept made possible only by blockchain, where gaming and finance find a home together.

The evolution of blockchain technology has seen it spread into different industries, infusing financial freedom, inclusion, and power restoration to the average person.

In a recent trend, the gaming industry has also become a beneficiary of the dynamism of blockchain by introducing economic models like Play to Earn (P2E) models, which allow gamers to earn incentives, rewards, and income from doing what they love to do.

The term GameFi refers to combining "Game" and "Finance." It relates to blockchain games where players can earn money by playing or participating.

The GameFi ecosystem creates a virtual gaming environment that uses cryptocurrencies, non-fungible tokens, decentralized finance, and blockchain technology. Simply put, GameFi embodies a monetized version of traditional gaming experiences.

In most cases, in-game awards are obtained through fulfilling tasks, competing with other players, advancing through game levels, etc. GameFi is interesting because players can trade in-game rewards on crypto exchanges and NFT marketplaces for real-world monetary value.

Players have full ownership of all rewards obtained in tokens, NFTs, virtual lands, avatars, and costumes and can trade them outside the platform.

Since blockchain is a distributed ledger technology that stores immutable data, player asset ownership is undisputed — and in the case of game crashes or attacks, players' assets remain secure on the digital ledger.

The attempt to monetize gaming started when people tried playing games on some Bitcoin-related websites to earn Bitcoin for their efforts. Further attempts were made to run a GameFi concept on the Bitcoin blockchain but were mainly unsuccessful because of the limited block space, slow processing, and high transaction fees.

It prompted developers to move to the "Bitcoin killer," Ethereum — a blockchain built on smart contracts that goes beyond just a medium of exchange to enabling decentralized applications and finance, creating a unique decentralized ecosystem.

Everything was going well for Ethereum until a blockchain game, Cryptokitties, blew up in 2017 — causing a lot of traffic and congestion on the Ethereum blockchain. The more people participated in the games, the slower Ethereum became and the higher their gas fees. It soon posed a significant problem for app developers, and finding greener pastures was the way forward.

With larger capacity and speed, other blockchain platforms like Solana, Harmony, Polkadot, Wax, BNB Chain, Avalanche, etc., are now big competitors in the crypto gaming space.

In Q1 2024, the Web3 industry experienced significant growth, with daily Unique Active Wallets reaching 7.7 million, a 77% increase from the previous quarter. Blockchain gaming, which accounted for 30% of total Unique Active Wallets, also saw substantial growth, ending the quarter with 2.1 million dUAW, marking a 59% rise. Polygon led the quarter with a robust gaming ecosystem and initiatives like the Inevitable Games Fund. Ronin and Solana also showed resilience and innovation in the gaming sector, alongside BNB Chain's technical upgrades and SKALE's emergence with notable partnerships and grants, reflecting the competitive and evolving nature of the blockchain gaming landscape, with various chains striving for prominence and user engagement.

Gaming UAWs soar in Q1 2024, more active than other sectors | Source: DappRadar

GameFi games have a lot of similarities and consistencies, but different blockchain games adopt different models and game designs to create a unique user experience and gaming ecosystem.

Players can earn money from in-game assets like virtual lands, avatars, costumes, NFTs, customized constructions, etc. — but users must convert them to NFTs before trading them in an open marketplace.

Traditional Online Gaming vs. GameFi Games

The difference between Call Of Duty, Fortnite, Minecraft and Axie Infinity, Cryptoblades, Splinterlands, or Mirandus is boldly written on the wall. The former adopts a play-to-win model, gives you immersive user experiences but only enriches the pockets of the game developers and secretes excitement hormones in players. At the same time, the latter offers everything in the former with a bonus of paying you for playing and participating.

Traditional online games are structured for gamers to compete to win and accumulate paid in-game assets to gain competitive advantages for winning. Video games considered GameFi are structured for gamers to earn as they progress and participate in the gaming ecosystem.

Explore the top crypto games of 2024.

Crypto gaming is still a budding industry. Some key features set it apart from traditional online gaming, like:

Decentralized Finance

GameFi games are a combination of blockchain and decentralized Finance. The presence of DeFi components allows players to earn from staking. By locking up NFTs through smart contracts, some blockchain games enable players to earn a yield annually.

Gaming guilds like Yield Guild Games enable players to stake their cryptocurrencies and NFTs to earn interest. Guilds also lend in-game assets to players who can't afford them and earn commissions.

Immutable Asset Ownership

In-game assets are not a new concept in gaming, and players trading them within the game has been common practice in popular games like Fortnite and Call Of Duty. The difference GameFi games bring with the help of blockchain, and DeFi is giving in-game assets real-world monetary value.

Blockchain takes away the centralization of traditional online games by creating immutable public ledgers documenting ownership of every in-game asset built or acquired by players. Blockchain technology also helps players retain the value of their assets regardless of what happens to the gaming platform.

