Gaming has been the most lucrative entertainment medium on the planet for a while. Now blockchain tech, crypto and NFTs mean even more ways for game developers – and players themselves – to earn money. So what is ‘play to earn' (P2E) and why should the gaming world care about it? Here's what you need to know.

The use of virtual currencies in gaming has been around for years, but there has been very little crossover into the real world. Now, with the spread of blockchain technology, cryptocurrencies and non-fungible tokens (NFTs), a bridge has been opened which could allow players to earn money (or something of value) as they play.

Plenty of gaming-related collectables can be claimed as NFTs, but play-to-earn games have gone further, placing cryptocurrency and NFTs as the stakes. Some games give away free NFTs (often in the form of avatars or other game peripherals) whereas in other cases, users must buy the NFT in order to participate. These avatars gain experience and superior capabilities as users progress within the game or buy enhancements via a loot box. Whilst this approach shares some characteristics with the free-to-play (F2P) model, what sets play-to-earn apart is that assets can be traded and sold to other players. That means that whilst in F2P money flows only one way – towards the developer – in P2E some value flows back to players.

The rewards are usually in cryptocurrencies (sometimes created purely for that game) or NFTs. These unique crypto assets are particularly suited to the environment as they can be used to authenticate ownership. There have been examples of users being required to lock up a certain amount of a particular cryptocurrency in a wallet to be allowed to participate in the game. This has the effect of reducing the availability of the cryptocurrency token which in turn raises its value.

By allowing players to buy in-game assets linked to non-fungible tokens (NFTs), the owners of those assets can boost their value by playing the game. Effectively in-game resources, land and items are tokenized. In some cases, the value of the NFT increases or decreases with performance and they can be sold either within the game or traded on secondary marketplaces. This is the fundamental of the P2E gaming economy: turning in-game items into assets that players can own, increase the value of and ultimately sell to earn real-world money.

A look at one of the longest-running P2E games, Axie Infinity, is a good way to both understand the model and highlight some of the challenges that come with it. In the game, players control “axies,” small fantasy avatars, battling them against those of other players. Players can buy axies ready-made from the in-game store or “breed” them. Breeding involves AXS, the in-game currency, combined with what developers call a “small love potion” or SLP. Both AXS and SLP can be earned by playing the game—fighting other players, competing in tournaments, etc.—or bought from the store using Ether, the cryptocurrency the game runs on. If you breed a rare axie, you can put it up for sale on the marketplace where you can also sell your surplus resources.

In theory, it should be possible to start with minimal investment and play long and hard enough to work your way into the game. The reality is that the developers use the usual psychological techniques to encourage players to buy their way to success. Additionally, paying players (who have bought enhanced powers for their avatars) will outcompete and destroy free players reducing the likelihood of a player advancing organically.

Sky Mavis, the owner of Axie Infinity, announced recently that it was moving away from the P2E model declaring it “unsustainable”. However, there are no signs others are preparing to follow suit.

Why should we care?

The main reasons play-to-earn games are of so much interest at the moment are the numbers of playing and the amounts of value stored within the games. At its peak, the fully diluted market capitalization for Axie's AXS token was about $16.7 billion and its total revenue from in-game purchases and market fees paid was $364.4 million in August 2021 The game accounted for $3.5 billion in NFT sales last year too. It has retrenched from these heights, but the numbers show the potential scale of the industry. To put the value of some of those assets into perspective, an Axie Infinity avatar was sold recently for 300 ETH – equivalent to around $120,000.

The blockchain gaming industry is projected to be worth $45 billion over the next few years and that growth may well come in markets not currently seen as the most important for gaming. During lockdown, cash strapped Fillipinos took to Axie Infinity in huge numbers. By 2021, local Axie players were, on average, earning five times the minimum wage in Manila. The popularity of in-game tokens like SLPs rose to such a level that it reportedly became the choice medium of exchange over the official Philippine peso. But it is India, with its huge untapped potential, that may be the biggest prize in the medium-long terms.

Are they legal?

P2E games come in different guises and the model works with both games of skill and games of chance. Whilst some games are initially free to play, some require players to buy in which makes a difference when it comes to trying to establish their legality. In the case of games of skill it is unlikely that they will fall within the remit of gaming regulators, whether or not they require players to buy in. However, when it comes to games of chance, it depends on a number of factors. If there is no buy in, it depends on the law of that particular jurisdiction and the interpretation by regulators and courts.

The dominant business model for play-to-earn games leans towards staking something of perceived real-world value in the hope of winning more. It is a matter of debate which tokens can be considered to have real-world value. Bitcoin, for example, is widely accepted as having financial value, whereas as NFTs representing an object or reference to an object, can be looked at differently. Definitions of what constitutes gambling also differ between jurisdictions. In some cases, the player would risk losing the tokens or the NFTs that are staked. In other cases, there is no risk of losing such assets. Generally, the laws of the country where the user accesses the play-to-earn game apply, but the game developer may have a local company and servers or have them abroad and these are also handled differently by each jurisdiction.

The threat of being ruled illegal is not the only challenge to the growth of P2E games. At a macro level, one of the reasons behind the fall in value of Axie's AXS token is a general drop in the value of cryptocurrency. The market is young and very volatile bringing an element of doubt to the value developers and players may realize. The way the NFTs are stored has also given rise to some high-profile incidents. Axie Infinity, for example, was famously the victim of a security breach which saw $600 million stolen in March 2022. Considering how much wealth is held in online accounts, they are an attractive target for criminals.

The location of NFTs on a game developer's server also gives rise to another concern. Despite players apparently owning their NFTs, if the server where they are stored collapses for whatever reason, those NFTs disappear into thin air. This is not a remote possibility. F1 Delta Time was a car racing P2E game that recently went bust meaning that all the NFTs associated with the game are now worthless. Considering that some people paid extraordinary sums for their cars, the losses will give players plenty of reasons to reflect.

Some have pointed out that the rewards for players of P2E tend to come from new entrants to the player base making the entire ecosystem reminiscent of a pyramid scheme. Play-to-earn may turn out to be an oxymoron, but for now, business is booming as people spend more in digital realities than ever before.

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