Category: Fintech

Currently, most online data “transfers”–communicating with friends and family, working with colleagues and clients, purchasing goods and services, and reading articles and social media are all facilitated with Web 2.0 infrastructure. This means that Web 2.0 is the foundational technology of our economy and society. So what about Web3, or Web 3.0?

One of the issues of the Web’s current iteration is that it is centralized. Centralization results in several limitations: being owned and controlled by a few central systems, it is vulnerable to hacking, corruption, and nefarious manipulation. There is a lack of data protection, and the data that is owned by that central authority usually belongs to big tech or the government.

Web 3.0 has grown from an imagined concept of a digital world starting in the mid-2000s to one that is possibly decentralized in the mid-2010s. In the current decade, the tech industry has begun to acknowledge the vast potential possible with an online ecosystem built from a decentralized Web 3.0.  

This shift would require the complete replacement of the current internet architecture we see with Web 2.0 and replace it with blockchain-based infrastructure. 

The result would be more democratic, with a shift to decentralized data ownership, peer-to-peer exchanges of data and assets with no intermediaries, protection from bad actors, and information that has guaranteed, blockchain verified sources. This shift to a decentralized Web 3.0 would fundamentally change how our businesses, financial systems, and societies are run for the better.

Web 3.0 Is Already Happening

There are already several projects working on designing the foundation of a decentralized Web 3.0. They are the Layer One foundation that is sitting at the base of Web 3.0, and they are designed to support the next iteration of the digital world. 

Many prognosticators have a vision of Web 3.0 with an open-source technology stack, with their code available for anyone to review, improve and build upon, creating an even better end-user experience in the long run. Ethereum, Polkadot, Avalanche, Cosmos, and several others are trying to do just that. 

All of the named blockchain projects already have decentralized applications (Dapps) live and running, providing their users with ways to communicate, share stories, transfer data and assets, and nearly all of the other general tasks we conduct on current Web 2.0 versions.  These new projects are the bridge that is forming to shift us to Web 3.0.

The Current Blockchain Networks Remain Siloed

Even with the progress that this new class of decentralized Layer-One blockchain networks is making, they remain siloed from each other to their detriment. These are like independent fiefdoms utterly separate from each other with their own social and economic activities and opportunities. 

They, however, have few if any pathways that connect them with each other. These are like hermit nations that have walled off the rest of the world. In the long run, this isolationist policy reduces the power of the projects that would gain from the total network effect possible by joining them together.  

The Need for Connection

There is a growing need for this connection–a unified, seamless, decentralized method for sharing assets and information between blockchain projects, building a combined ecosystem that will benefit all the constituents and their users. 

This need is based on overall liquidity and the volatility that results. Without a global connection, these projects’ economic structures will have digital assets with low liquidity, high volatility, and poor ways to unload the assets. By having a lack of interoperability and cross-chain communication, every project will have a more difficult time gaining traction and becoming successful.  

Imagine if our current Web was divided into 12 parts, required the use of 12 different browsers, and you needed to have separate banking facilities for each to make a purchase? 

Each had its own content and services, but you could not take that data from one and use it easily on another. That is the current state of a siloed blockchain network.

If these issues are not resolved, the migration to a decentralized Web 3.0 will be impossible, and we will be stuck with an edited VR/AR version of Web 2.0 run solely by big tech.

Moving Past the Issues

The acknowledgment of the problems resulting from a siloed industry of individual blockchain projects has resulted in the different protocols allocating a significant amount of time and money into building their own bridges that will allow users to share their data and assets between multiple protocols.  

There are so many DeFi Dapps that are running on Ethereum that there has been a need for bridges to be built between Ethereum and Polkadot, Binance Smart Chain, Avalanche, and others over the years since their inception. 

These bridges require dedication of time, money, and other resources to build and require diligence to maintain. Still, these bridges provide nothing more than a way to send specific assets between two smaller branches of the ecosystem, not the full spectrum of data and assets.

Beyond the resources needed to build and maintain these single-use bridges, they are often centralized. They are built, and operated by a single entity that is an intermediary working between the protocols, but are bottlenecks between the systems and have the sole authority to decide which tokens are supported and to which networks are worth connecting. 

