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How Does the Blockchain Play-To-Earn (P2E) Model Work?

P2E

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Video gaming has rapidly evolved into a dominant form of entertainment, surpassing traditional mediums like TV and movies in popularity. While many engage in gaming for leisure and a break from the real world, there’s a growing segment that sees it as a source of income. The concept of earning through gaming isn’t new; it has roots in the early days of online gaming with practices like gold farming and trading in-game items, especially prevalent in regions with lower incomes.

The advent of blockchain technology, particularly Non-Fungible Tokens (NFTs), is poised to revolutionize the gaming industry with the rise of play-to-earn (P2E) games. A prime example is Axie Infinity. The earning potential in such games is significant, with some players making enough to support themselves financially.

This Cryptopolitan guide aims to explore the world of play-to-earn games and their potential to redefine the entertainment landscape, possibly even bringing cryptocurrency into the mainstream.

Understanding Play-to-Earn Games

Play-to-earn games are transforming the gaming experience by offering real-world value for in-game activities. In many blockchain-based P2E games, characters, items, or virtual lands are represented as NFTs. These digital assets can be traded outside the game environment, similar to other NFTs, allowing players to earn cryptocurrency through their gaming skills and strategies.

The advantages of P2E NFTs are significant

They grant players true ownership of their in-game assets, breaking free from the restrictions of traditional gaming ecosystems. This ownership means players can trade their assets on various NFT marketplaces, converting them into cryptocurrency or even fiat currency.

The blockchain foundation of these NFTs introduces unique features, such as the ability to programmatically generate rare and unique traits for items, adding a layer of exclusivity and value.

Beyond NFTs, many play-to-earn games incorporate their own in-game economies using traditional fungible tokens. Players can earn these tokens through various activities like completing quests, engaging in battles, or other game-related tasks. These tokens are not just in-game currency; they can be used for purchases within the game, unlock special features, or even be sold on cryptocurrency exchanges for real money.

The profitability of play-to-earn games has reached a point where they are a viable source of income for some. For example, the Axie Infinity Scholarship program allows players to rent characters from others, enabling them to participate and earn without a significant initial investment. This arrangement also benefits character owners, who receive a passive income stream even when they’re not actively playing.

The differences between Play-to-Earn and other games

The primary distinction between Play-to-Earn (P2E) games and traditional video games lies in the nature of the rewards they offer to players. In conventional gaming, players typically earn in-game points or virtual currency, which are confined to use within the game’s ecosystem. P2E games, on the other hand, revolutionize this concept by allowing players to earn tangible rewards, such as real money or cryptocurrency, for completing in-game tasks. This model not only motivates players to engage more deeply with the game but also opens up opportunities for them to profit from their gaming skills.

To illustrate, imagine playing a P2E game where completing a specific challenge earns you cryptocurrency tokens. These tokens can then be exchanged for real-world fiat currency or other types of cryptocurrency. In contrast, traditional games would reward you with points or virtual currency that have no value outside the game’s world. This limitation is what sets P2E games apart, making them particularly appealing to those who wish to earn money through gaming.

Axie Infinity: A Leading Example of Play-to-Earn Gaming

Axie Infinity stands out as a prominent example in the P2E gaming sphere. In this game, players collect and nurture digital creatures called Axies, each with unique abilities and traits. By engaging in either PvE Adventure Mode or PvP Arena Mode, players can earn Smooth Love Potion (SLP) tokens. These tokens are not just in-game items; they hold real value as they can be used to breed new Axies, creating a dynamic in-game economy.

Integrating NFTs with DeFi in gaming

The P2E model is further enriched by integrating NFTs with concepts from decentralized finance (DeFi). A prime example of this integration is Aavegotchi. This game represents an innovative blend of NFT gaming and DeFi, offering players digital pets that are not only collectible but also capable of generating yield. Players can stake Aave’s aTokens within these NFT characters, which accrues value over time. This combination of gaming and finance exemplifies the evolving landscape of digital entertainment, where gaming experiences are intertwined with real economic value.

Controversy revolving around P2E

Presently, most play-to-earn (P2E) games are relatively basic when compared to the high standards of modern gaming. However, the burgeoning interest in cryptocurrency and the potential for new monetization strategies have caught the attention of numerous gaming studios. This shift towards P2E models has sparked a debate within the gaming community, particularly among traditional gamers and developers.

A significant portion of the gaming community, who play games for relaxation and escapism, express concerns about the integration of real-world economic systems into gaming. They argue that this could transform gaming from a leisure activity into something more akin to a capitalist venture, potentially leading to increased stress and addiction. The fear is that gaming might evolve into something resembling a second job or a gambling experience, rather than a means of relaxation akin to watching a movie.

Despite these apprehensions, influential figures in the tech world, such as Reddit Co-Founder Alexis Ohanian, have a different vision for the future of P2E gaming. Ohanian has predicted that P2E games will dominate the gaming market, constituting up to 90% of it within five years. He bases this prediction on the premise that players will increasingly seek compensation for the time they invest in gaming. Moreover, he is optimistic that P2E games will evolve to offer the same level of enjoyment as traditional games, with the added benefit of enabling players to earn tangible value for their gaming efforts.

This perspective suggests a future where the lines between gaming for pleasure and gaming for profit become increasingly blurred. As the P2E model continues to evolve, it may redefine what it means to be a gamer, merging entertainment with economic opportunity.

