The crypto industry saw its reputation soar in 2020, and in 2021, the industry attracted even more funding, talent, media exposure, and users. This is largely due to the popularity of blockchain games, a new ecosystem also known as GameFi (GameFi, a word coined by combining Game and Finance, like the logic behind DeFi), which allows users to earn crypto assets by playing games.

Jonathan M. Hayashi from Headline Asia and Infinity Ventures Crypto (IVC) will take readers on a deeper dive into the current status of GameFi and its potential in Japan.

The two cores of GameFi are “Play to Earn (P2E) and “Scholarship”

In the United States, Europe, China, and Japan, many talented people from major game developers and publishers, from young talent to executives, are jumping ship to startups that are developing blockchain games. The incumbent major gaming companies are also increasingly interested in moving into GameFi.

On the other hand, in developing regions and countries such as South East Asia, India, the Middle East, South America, and Africa, there has been a surge in the number of people who earn a living and support their families by playing blockchain games, in addition to startups working on the various innovations needed to develop an appropriate GameFi ecosystem. A number of venture investment funds specializing in this area are also emerging.

Dubbed GameFi after DeFi (Decentralized Finance), this trend is forming a new industry of its own, around the world. Its essence lies in two aspects, “Play to Earn” (P2E) and “Scholarship”.

Some have suggested that Play to Earn is the same as Real Money Trading (RMT), which is banned in almost all the existing games. Certainly, the act of a user selling a game character that they have invested time and perhaps also money in strengthening, or a rare item they have acquired to another player is almost identical to RMT in and of itself.

How is GameFi different from RMT?

However, in traditional games, characters and items are essentially controlled by the game company. At the sole discretion of the game company, the items of a particular player can be removed or the game itself can be closed down, causing all data in the game to disappear. In blockchain and NFT games, on the other hand, all data in the game is written to a distributed ledger. Even the company operating the game cannot change or tamper with characters or items, so they truly become assets owned by the user.

There are also benefits in terms of increased transparency and efficiency of transactions. If a game item is an NFT, for example, the same NFT could be used in the next game developed by the same company, even if the original game is to be closed down. Furthermore, the same NFT can be played in a game created by another company. Traditionally, the value of a game item was dependent on one particular game, but when a game item becomes an NFT, the value of the NFT itself becomes separate from the game, and as long as there are players who find value in it, games will be developed in which such NFTs can be used again.

Developers are also free to develop games that can use NFTs, now those game items are recorded as NFTs in an open, distributed ledger. In addition, they are also free to develop applications to trade them, split NFTs like stock splits, or use them as collateral for loans. It may be easier to understand the difference if we call the previous RMT the “Closed Play to Earn” and the current Play to Earn, the “Open Play to Earn”.

How does “Scholarship” boost “Play to Earn”?

Axie Infinity, the most popular Play to Earn game at the moment, showed rapid growth in 2021. However, it was actually released back in 2018 and did not grow much with the concept of Play to Earn alone. The catalyst for growth was the emergence of scholarships.

In 2021, Yield Guild Games (YGG) created the scholarship business model. YGG is the world’s largest blockchain gaming guild and the first in the Philippines to be funded by leading VC Andreessen Horowitz (a16z) (Editor’s note: IVC also invested in YGG; IVC co-founded YGG SEA and YGG Japan, which are subDAOs of YGG).

How YGG’s scholarship business model works:

• Scholarships are a rental system for NFT as game assets, such as game characters and game items.
• Users who want to earn money by playing Play to Earn games need to purchase game assets first. The amount has been a high hurdle for many potential players.
• The scholarship is a system where NFTs are purchased and rented out by YGG to the players. Players who rent NFTs are known as ‘Scholars’, while the organization that acquires Scholars and manages the NFT rental process is known as the ‘Guild’.

The three layers of the GameFi industry and its major players

Like any other industry, the GameFi industry has different layers in the value chain, from upstream to downstream: some players specialize in one layer, while others operate in multiple layers. For the sake of clarity, this article will divide it only into three layers.