Therefore, these intermediaries are exactly what decentralization is designed to prevent, a central authority with control over assets and information that increases security concerns due to potential corruption and a single point of failure. 

A second impact that results from a siloed blockchain space is the choice needed to be made by developers and thought leaders—choosing what protocol to use for their Dapps. If they are only able to run on one network, they will have several disadvantages. 

Their potential user base is immediately limited, which means that a single network’s Dapp success and mass adoption will also be limited. For a developer to deploy a Dapp across multiple networks, they will have to devote more resources to their apps, fragmenting their liquidity across the various network-specific applications. 

Interoperability Is the Web 3.0 Solution

The drain on resources and struggles that we see with the one-off bridges between networks means that a universal interoperability solution is the best way forward for the industry. 

Blockchain tech is one of the most innovative sectors in the world today, with talented programmers who should prioritize the requirements of universality, accessibility, security, and decentralization all on equal footing when considering interoperability. This strategy is the only viable solution to the problems that Web 3.0 faces today. 

To build such ubiquitous connectivity, there is a need to develop open protocols that provide standard pathways, which will require industry collaboration. An industry where protocols compete against each other is now history. Protocols should evolve for their own use cases, but they need to assume that interconnection is a requirement to reach scale.

Like our fiefdom’s analogy, projects must create their goods and services, but to thrive and gain from the other projects–they should communicate, exchange, and grow from the mutual knowledge and skills of the neighboring cities.   

Much of what is going on in the blockchain space focuses on blockchain infrastructure and interoperability. Achieving the purest form of interoperability means that both users and developers must be able to operate seamlessly across multiple blockchain platforms, not realizing there was even a change. 

When we use the current Web, we do not think of the protocols behind an email, text, or video conference. The same must be demanded of Web 3.0 for it to be successful.  

Interoperability is becoming a focal point for several protocols that have realized that cross-chain communication is required to protect their futures. Cross-chain communication empowers developers to utilize the network that best fits their needs while knowing that the new application can be accessible to a user on any platform. This structure allows a network to focus on the applications native to its protocol, optimizing its infrastructure instead of devoting the resources to building individual bridges.

The Path to Web 3.0

2021 saw the seeds of digital assets’ potential planted in the minds of consumers, institutions, governments, and their regulators. The movements of big tech into the metaverse, the rise of the NFT market, the creation of Central Bank Digital Currencies (CDBCs), and the moves toward the regulation of crypto in several sectors proved this change was manifesting. 

Moving forward, we are in the position to capitalize on the achievements that have been made to date and build on them with a scalable and efficient system. We cannot get caught up focusing on what is best for a single protocol while neglecting the big picture. Interoperability underpins Web 3.0 and must remain the objective for the near future.

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service, or offering. It is not a recommendation to trade. 

When we have assets and debts, there are two conflicting things going on. Our assets are growing in value while our debts are accumulating interest. Enter: self-paying crypto loans.

Imagine if loans had no interest. Instead, the appreciation of your assets is automatically going to pay off your debts. Your mortgage payment is automatically paid off by your stock portfolio’s growth, and a car payment is paid by the funds of your high yield savings account. Your credit cards are paid off by your real estate portfolio, and all along the way, you don’t have to sell any assets to make the payments.

This may seem odd at first, but we are closer to this kind of entwined monetary system than most may think. There are new DeFi protocols that are attempting to allow anyone to borrow against their future asset yields, meaning they are creating self-paying crypto loans. 

Alchemix is the most advanced of these platforms, where you can deposit crypto assets, borrow against them, and then have the future yield of these assets automatically pay off your debt. This system creates a loan where its value only goes down, and the collateral that you provide is never liquidated. The idea of self-paying loans is certainly an interesting one and may change how we think about money.

What Are Self-Paying Crypto Loans?

The concept is a new financial tool at its foundation. It’s blending both aspects of a lender and a savings account into one. You earn interest on your deposits even when you are also borrowing against them. 

The interest that you earn is automatically used to pay down the loan amount, ensuring that the amount never increases, and because you are borrowing the same asset that is being used as collateral, your assets will never be liquidated.  

