i3 | January 03, 2022

How GameFi is Empowering Metaverse Game Development

John Gaudiosi
Abstract purple banner

The gamification of financial systems allows crypto investors and gamers the opportunity to profit from blockchain games.

While there are still game developers exploring the traditional route of pitching venture capitalists their next big video game idea, a growing number of creative innovators have turned to Initial Exchange Offerings (IEOs), or token offerings, as an avenue to retain control of their path to potential digital riches. With the pandemic giving the global video game industry a continued boost in audience, as more people turn to cell phones, tablets, consoles, PCs and virtual reality devices to escape the real world, a confluence of new gaming technologies like blockchain, NFTs (non-fungible tokens) and GameFi, have created the perfect storm of investment for those game makers who can sell their vision of the metaverse. At the same time, the way gaming metaverses are being developed is opening up new revenue opportunities for the gaming communities, as well as the developers and investors.

Token offerings, which require game developers to create an in-depth white paper that outlines how their team of developers can integrate NFTs, blockchain technology and digital sales into a metaverse that will rely on digital tokens to power their metaverse’s virtual economy, have taken off lately. One of the key selling points of these investments is GameFi, a portmanteau of “game” and “finance,” which has essentially gamified financial systems to allow anyone to use crypto currencies, NFTs and virtual land, and in-game item sales. Developers aren’t just developing gaming experiences, but an entire metaverse ecosystem that offers multiple ways for creators to earn money via the sale of virtual items.

Joe Minton, president of Digital Development Management, which has secured over $1 billion in development funding for its clients and advised on numerous gaming-related equity transactions, believes that blockchain gaming, and IEOs in particular, provide an incredible opportunity for game developers to directly secure the resources needed to create the future of interactive entertainment and to do so in close collaboration with their gaming communities.

“We see the fundamental importance of a connected series of metaverses to be based in the actual ownership of digital goods,” explains Minton. “Similar to how you showcase your artwork, games and books in your physical home or apartment — all of us as inhabitants of various metaverses will display and directly interact with our digital goods whether we are relaxing alone or have invited friends into our online space. By having a number of different tokens making up these economies, there will be no one company or country controlling the purse strings underlying these digital worlds.”

According to a recent study by Bitkraft, which operates four funds with a total of over $500 million in assets under management and has over 50 companies in its global portfolio, and Naavik, which helps game companies with market research, game design assistance, user acquisition expertise, and M&A due diligence, the global video game industry generated $336 billion in 2021.

Part of this growth has come from two sectors that GameFi supports with the $11.5 billion grey market game sales, where digital game items are bought and sold, and the $1.5 billion blockchain gaming arena, which is in its infancy. According to DappRadar, there are just over 1,000 games on public blockchains as of this writing, compared to the tens of thousands of mobile games that flooded Apple’s App Store in the early days.

Into the Metaverse

According to video game research firm Newzoo, there’s a massive audience of three billion global gamers to support multiple blockchain-driven metaverses. One such metaverse, Shrapnel, is in development at Seattle-based game publisher Neon. The first-person shooter is being designed to allow players not only to virtually fight as soldiers for hire in a world set 20 years in the future, Neon is providing all of the tools for the community to build their own weapons and gear, design their own maps, and purchase NFTs and other virtual items using Shrapnel tokens. Gamers are no longer people who are filling up their leisure time, they can be owners of valuable assets and creators who can earn an income creating “minted” content for games like Shrapnel.

Veteran game developer Mark Long, CEO of Neon, says blockchain gaming has emerged so rapidly that there currently aren’t any venture capital firms that specialize in the intersection of the two verticals. In order to raise the initial $10.5 million, Neon partnered with Griffin, which has backed successful companies like Discord, Overwolf and Skillz, and Polychain, which has invested in projects like Coinbase, Compound Labs and Polkadot.

“There are a lot of breathless proclamations being made about a GameFi paradigm shift right now — Play-to-Earn in particular,” Long explains. “While I do think we’ll see whole categories of in-app purchases getting minted — like trading cards and cosmetics — it’s more accurate to think of blockchain’s application in gaming as a collection of composable micro services that allow for novel player experiences. The idea of governance, for example, blockchain smart contracts could allow for players to vote on features or the technical roadmap of a franchise. That kind of player empowerment is exciting to me.”

Long serves as an advisor for several developers using the GameFi fundraising route, including Six Foot Games and Unio.

A very different GameFi experience comes in the free-to-play mobile game, Genopets, which rewards players who live an active lifestyle. The game combines user’s step data from their mobile device with blockchain Play-to-Earn economics, so players can earn crypto for taking action in real life as they explore the Genoverse evolving and battling their Genopet.

Jay Chang, co-founder of GenoPets, explains that as players walk, they can take those real-world steps and convert them into XP, which is used to level and evolve the Genopets to the point of becoming valuable to other players. At that point, they can sell it, as well as any other in-game NFTs that other players might want or need in the community, like Nintendo’s Animal Crossing.

“GameFi will allow players to have ownership of the assets and give them potential to earn from their in-game grinding,” says Albert Chen, co-founder, and CEO of Genopets. “The obvious hurdle is onboarding mass market gamers into web3. Billions of free-to-play gamers around the world need a simple, rewarding and fun reason to learn web3. We believe GameFi will be that opportunity.”

