Web 3.0 is outstretching its hands to online gaming communities and 2022 is set for a GameFi — or “play-to-earn” (P2E) — hypergrowth. There are already 1.4 million daily interactions with games dapps - nearly half of the industry's usage - as well as $4 billion generated through in-game NFT transactions, according to the 2021 Dapp Industry Report. Modesta Masoit, DappRadar Head of Finance and Research claims we’re on the cusp of GameFi mass adoption: "As these three categories converge (DeFi, NFTs and gaming), 2022 will, I expect, come to be known as ‘The Year of the Metaverse', with project supporting and helping navigate this complex, cross-chain and cross-category paradigm stealing the spotlight."

CryptoKitties started in 2017 as a way to address the shortage of meaningful innovation in blockchain technology as one of the first recognised blockchain games has triggered mitosis. P2E games now give control over to players as to how their in-game assets are stored and exchanged using distributed networks, independent of any publisher. In other words, players actually own their own assets and have a financial stake in the game.

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GameFi Education Still Has a Ways to Go

Undeniable technological advances don’t always necessitate harmony amongst their recipients. The chief complaint of players who are skeptical of blockchain in-game economies is a company's profit motive. “Once I’ve purchased a game, why do I need to keep paying to play it?” Players don’t want to feel like they’re being financially exploited by publishers of the games they know and love. Where GSC Game World listened to fans after their backlash over S.T.A.L.K.E.R. 2 to incorporate NFTs, original plans for Ubisoft Quartz are still to go ahead despite fans’ concerns.

“This experiment is meant to understand how the value proposition of decentralization can be received and embraced by our players. We know it is a major change that will take time, but we will stay true to our three principles.” – Didier Genevois, Ubisoft’s Blockchain Technical Director

Ubisoft’s bold move echoes that of other ambassadors hoping to lead by the example of merging NFTs from the digital art realm into the everyday. Just as the general consensus of traditional banks to refer to Bitcoin as a “fraud that will blow up”, only to later announce crypto projects, NFT adoption is bound to require time for users to adjust.

GameFi and cryptocurrency are inextricably linked, a lack of understanding for one translates to the other.

For newcomers, blockchain-based gaming may be difficult to learn, and some games have high upfront costs that can prove to be a barrier. DAO’s such as Merit Circle is founded to educate community members on how to make money through P2E gameplay. They invest in community-held assets that can be used by its 2,700+ active global gamers to earn daily rewards. Over $2 million has already been earned by the participants, to date.

Could supportive GameFi communities potentially reverse course and lower the bar to entry?

When a DAO pools its assets to purchase in-game NFT’s, it can lend them out to its participants at a fraction of the cost. Now you have a broader swath of users with access to in-game assets which can advance their play and then (of course) allow them to earn more while playing the game.

Certain industry figures do predict P2E to make up 90% of the gaming market within 5 years, due to its ability to properly value and reward players for their time spent. As the president of Square Enix notes in their open letter, gaming motivations driven by explicit financial incentives create a tangible reward system whilst having fun engaging and connecting with one another.

“When we are looking at our NFT marketplace, in particular, it has already transacted over 3 billion dollars just in Axie [the game's native token] and in-game characters. Which I think showcases the potential for some of these economies. When you are using NFT’s and you let people basically own part of the game universe you are creating. A big part of our tech stack is the marketplace.”  - Aleksander Larsen, COO of Axie Infinity

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Gaming the System

The breakout of P2E gaming dominated 2021, with crypto GameFi apps even surpassing that of DeFi in popularity, with Microsoft undergoing its biggest acquisition to date in a $68 billion deal with Activision Blizzard, in a move to develop its own gaming metaverse. With the public’s attention on positive hype and staggering real-world investments, P2E games continue to be prime targets for cybercriminals.

With a greater ability to earn comes a greater capacity for manipulation and exploitation.

Having already demonstrated its hacking capabilities tenfold, along with successfully laundering over $100 million in cryptocurrency, North Korea is primed to exploit the rapidly emerging P2E marketplace. Divisive assignment of power-leveling - working akin to NFT wash-trading - can also be used to inauthentically level up in games resulting in a profit. This is done by enlisting a fleet of other willing individuals in the player’s stead, who might also double up as trained hackers spending hours playing the most popular P2E games in order to spot vulnerabilities (openings to exploit).

As RUSI notes, an AML breach can occur quite easily. Neither the Financial Action Task Force (FATF) updated guidelines nor the Financial Crimes Enforcement Network (FinCEN) clarifies whether blockchain-based in-game assets are covered by AML/CTF regulations. The first question to ask, however, is how in-game currencies and NFT’s indeed constitute a 'representation of value' under the FATF definition.

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The True Value of Compliance

P2E games have effectively created a new economy. Like all new economies, precautions must be taken to ensure the safety of all parties against malicious actors. While some may consider even the most basic AML provisions burdensome, the benefit to the GameFi ecosystem of protecting players from anonymous hackers and protecting gaming marketplaces from sanctions violations should outweigh any complaints.

Popular P2E games with massive jackpots would be well advised to perform basic due diligence, as failure to abide by sanction laws can carry heavy penalties. Similarly, for players spending substantial amounts of money on in-game assets, marketplaces are somewhat responsible for money laundering or other financial crime that occur from a lack of internal policy or controls. Famously, BitMEX was fined $100 million dollars for turning a blind eye to user activity.

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Law of Inertia

Technology is a rolling stone that gathers no moss. GameFi comes together with NFT’s and cryptocurrency to power a new economy in web3, resistance is futile. Regulators coming from traditional markets have a few roadblocks they can (and probably will) deploy, and it’s up to the nascent purveyors to anticipate and evolve in order to ensure a smooth journey forward.