How Self-Paying Crypto Loans Work

In the case of Alchemix, to use it, you must first deposit funds into the Alchemix account in the form of the popular stable coin DAI, or other assets like ETH or USDC. Dai is an Ethereum network built by stablecoin pegged to the US Dollar. The DAI that you purchase will immediately go into what Alchemix calls its “Vault,” immediately earning interest. 

Image courtesy of Alchemix

When funds are deposited, the account owner can immediately borrow up to 50% of deposited funds as alUSD. alUSD is also a stablecoin that has been created by Alchemix and is pegged to the USD. From there, you can take the alUSD and use it how you wish. You could cash it out as fiat USD, or you could buy another crypto such as Bitcoin or Ethereum.

Once you have your amount of capital deposited in Alchemix, and you have half of this value available to be borrowed in the form of alUSD, the thing that makes Alchemix special is that the loan amount never increases: It can only go down. Instead of the interest going to increase your deposits, it pays off your debt.

Why Are Self-Paying Crypto Loans Better?

It is easier to understand with a simple example. Let’s say you have $10,000, and the current interest rate is a fixed 10%. Let’s also assume that repayment is flexible and there will be no additional money entering the system.  

With Alchemix, you can take your deposit of $10,000, and you can borrow $5,000 against it.  You are earning 10% interest on the $10,000, which is $1,000 a year. The interest that you are earning on that deposited amount is going to directly pay down the loan, which is NOT accumulating interest. This means that after one year, you still have $10,000 in assets in the Vault, and the debt is only $4,000, so the total is $6,000.  

Alternatively, with a traditional institution, you could deposit that same $10,000 and borrow $5,000 against it. After a year, you would have $11,000 in assets but also have $5,500 in debt (due to the 10% interest on the loan). This total would only be $5,500, not $6,000, and a 9% lower return than if the loan was obtained with Alchemix.

How Is This Possible?

The protocol is taking advantage of the larger supply of capital to pay down the smaller liability. The effective interest rate gets doubled by directly paying down the debt with the earned interest. This is similar to reducing costs for a business. Cost reduction is a more efficient way to increase the profit margin than expanding the business’s revenue.  

The idea gets even better when you consider that TradFi (traditional finance) interest rates paid on assets are near-zero (or 7% using average S&P returns), but Alchemix has historically offered 10 to 20% interest on DAI (we will discuss why so high shortly).  

Let’s investigate a few examples of how this can fundamentally change our relationship with money. To do so we will assume that the interest rate is a flat 10%.  

Self-Paying Mortgage

Let’s assume that you are buying a home to be your primary residence, which costs $300,000. You qualify for an FHA loan that charges 4.5% interest, and you are required to pay 3.5% down. For this loan, you will only need to provide $10,500 for the down payment, but you have $25,000 in cash. You are debating whether to put all of it down or to put the sum in Alchemix.

If you put the $25,000 into Alchemix and use a $12,500 loan for the down payment, you have covered your down payment, and you have the $25,000 in Alchemix earning interest, and you can borrow against the interest. Every month you would be able to borrow an additional $208 from the debt that is being automatically paid. 

This $208 could be going toward your monthly mortgage costs. At a 4.5% interest rate, you would be paying $2,091 a month. With a Vault deposit of 251,300, you could be making earned interest to cover the entire mortgage.  

Self-Paying Auto Loan

If we are in the market to buy a used car and debating whether to pay for it with $10,000 in cash or put the money into Alchemix and get a car loan, we can use the following parameters.  A credit score of 660 to 780 (considered Prime), a $2,000 down payment, an interest rate of 5.5%, and a term of 36 months.  

Data courtesy of cars.com

If you deposit the $10,000 into the Vault and borrow $2,000 for the down payment, you are earning $83 a month while having to pay $242 a month toward the car loan. This is a net cost to you of $159/month. Since you have an additional $3,000 left, you could continue to draw out the $159 a month for the first 18 months (nearly 19) months before having to pay anything for the car out of pocket. And you will have your $10,000 in the Vault earning interest.  

