If you find yourself baffled by the host of new terminology spawning from the Metaverse space, don’t feel bad. Some of it is esoteric, meme-related, or borrowed from other subsectors of crypto or finance. Today I’d like to demystify one such term, and that is “GameFi.”

In the interest of full disclosure, Ikigai has a small position in each of the projects we’re going to talk about today (ILV, AXS, SLP, and DFK JEWEL) and we may reallocate our funds at any time if it’s in the best interest of our investors.

GameFi refers to the intersection of three separate technologies, which are beginning to blur together. These three are:

• Non Fungible Tokens (NFTs)

• Decentralized Finance (DeFi)

• Play to Earn (P2E)

I’m sure most of you are familiar with NFTs by now. Popularized by images of apes or pixelated punks that have been surfacing as profile pictures (PFPs) as they say. Decentralized Finance is another one that rapidly became part of our social milieu in earnest over the last year or two. And if you’ve been following the stories about Axie Infinity and the economic impact their game had on Filipinos living below the poverty line then you’re a leg up already with P2E. But what these three things have in common is perhaps less clear.

Here’s the thing, the economics that DeFi brought us are now understood fairly well by the people who participated in these projects or even followed them closely. The story goes something like this:

Step 1) Build an exchange that is outside of any centralized control, ie. a DEX.

Step 2) Create a worthless governance token to incentivize people to add liquidity.

Step 3) Create liquidity pools, where people deposit an equal amount of two assets.

Step 4) Incentivize people to add funds to these liquidity pools by giving them LP tokens in exchange for their deposits.

Step 5) Allow people to “farm” these worthless governance tokens with their LP tokens at ridiculously high rates such as 1,000% or more.

Step 6) Profit as your TVL “moons” 

So far so good, because the worthless governance tokens turn out to have some market value and not really be worthless after all. However, eventually the yields fall and who can be bothered to supply tokens for a measly 50% APY or whatever?

Now here’s the plot twist. Some metaverse games started to get wise to this DeFi alchemy and implement this alongside their play to earn games. Let’s move from the abstract to the concrete now to make this a bit easier to digest.

In the Sky Mavis game, Axie Infinity, players battle their little “Axies” for fame and fortune and Smooth Love Potions (SLP). But did you know these little critters are actually NFTs with their own DNA that essentially live on the blockchain?

In this image, you are seeing what Axies look like to someone playing the Axie Infinity game. But behind the scenes, the logic that makes these little critters tick comes from the blockchain. Specifically, the Ronin Sidechain. This means that ownership of Axies can be tracked on the blockchain and we can even track the lineage of each Axie.

But the fun doesn’t stop there, because Axies live in a magical land called Lunacia which is essentially a bunch of land plots which are… you guessed it, NFTs also! You can see these lands on the Axie Infinity marketplace.

As you can see, these lands are not cheap. In fact, the least expensive land for sale right now will set you back about 3.8 ETH which is just over $17k at today’s exchange rate. So what can you do with these magical Lunacian plots? Right now, the answer is “not much.” However, there are updates coming that will bring quite a bit of functionality ranging from raiding with your friends, setting up in-game shops, venturing into dungeons, collecting resources and more.

So far we’ve talked about the play-to-earn mechanism and the NFTs, but the third wrinkle was just rolled out over the last couple of months. That is of course the DeFi stuff which is being called collectively the Ronin Dex.

On the Ronin Dex you can deposit your AXS tokens (Axie Infinity Shards) and earn 113% APR on your money if you have a Ronin Wallet set up.

But much like their DeFi grandfathers, there is also staking and pooling for worthless (or maybe not so worthless) governance or utility tokens. Enter RON, the token that will be used fo pay for transactions on the Ronin Sidechain in the near future.

By locking up an equal amount of AXS and ETH, or SLP and ETH you can earn for yourself some shiny new WRON tokens. That’s wrapped RON if you’re wondering, probably because it will have a digital twin on the Ethereum blockchain very soon…

So how’s it working out, you might wonder? Well over the last 30 days the Ronin Network has locked up some $1.47 billion dollars of value (we call that TVL). Not half bad if you consider that the WRON token is not even circulating yet so nobody has any idea what it will trade for once it actually goes live. But that’s not the point.

The point is that Axie Infinity is no longer just a game. Because of the liquidity pools and staking, you can now exchange SLP for AXS right inside the Ronin Network, for essentially free. That would have cost you $100 or more if you had to use Ethereum. That’s a lot of money when SLP is trading for just a few cents each.

Now think about this. We’ve got a game, so there’s entertainment. We’ve got financial services including staking, swapping, trading, etc. We’ve got assets, such as Axies, Lunacian plots and more. Can you see how the metaverse is slowly being woven out of the digital fabric of our world? Pieces are coming together, creating new things that didn’t exist before and now the bar has been raised.

And it’s not just Axie Infinity, other games are launching exchanges and staking pools on top of their NFT-powered games too. Take Illuvium or DeFi Kingdoms for example.

As you can see, this game Illuvium which hasn’t even launched yet has already managed to lock up $2.1 billion dollars. I think that’s something that any game developer right now is watching while possibly dabbing the saliva from the corners of their mouths.

Here’s another one, DeFi Kingdoms (DFK) in which the game is built around a DeFi interface. Notice the retro gardens where you actually “plant” your seeds and harvest rewards.

And if you should need to make a trade, simply visit the marketplace and visit the NPC that handles that sort of thing.

It’s my opinion that GameFi will become the new norm for metaverse names going forward. But the most exciting thing to me is trying to figure out what’s next after that. The world is changing so quickly, everywhere you look. There’s so much opportunity and so much disruption coming down the pipeline. It boggles the mind at times.

Thank you,

Hans Hauge

Head of Quantitative Strategy

Ikigai Asset Management