Tax Considerations in Play-to-Earn Gaming

The rise of play-to-earn (P2E) games introduces complex tax implications for players. Current IRS guidelines on this matter are not comprehensive, suggesting that gamers should adopt a cautious and informed approach to manage potential tax liabilities. Tools like ZenLedger can be invaluable in this context, as they help consolidate transaction data, simplifying tax preparation.

Key tax considerations for P2E gamers include:

Income Tax on Created or Earned Assets: Players who create NFTs or earn in-game tokens and then sell them might be liable for ordinary income tax on the proceeds.

Tax on Initial Investments: If players sell cryptocurrency to purchase NFTs or in-game tokens, they may incur tax liabilities on the crypto sold to fund these purchases.

Capital Gains or Collectibles Tax: Purchasing NFTs and later selling them at a profit could result in capital gains tax. Additionally, these digital assets might be subject to collectibles tax, depending on their nature and the jurisdiction.

The Evolving Landscape of Play-to-Earn Games and the Metaverse

P2E gaming is developing alongside the concept of the metaverse – expansive virtual environments where users can interact in a myriad of ways. A notable example is Decentraland, which has already seen significant sales of virtual land. As these virtual worlds grow, P2E elements are likely to become increasingly integrated, enhancing the economic dynamics of these digital spaces.

A key aspect of this evolution is the decentralized nature of NFTs, which could enable the transfer of in-game items across different games and metaverse platforms. This interoperability would allow, for instance, an item acquired in one game to be used by a player’s avatar in another virtual environment. However, the protocols necessary for such interoperability are still in the early stages of development.

Why do P2E games and blockchain mix together well?

For many gamers, especially those transitioning from traditional online games, the concept of true ownership in Play-to-Earn (P2E) games, powered by blockchain technology, is a novel experience. In traditional gaming, perceived ownership of in-game assets like currency or items is often illusory. Game developers or publishers, who control the servers, can manipulate the game economy or reverse transactions due to various issues. Additionally, trading in-game items on third-party websites has historically been fraught with fraud risks.

Blockchain technology addresses these issues effectively. It records every transaction in immutable blocks, ensuring that no alterations or deletions can occur. This level of transparency allows players to view all transaction histories, fostering trust in the fairness of the game economy and the security of their assets.

Challenges of the blockchain P2E model

Blockchain technology, while offering transformative potential for the gaming industry, also presents a range of challenges and risks that need careful consideration. Here are some key issues to be aware of:

Regulatory Challenges

The incorporation of blockchain in gaming raises several regulatory concerns, including potential issues related to money laundering, fraud, and consumer protection. It’s crucial for businesses to thoroughly understand and comply with the regulations set by governments and regulatory bodies in each country. The regulatory landscape can vary significantly, and in some cases, play-to-earn (P2E) games may face restrictions or even be barred from platforms like the 

Play Store or App Store due to these concerns.

The year 2023 has been marked as a significant period for regulation in the blockchain sector. Both business operators and investors in this space must stay informed about industry trends and regulatory developments to prepare and adapt accordingly.

Technical Hurdles

The consensus on the benefits of blockchain, such as enhanced transparency, robust security, and the creation of value through tokens and NFTs, is countered by the high technical barriers to its implementation. Blockchain technology is still emerging, and there is a limited pool of experts in this field. Recruiting skilled professionals can be time-consuming and costly. 

Many companies remain hesitant to fully embrace blockchain due to the challenges associated with developing and maintaining blockchain infrastructure, such as mainnet and smart contract development. Additionally, there’s the task of sustaining the value of tokens and NFTs, which requires a strategic approach and deep understanding of both technology and market dynamics.

These challenges underscore the need for a balanced and well-informed approach to integrating blockchain into gaming. While the opportunities are vast, navigating the complex regulatory landscape and overcoming technical barriers are crucial steps for the successful and sustainable adoption of blockchain in this rapidly evolving industry.

Conclusion

The integration of blockchain technology in play-to-earn (P2E) games is reshaping the gaming industry. It offers players true ownership of in-game assets and the potential to earn real-world value, creating a new economic dynamic within gaming. However, this innovation comes with challenges, including regulatory hurdles and technical complexities. As the industry evolves, balancing these challenges with the opportunities will be key to the sustainable growth of blockchain-based gaming.

FAQs

Can play-to-earn games impact the traditional job market?

Play-to-earn games have the potential to create new forms of income, especially in low-income regions, but they are unlikely to replace traditional jobs. They offer supplementary income opportunities rather than full-time employment.

Are play-to-earn games environmentally sustainable?

The environmental impact of P2E games depends on the blockchain technology used. Some blockchains consume significant energy, but newer, more efficient technologies are being developed.

How do play-to-earn games handle player privacy?

Blockchain technology in P2E games offers enhanced security, but players should still be cautious about their personal data. Privacy depends on the game's design and the underlying blockchain's features.

Can children play play-to-earn games?

While some P2E games may be suitable for children, parents should be aware of the financial aspects and potential regulatory issues involved, making some games more suitable for adults.

Is it possible for play-to-earn games to crash in value?

Yes, like any market-driven entity, P2E games can experience fluctuations in value. Players should be aware of the risks and not invest more than they can afford to lose.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

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Shummas Humayun

Shummas is an aspiring Web 3.0 developer and a technical research writer interested in renewable energy, blockchain, and cybersecurity. He also enjoys coffee and gaming in his free time.

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