Digital Nomad Lifestyle

After working in the banking industry for years, you have saved $150,000 and want to take a year sabbatical to work on your masterpiece. You chose to put $150,000 in Alchemix. You check out possibilities and find that you can live in Buenos Aires for $862 a month.

Data courtesy of Nomadlist

This is significantly less than the $1,250 that you can safely withdraw. This way, your savings are completely covering your new lifestyle. What’s more, every month, you’re adding to the top line of Alchemix, so the monthly allowance is also going up. This can help account for inflation, increase your standard of living, or build a fund that supports your lifestyle.

How a Self-Paying Crypto Loan Scheme Works

Alchemix gets a slightly better rate due to their volume, but Alchemix also has a bonus DAI treasury in its “Transmuter” which also earns interest on Yearn and this interest goes to Alchemix. The Transmuter was initially used to convert alUSD back to DAI, but because Alchemix has gained popularity, the Curve pool for alUSD has also gained popularity with over 68 million alUSD, providing sufficient liquidity for Alchemix users to skip the Transmuter step entirely. 

The Transmuter provides an essential service ensuring that the alUSD maintains its $1 peg, but it can do so effectively while earning interest on about 124,000,000 DAI in its current stores. This has meant that even with the recent crypto crashes, including the near-death of Terra, alUSD has stayed solid, briefly falling to $0.96 and climbing back.

This was a great test of the Transmuter’s ability to maintain alUSD’s peg and continue earning interest.

A comparable strategy is when companies earn interest on their float. Money that they can claim but do not currently need, and they are able to invest while unused. 

Prepaid gift cards are an example. The current balance for Starbucks prepaid cards is at $1.4 billion. Customers could use that at any time, but Starbucks already has this cash available and they are using it to make money through investments or business expansions.  

Likewise, Alchemix is putting the money to work, but the depositors are getting the upside, rather than Alchemix (or Starbucks).

Alchemix is making a profit because they are getting a higher interest rate than they are paying to their depositors. Ten percent of the profits that Alchemix earns for users is stored in the treasury and is used for paying the Alchemix team in addition to solving any bugs or issues that have come about. 

This system aligns Alchemix’s incentives with those of its customers. They are only paid when providing good returns for users and are therefore incentivized to find the correct balance of return and risk. 

It is deceptively simple:

1.     Deposit DAI (or other allowed coins)

2.     Borrow alUSD

3.     Debt is repaid with Yearn Interest (now Saddle is available too)

This simple model shows how DeFi can provide new projects that are built upon each other.  Alchemix is built on Yearn and Yearn on Compound, AAVE, and other apps, all of which are built on Ethereum.  

Risks of Self-Paying Crypto Loans

The strength of Alchemix comes from the leveraging of other DeFi protocols. Specifically, the intelligence behind building a new lending protocol that is automatically repaid and cannot be liquidated. 

However, failures of the parts below Alchemix (Yearn, Saddle, Compound, AAVE, Ethereum) in the stack could easily cascade to harm Alchemix, and there is not much Alchemix could do to fix this. Alchemix has created security systems to protect their users’ funds in an emergency event, and they have proven reliable with crypto market crashes.

Alchemix has been audited, and its V2 version has a continuous auditing system. Security is clearly a priority for the project.

Closing Thoughts

Self-paying crypto loans represent a new era of finance that will potentially bring massive changes. It gives us reason to think of money differently. 

The latest projects will likely attract those willing investors who may well make great returns. This novel style of lending and borrowing opens new doors. Particularly, it opens the relatively unexplored avenue of using variable returns to pay down low- or zero-interest loans. 

Disclaimer:  The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment.  Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business.  Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

Because NFTs are a new type of asset, they have drawn the interest of many new investors worldwide. Usually, members of the art world, the collecting world, and the world of crypto have the most interest. 

Still, as their popularity has grown, NFT prices have shot up, drawing the interest of more people including those interested in NFTs as a speculative asset for potential income.  Because of this interest in potential investment income, the question of valuation becomes much more important. We will discuss the factors that can be used to value NFTs and how this process has been done with data science.