Play to Earn (P2E) Model

Blockchain games come with an attractive economic model that monetizes gaming, but this time, not just for the game developers but for players also. Players earn money from completing levels, battling other players, and acquiring and trading in-game assets like avatars, costumes, virtual lands, customized weapons, etc., in the form of NFTs. In the Play-to-Earn model, players earn in-game assets, such as tokens or NFTs, that can be traded or sold for real money. This model has been popularized by games like Axie Infinity, where players breed, raise, and battle creatures called Axies. The in-game economy of Axie Infinity allows players to earn Smooth Love Potion (SLP), a token that can be used within the game or exchanged on various cryptocurrency exchanges.

Move-to-Earn (M2E)

The Move-to-Earn model rewards users for being physically active, promoting health and wellness alongside gaming. A prime example of this is Stepn, a mobile game where players earn rewards in the form of GMT tokens by walking, jogging, or running outdoors while wearing NFT sneakers. These tokens can then be used within the game's ecosystem or traded on the open market, providing a financial incentive for maintaining a healthy lifestyle.

Explore the top move-to-earn games in the crypto market.

Tap-to-Earn (T2E)

Tap-to-Earn is one of the newer models in the GameFi universe, where players earn tokens through simple actions like tapping on a screen. An example of this model is Notcoin, a game designed to be highly accessible where players tap to mine virtual coins. The simplicity of the gameplay makes it easy for anyone with a smartphone to participate, and the rewards can be used within the game's ecosystem or converted into other forms of cryptocurrency.

Learn more about Notcoin on KuCoin Pre-Market.

Players from any location can play and earn with Crypto games, except for policy restrictions. Blockchain gamers can earn in-game currency from different GameFi projects by actively committing time and energy to complete game tasks and levels and constructing customized weapons or assets that can be loaned.

For passive income, the infusion of DeFi components allows users to stake their earnings in cryptocurrencies and NFTs to earn more or lock away their profits to earn yields over time.

Variations exist within different GameFi projects, but the process of getting started with most GameFi projects is mainly similar. The following will help you get started:

Create a Crypto Wallet

A digital wallet is high up in your "to-start" list because this enables you to store your NFTs and cryptocurrencies and make in-game and external transactions. The cryptocurrency wallet you'll need depends on the blockchain on which the GameFi game runs on. For example, for Ethereum-based games, you can open a MetaMask wallet, etc.

Opening a new cryptocurrency wallet to participate in a blockchain game is advisable. It helps you guard your funds against possible scams or attacks under the disguise of a GameFi game.

Find out all about crypto wallets and how to pick the best one for you.

Add Pre-Game Funds

Some blockchain gaming platforms have their economy with in-game cryptocurrencies. It determines what cryptocurrency you fund your wallet with. While getting started with GameFi is free, you may be required to purchase starter items like weapons, equipment, avatars, or NFTs to start playing and earning.

Aside from being very lucrative for investors and users, here are some reasons behind the rising popularity of the crypto games:

Monetization of Efforts: What's a better way to earn than to earn doing what you love? You can earn money simply from playing games with blockchain and non-fungible tokens. Blockchain-based games can serve as a source of active or passive income for their users. If gaming is your hobby, you could game your way into being a millionaire. What a lovely time to be alive.
Ownership of Individual Digital Assets: GameFi projects allow users to earn and keep their digital gaming assets. Aside from this digital money, the owners get to keep the virtual weapons, outfits, and special characters they create during their game. The fantastic thing is that these in-game items possess real worth and are also unique to each user. No one can claim ownership of another person's in-game items as it is easy to confirm digital asset ownership using the immutable public ledger, blockchain. GameFi provides a secure marketplace where owners can trade or exchange their assets.
User-Oriented: Unlike traditional games, blockchain games are usually concerned about one thing: you. The user communities control these games' voting power, and governance ensures that every decision taken on the gaming platform is in the best interest of the users.
Easy Entry: GameFi has little to no cost for getting started. It drastically reduces the entry barrier for players anywhere to play blockchain games, unlike traditional video games with high fees attached to key in-game assets that improve players' gaming experience.

GameFi is poised for significant expansion in 2024, with predictions suggesting it could encompass up to 10% of the global gaming market, dramatically rising from the current 3%. This growth is supported by advancements in blockchain technologies, including the adoption of Layer 2 solutions for enhanced scalability and reduced costs and the integration of AI to improve gameplay. Despite these technological advancements, GameFi faces challenges, such as the need for deeper integration of genuine gameplay quality over blockchain gimmicks.

Moreover, the industry is expected to see a surge in player base to 50 million active participants, driven by its accessibility on various devices and interoperability across different blockchain ecosystems. Community-driven development and sophisticated economic models (tokenomics) are also expected to play crucial roles in shaping a sustainable and engaging environment within GameFi.

With blockchain technology evolving, cryptocurrency gaining wide adoption, and new GameFi projects emerging, it's inevitable that blockchain gaming will continue to gain momentum and market share in the gaming industry.