The upstream in the GameFi industry value chain

The upstream in the GameFi industry value chain is the infrastructure required to develop blockchain games, including blockchain, development platforms, and API providers for developers.

The most used blockchain at the moment is Ethereum, but latecomers Solana, Polygon, Avalanche, Binance Smart Chain, and Fantom have also seen a recent increase in the number of games being developed on top of them. We can expect popular games coming from Immutable X, Ronin, and Flow, all of which specialize in GameFi, as well as OASYS from Japan.

Players offering development platforms and development support services for game developers include FORTE, which has partnered with Zynga and raised over JPY$90 billion in its first two years in business, Microsoft and Samsung, whose own tokens are listed on the Japanese crypto asset exchange ENJIN, and Double jump.Tokyo, known for its blockchain game My Crypto Heroes, which it is in partnership with Square Enix, Sega, and Bandai Namco.

The middle layer in the GameFi industry value chain

In the middle of the GameFi industry’s value chain are the games themselves, and it is the players that are most well-known to the public.

Sky Marvis, the developer of the previously mentioned Axie Infinity, has the 5th largest market capitalization among gaming companies, next to Activision, Nintendo, Roblox, and Electronic Arts. Sorare (Editor’s note: Headline is also a lead investor in Sorare), whose sales have grown 100-fold in one year, raised more than 700 million dollars from Softbank Vision Fund and other investors, Dapper Labs, which ignited the trend of NFTs and blockchain games in the US and European markets, became a major player in the industry, and there is, of course, Animoca Brands, one of the first to develop blockchain games and invest in the GameFi industry. They are all gaining popularity.

Other games include MIR4, an open-world RPG that was one of the first to be released globally as a smartphone app among Play to Earn games (which are still mostly PC games); DeFi Kingdoms, a retro RPG game that has already surpassed Axie Infinity in terms of the amount of digital assets deposited in the game to become the number one; STEPN, a Move to Earn game linked to smartphone GPS data that is gradually gaining popularity in Japan; and Alien Worlds, an auto-play game that ranks first in terms of active users. Last but not least there is God Unchained, developed on Immutable X, which is among the game titles that have been generating a lot of buzzes recently.

Downstream in the GameFi industry value chain

Downstream in the GameFi industry value chain are the players who provide services to game developers so that their games can reach a wider audience. Players here fall into three main categories: Guilds, Launchpads, and Aggregators.

1. Guild: Guilds are the organizations that run the aforementioned scholarships. In addition to YGG, Merit Circle and Good Game Guilds are also top-tier players in this area.
2. Launchpad: Launchpads help a blockchain game launch its game and game tokens to the general public, providing services such as pre-launch marketing initiatives, referrals to market makers who provide liquidity, and executing and managing the launch process. This selling process is often referred to as an ‘initial game offering’ (IGO), after the initial coin offering, or the ICO. The most well-known players include Enjinstarter, Gamestarter, and Seedify.
3. Aggregator: Aggregator is like the web3 version of Steam. It is a platform where many games can be accessed and discovered. Not only can users play a variety of games through aggregators, but they can also check their own game assets and earnings in each game on their dashboard. Some platforms even allow the trading of game assets; GameFi Aggregator, Ethlas and OP Games are commonly used options.

The possibility for Japan to become an important player in GameFi

Japan’s per capita spending on smartphone games has been the highest in the world since 2013, with its staggering 52.7 million smartphone game players. The Play to Earn games will offer this huge potential user base the opportunity to earn income simply by playing games as they always have. It is a clear value proposition.

On the other hand, as many familiar with the industry know, many existing blockchain games are not attractive to Japanese players, as they feel the games are foreign in design and taste. However, major game companies in Japan such as Square Enix, Bandai Namco, CyberAgent, Akatsuki, and gumi have already shown interest in expanding into blockchain games. There is also the successful case of My Crypto Heroes, which is the world’s number one blockchain game from Japan, so there is a great potential for Japan to become a blockchain gaming powerhouse in the near future.

YGG Japan, co-founded by IVC, will focus on community development in Japan and also act as a bridge between blockchain games from Japan and overseas communities in order to promote the spread of blockchain games in Japan.

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