Factors for NFT Valuation

Being new, there are no set of rules used to assess the value of an NFT. The ways that companies and other assets, including art and other collectibles, are valued differently from NFTs and are therefore not directly applicable. One avenue that seems to be somewhat reliable is the payment of the purchase made by the last buyer of the NFT. This is not sufficient because, with NFTs, we have seen significant volatility. It’s hard to guess what the next buyer will be willing to pay just using these estimates from previous purchases. 

Most buyers lack the needed skills and information to logically ascertain an NFT’s value and usually make guesses with little reason behind them. Sellers also have a challenging time determining what kind of price they might receive for the NFTs that they currently hold. In time, much like the value of art, the value of an NFT is driven by perception, and neither the buyer nor seller have any control over this. 

Let’s consider the following: an NFT artwork may be in demand for a particular time with buyers believing it is rare and will produce value in the near term. They then discover that the image is available for free online, and the pool of potential buyer’s dries up.

Renowned artists’ NFTs and tokens that are associated with tangible assets are easier to define their values, but in most cases, investors and traders will have a more challenging time determining the value of the majority of NFTs.  

There are, however, several factors which one can utilize to make a price prediction. And when combined, they produce a much more justifiable and hopefully accurate number.

Scarcity

An NFTs demand is directly proportional to its rarity, but what can we use to determine how rare an NFT is? Artworks from known artists or celebrities or influencers are undoubtedly good examples of rare items. Certain game items and collectible NFTs from the likes of the NBA would also fall into this category. The scarcity factor will add intrinsic value to these NFTs.

These items are numbered, with only a total of up to 99 available. The players are all top stars in the NBA, and NFTs have unique attributes, resulting in their elevated values.

The immutable nature of NFTs gives the holder a sense of value through distinction. Jack Dorsey’s first Tweet NFT would be another example of a scarce NFT giving it added value.

Use

An NFT’s use is also a critical factor in evaluating its value. An NFT must have a real application or utility to add to its value. Take, for example, an NFT that tokenizes a precious metal, security, real estate (real or virtual), or an in-game asset, which will have an intrinsic value for specific buyers. 

When real-world items are tokenized, and ownership is immutable on blockchains, there is a tangible value. The NFT world is just beginning, and as it begins to mature, new innovative use cases will undoubtedly emerge.

NFTs can effectively define ownership and its rights, eliminating fraudulent activities. Their use in a project will influence its value. After it’s minted, an NFT will have value from its built-in characteristics. 

As time passes, the value will accrue at a rate that depends on its utility and the related project. Metaverse tokens from Decentraland that relate to virtual real estate have grown in value due to the strength of the project’s interest. 

Most NFTs with defined use are great for both short-term and long-term trading. NFT event tickets can be a great short-term bet, and those that represent real estate can accrue long-term value.

Interoperability 

Like use, a key factor in valuing an NFT is its interoperability, an NFT’s ability to be utilized in more than one application and across blockchains. If a gadget is able to be used in several games, the chance of the token increasing in value also increases. 

How an NFT works on different blockchains will also make it easier to transact. This is a difficult measure, but the breadth of use for tokens and their interoperability across chains is another way to build value and something that developers can strive to create.

Social Proof

One of the most decisive factors that can determine an NFT’s value is social proof of the underlying project or artist. When someone first encounters an artist or project, there is a tendency to rely on cues from those around the project. An NFT’s social proof indicates what people are thinking about the project, and the more buzz, the better.

Checking the minter and the NFT’s presence on social media platforms like Discord, Telegram, Instagram and Twitter can help to gauge the acceptability. If followers are low, it will indicate that there is a missing foundation, and the NFT’s value will be low and may never grow. Social proof of the NFT and the project or person behind are significant factors when building a valuation.  

Provenance (Ownership History)

The identity of an NFTs issuer and its previous owners can affect the NFT’s value. NFTs created by well-known people, projects, or corporations can benefit from an ownership history value. This attribute can be enhanced in an NFT by working with groups or individuals with a substantial brand value when minting their NFTs. 