Metaverse Building Blocks

There remain many hurdles to overcome as this fast-moving fundraising option evolves and adapts to the game industry’s shift to metaverses that offer gamers far more involvement than past game experiences. Polychain Capital partner Ben Perszyk believes integrating crypto incentive and ownership structures into gaming will have two profound outcomes on the category: first, it means players will get to truly own the items they earn, create or purchase in-game. Second, it means giving the community ownership over the games themselves, more closely aligning the needs and wants of the player base with those of the publishers and studios.

“Obviously, there are a number of technical challenges to be overcome, this is an incredibly new design space, but the framework for game creators is actually quite simple: make games people want to play, and leverage crypto’s unique financial incentive structures to attract and retain an early community of players and contributors,” Perszyk says.

Marco van den Heuvel, CEO of Merit Circle, understands that many people may find blockchain, crypto and NFTs scary, or don’t understand the value or utility NFTs hold. “A large part of this has to do with education, or better yet, the lack of it, van den Heuvel says. “I believe that gaming might be the perfect way to introduce people to these topics. Even more interesting is the great variety of games exploring methods in which the same NFTs can be used across multiple games. This open and transparent stance is fascinating, but it can simultaneously be rewarding for the game developers.”

With a built-in fee, game developers can earn a percentage from each secondary sale. This is a large shift in comparison to the shady practices on black marketplaces. A recent DappRadar report showed that over one million people connected their wallet to a blockchain game on a daily basis in October (2021), and this number has already grown significantly since then.

Van dan Heuvel thinks that a future in which the metaverse plays a key role in our society isn’t possible without GameFi. “If we are looking to build healthy economies in these online environments in which assets are truly owned by a digital person, we need a healthy combination of both blockchain technology development, game developers adopting these technologies and more traditional companies building on top of those worlds,” says van dan Heuvel.

Pierre-Edouard Planche, partner at Griffin Gaming Partners, believes that although approaches to digital game/metaverse economies can greatly vary, the core concept remains: the more value a gamer brings to a game’s ecosystem — whether adding to a large developer’s product offering via modding, working their way up the ranks in esports, or driving positive community involvement — the more the participant should be rewarded. Rewards can come in many forms whether through traditional means of profit (ie. secondary markets, automated revenue shares and renting-out assets) or via the accumulation of further digital asset ownership for which one has full (or enough) control of.

“For developers this means the size of the pie is also growing,” Planche explains. “Gamers now have skin in the game and own a piece of the ecosystem, and as a result they spend more time and money, which equals increased engagement and monetization. When the utility of blockchain integration is leveraged correctly, we have seen early though promising proof points of complementary revenue channels to developers through secondary markets, as well as four to five times multiples on ARPUs (annual revenue per user) vs. industry leading metrics. This dynamic generates very passionate communities who become even more proximate to the developer, creating a very close feedback-loop and in some cases ‘outsourced community development’ to help accelerate a project forward.”

Gaming wouldn’t be a key focal point of blockchain today if it weren’t thanks to the technical advancements the community has accomplished in the past decade. Experts like Blanche believe there are still improvements needed, notably regarding user-experience, scalability and in some cases accessibility. But the good news is web3 gaming means anyone can start getting involved, whether as an investor, gamer or builder.

Global Gaming Revenue 2021 pie chart

Global Gaming Revenue in 2021

Total size = $336B

Game Content & IP: 58% and $194.5B

Gaming Hardware: 
32% and $108.6B 

Gaming Software:
10% and $32.4B

Source: Bitkraft and Naavik

Gaming Market Stats

Game content and IP ($193.3B) is more than double the combined size of gaming hardware and gaming software ($85.4B).

Within game content and IP, mobile gaming content ($79.1B) is almost as large as PC and console gaming content combined ($82.5B).

Grey market game sales ($11.5B) — the trade of video game systems, games or virtual items through unintended or unofficial methods — are estimated to be almost twice as large as several more highly publicized segments (VR gaming content = $3B; AR gaming content = $0.5B; HTML5 gaming content = $2.6B).

All of blockchain gaming ($1.5B) is today “only” roughly 10% of the size of grey market game sales, albeit growing rapidly. The introduction of digital ownership via NFTs suggests blockchain games could potentially eat into the large grey market.

PC gaming hardware ($42.9B) is significantly larger than console hardware ($24.8B), despite recent successes of Sony Playstation 5, Microsoft Xbox One, and Nintendo Switch.

The Esports ($1.1B) and Game Engine ($1.9B) markets are still relatively small in comparison to the overall gaming industry.

Mark Long

“It’s more accurate to think of blockchain’s application in gaming as a collection of composable micro services that allow for novel player experiences.”

–Mark Long

Mark Long

We see the fundamental importance of a connected series of metaverses to be based in the actual ownership of digital goods.”

–Joe Minton 

Ben Perszyk

"The framework for game creators is actually quite simple: make games people want to play, and leverage crypto’s unique financial incentive structures to attract and retain an early community of players and contributors.”

–Ben Perszyk

i3 magazine January/February 2022 cover

Subscribe to i3

I3, the flagship magazine from the Consumer Technology Association (CTA)®, focuses on innovation in technology, policy and business as well as the entrepreneurs, industry leaders and startups that grow the consumer technology industry. Subscriptions to i3 are available free to qualified participants in the consumer electronics industry.