Reselling NFTs that were held by influencers is another avenue to gain traction as well. NFT marketplaces and sellers can aid buyers in finding information about previous owners of NFTs, providing a simple user interface with tracking. By highlighting investors who have been successful with NFT trading, they help other buyers with valuable insights.

Liquidity

NFTs that have significant liquidity will carry an added value. Secondary markets that have frictionless BSC or ERC standard NFT trades give added access to buyers. Traders will flock to NFTs that have higher volume knowing their tokens can be sold when desired and profits are taken. A token with high liquidity is better able to retain its value even if the native platform is closed.  

Increasing engagement is essential for token economics, and liquidity is one way to enhance engagement. In-built systems that depreciate NFTs for being idle and encourage competition can build a more substantial market. NFT systems should be created to support the liquidity of the emerging NFT market.

Price Speculation

Speculation can be a catalyst for appreciation. We have seen several NFTs, collections, and the market as a whole jump in value by thousands of percent in a short time. While some will oppose speculation as a valuation driver, the desire of humans cannot be neglected.  

The conventional financial system of derivatives bases its values on speculation, and this speculation element should also be included in NFT valuations. Charts of price performance, a project’s assets, and even items beyond fan speculation can drive price speculation in NFTs.

NFT Ecosystem Changes

As the ecosystem of NFTs continues to evolve, additional factors will affect NFTs’ values, which will need to be incorporated to improve price valuation accuracy. Like art, NFTs have subjective values, and this makes valuing an NFT in the future more difficult. NFTs have nearly endless possibilities. Their use and versatility will continue to grow with additional applications and categories. These will need to be applied to future price valuations. 

Valuing NFTs With Data Science

Data science advisor for the London Business School and mentor at Cambridge University’s Judge Business School, Stylianos (Stelios) Kampakis, recently worked on a paper with one of his students that undertook the process of valuing the popular CryptoPunks NFTs using hedonic regression. Here are some examples of these NFTs. 

The highest price for a single NFT in this collection was $24 million, #5822.

The paper looked at what attributes could contribute most to valuation, and the author stated that it can be used for a similar system with other NFTs, and the paper showed how it could compare NFTs to more traditional investments. The paper reviewed the “physical differences” between the various artistic attributes of NFT art and found specific physical attributes (a beanie, bandana, glasses, facial hair type), or a lack of which, leading to scarcity were more important in defining value.  

A similar regression could be applied to other NFTs using available price data, and then adding in the various attributes we have outlined above to improve the valuations further. 

Closing Thoughts

When trying to estimate the value of NFTs, we must be mindful that not all of them will be valuable. The vast majority may have 15 minutes of fame and then crash or never even have that 15 minute of fame. 

When valuing, consider all the factors to arrive at a price decision, even new ones that have not been discussed here. Conducting due diligence to make an informed decision should be part of any financial decision, including the purchase and sale of NFTs.

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.

With the advent of blockchain, a new space has been created for the world of video games. GameFi has rapidly been expanding into the more traditional video gaming industry since its first appearance with Axie Infinity. 

Axie attracts gamers to its universe by offering them opportunities to make money while they are enjoying the game. We will be explaining GameFi and the differences between it and the more familiar traditional video games we know, how one can get started on a particular GameFi game, and potential income streams they provide players and investors.

GameFi in Brief

GameFi starts with combining the words game and finance, similar to DeFi for decentralized finance. GameFi refers to a blockchain-based game model that has a play-to-earn feature that incentivizes players. In a GameFi ecosystem, blockchain technologies with cryptocurrencies and NFTs (non-fungible tokens) create a virtual gaming environment for the players.

Players can earn in-game rewards by completing in-game tasks, winning battles with other players, or reaching new game levels. These assets earned during play are owned and controlled by the player and can even be traded on crypto exchanges or NFT marketplaces.

GameFi’s Inner-Workings

GameFi player rewards come in many forms. Anything such as native cryptocurrencies or in-game assets like avatars, avatar features and costumes, weapons, virtual land, and virtual building materials. 

Every GameFi project will create its own different game model and economy built around that model. Generally, a game will create its in-game assets as NFTs running on a blockchain project or sidechain, while in other cases, the in-game assets would need to be converted to NFTs before players could trade them. This second model can be a cost-saving method for the game’s project, putting the fees to create the NFT on the trader.

In-game assets will generally provide a specified benefit to the game’s players, which allows them to make additional rewards. However, some games will feature player avatars and cosmetic changes, which are purely visual and have no impact on either gameplay or the in-game earning.

Depending on the game’s model, players can earn rewards through the completion of tasks, winning battles against other players, or constructing and monetizing structures on their owned plots of land. Some games will allow their players to generate passive income, not even having to play the game. This can be through staking or lending of their owned game assets to other players.  

Common GameFi Features

Let us look at GameFi’s most common features.

Play-to-Earn (P2E)

Nearly every GameFi project will have a Play-to-Earn or P2E model as a novel gaming mode at its core. This P2E model turned the gaming world on its head, which has relied on a Pay-to-Play (P2P) model that started with the video game arcades of the 1970s. 

The Pay-to-Play model requires a gamer to invest before they can begin playing the game, putting money into the Astrids game at Dave and Busters, or nowadays purchasing a Call of Duty license or recurring membership subscription for their Xbox.

In the majority of cases, traditional video games with the Pay-to-Play model will not generate any financial rewards for their players, and any in-game assets that the player obtains are controlled and held by the gaming company only for use by that player. The P2E model, in contrast, will give players complete control over their in-game assets and will also provide them opportunities to make money for their play or passively.  

The economics of the game will depend on the GameFi project’s chosen model. Games built around a decentralized blockchain technology can and should give their players complete control over their acquired in-game assets. However, this is not always the case. Players should understand how the chosen game works, its economics, and who is behind the project before devoting time to any P2E game. 

One notable feature of P2E games is that they can be free to play but still have the ability to generate financial rewards for their players. However, some GameFi projects will require players to purchase NFTs or other crypto assets before being allowed to play. 

Axie Infinity

Axie Infinity has gained the spot of one of the most popular Play-to-Earn games. Axie is an Ethereum-based game with NFTs that has grown in popularity since its release in 2018.  Players can use their NFT pets, called Axies, to earn Smooth Love Potion (SLP) tokens.

These can be earned by completing daily tasks and by battling other players. Players can also get the rewards of another coin, the AXS, if they are able to achieve a defined player versus player (PvP) rank.  

On top of this, Axie Infinity players can use both AXS and SLP to breed new Axies, and these new Axies can be used in-game or traded on the Axie Infinity NFT marketplace.

Beyond buying and selling Axies, players have the ability to lend their Axies to other players, in a process known as scholarship, allowing NFT owners the ability to earn without having to play the game. This model of lending gives the borrowers called scholars the use of the Axies to earn rewards during play without having to pay anything up front.

This passive model is a way for players with strong Axies to earn without investing other than what they made through their own play beforehand. Rewards earned with the borrowed Axie are split between the scholar’s student and the Axie’s owner. 

Ownership of Digital Assets

Blockchain technology allows for digital asset ownership, and this makes it possible for owners to monetize their in-game assets in several ways possible for a project.

With traditional video games, a player can own pets, houses, avatars, weapons, tools, construction materials, and much more. But with GameFi, these assets can be issued in NFT form and minted on the blockchain. With this GameFi system, the player will have full control over their in-game assets. The ownership of these assets can be verified, are transferable, and can be authenticated.

With the rise of metaverse games such as Decentraland, TheSandbox, and a few other lesser-known games, the focus on virtual real estate has grown, and its ownership has grown as well. These games allow players to purchase and monetize their virtual real estate like it was property in the real world. 

The Sandbox allows its players to buy plots of digital real estate and then develop these plots so that they can generate value through revenues. One popular form of development has been the creation of casinos in these metaverses. Some of the developed lands will charge other players to visit when they are the venue hosting content or events like virtual concerts bringing in thousands of visitors all paying to see the event, or they can also rent this customized land to other players who will monetize it.

Applications for DeFi

There are some GameFi projects that provide DeFi features like staking, liquidity, and yield farming. With these GameFi projects, a player can stake their game tokens to earn rewards, unlock special items, or gain access to new gaming levels. 

The introduction of these DeFi elements can make blockchain gaming more decentralized. Traditional game companies will have centralized control of the game and its updates; some GameFi projects allow its community to participate in the game vision process, proposing future updates via DAOs (decentralized autonomous organizations).

Using MANA, the native governance tokens of Decentraland, players can vote on a project’s organizational and in-game policies if they lock their tokens in the DAO. The more tokens they lock, the stronger their voting power. This system allows gamers to have a direct influence on the development of the game they are playing.

Traditional Games and GameFi

With traditional games, a player can earn in-game currency that is used to purchase assets and upgrade characters. However, these tokens cannot generally be traded outside of the game space. They will also not have any value beyond the game’s scope, and even if they do, most games will prohibit players from monetizing and trading the earned/purchased assets in the real world.

Blockchain-based games have in-game tokens and assets in cryptocurrency or NFT form. Some games will use virtual tokens rather than crypto or NFTs. However, players can usually convert their in-game assets into NFTs if so desired, allowing the gamer to transfer their earnings to a crypto wallet and trade the crypto on exchanges and the NFTs on marketplaces. The crypto profits from in-game can be converted via an exchange or marketplace to fiat currency as well.

Joining the World of GameFi

There are already thousands of blockchain games available to play, and each has its own tokenomics system. Players should be careful of fraud projects or spoofed websites.  Downloading a game from the wrong website or connecting a wallet to the wrong site can be detrimental. 

It is best to create a new crypto wallet for the GameFi game and only use funds that can be lost in a worst-case scenario. Once you have found a Game you are confident with, you can begin.

Create a Crypto Wallet

Accessing a game will require a compatible crypto wallet. MetaMask and Trust Wallets are commonly used. 

The chosen game may use a different wallet or connect to a specific blockchain network. Blockchain games on the BNB Smart Chain (previously the Binance Smart Chain) will require that a Metamask wallet be first connected to the BSC network. A Trust Wallet or other supported wallet could potentially be used.

Games running on the Ethereum network can be accessed when you connect your wallet to the Ethereum blockchain. Some games like Gods Unchained and Axie Infinity have built their own wallets, reducing costs and improving performance, so you may need to create one of these. 

Connect the Wallet to the Game

A wallet will need to be connected before gameplay can occur. Connect with the official website only. Find the website and look for the wallet connection option. Most blockchain games will use your wallet as your account username and password, so most games will ask you to sign a user message to your wallet, allowing you to connect to the game.

Check Game Requirements

Most projects will require the purchase of some native cryptocurrency or an in-game NFT to begin. The upfront requirement will vary from project to project, and you should consider this purchase’s earning potential and overall risk before moving forward. Include in this estimate the time needed to get your initial investment back, and any profits that can be obtained.

3 Axies are needed in a wallet to play Axie Infinity, which can be purchased in the marketplace. This purchase will require wrapped ETH (WETH) in a Ronin Wallet. ETH can be bought elsewhere, and the Ronin bridge can be used to transfer the ETH to your Ronin Wallet. If you do not have the upfront funds, you can look for a scholarship program. Allowing you to borrow NFT Axies, but you will share your earnings with the Axies’ owners.

GameFi’s Future

In the past year, GameFi has grown tremendously and will likely continue with the spread of more blockchain projects. In July 2022, DappRadar lists nearly 1750 blockchain games, up from about 1400 in March of the same year–25% in four months. 

There are now popular games crossing multiple blockchains beyond Ethereum and the BNB Smart Chain, including Solana, Polygon, Harmoney, and more. The ability for players to own and earn from their in-game assets is especially attractive in developing countries. With the continued growth of blockchain tech, the GameFi world will continue its speedy growth.   

Final Thoughts

Browser games have hoped to make Bitcoin profits since the beginnings of blockchain tech.  Ethereum was created from a desire of a young man to have control over his in-game assets.  The advent of smart contracts has changed the potential of the gaming world, with decentralized novel experiences and opportunities. 

GameFi can attract gamers, providing an entertaining escape and a financial incentive. The growing popularity of blockchain-based games will continue and will likely be a driving force behind the development of the metaverse.

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.