Attorney Shao Shiwei | Why Can Playing Blockchain Games Be Profitable?

The slogan of blockchain games predominantly features the "play to earn" model. During the years when the pandemic swept across the globe, the blockchain game Axie Infinity unexpectedly became a livelihood tool for residents in the Philippines. Many local young people earned hundreds of dollars per month through this pet-raising game.

1. CryptoKitties

In 2017, the world’s first blockchain game, CryptoKitties, was launched. It is a decentralized application (DApp) developed on the Ethereum network. Initially, 50,000 smart contracts were issued to generate generation-zero cat NFTs. After purchasing an NFT, players could breed kittens, which could then be sold for cash realization, achieving "play-to-earn." If rare kittens were bred, they could be sold at higher prices.

Additionally, players could earn rental income by leasing out their kittens. In December 2017, a virtual cat was sold for a high price equivalent to RMB 750,000.

While this game appeared to offer genuine profit opportunities, it was essentially a clear-cut Ponzi scheme.(A Ponzi scheme is a term for investment fraud in the financial sector. Simply put, it operates on a "robbing Peter to pay Paul" basis, using funds from new users to pay short-term returns to existing users, thereby creating an illusion of prosperity to attract more participants.

investment). The total value of all cats equaled the sum of Ether deposits made by players in the game. If Player A earned money by selling a cat, it necessarily meant that Player B had deposited funds to enter the market. Throughout the game, as the number of bred cats continuously increased, the unit price continuously decreased. Due to the game’s lack of inherent entertainment value, the number of players exiting the game grew increasingly

large, accelerating the depreciation of the cats. Although the CryptoKitties white paper attempted to characterize them as collectibles, players did not purchase them due to an appreciation of the cats’ visual imagery; rather, they bought them with the expectation of selling them at a higher price to new participants. No players purchased and collected cats based on genuine affection. Under these premises, the ultimate outcome of the game was collapse.

2、Fomo3D

Fomo3D, another game based on the Ethereum network, attracted RMB 70 million in capital within 16 days of its launch. Its core gameplay involved "auctioning." Within the prize pool, players entered the game by purchasing keys (the price of which would gradually increase). Each bid by a player would reset the game countdown timer. The last bidder would receive 48% of the Ether

in the prize pool. Additionally, every player who placed a bid could receive dividends according to the game rules.

This was also a Web3 game capable of generating profits, but it was simultaneously a gambling-style game characterized by high risk and high reward.Only the last bidder could obtain the maximum return. Were other players simply waiting for dividends? It was not that easy. Since everyone aspired to be the last bidder, the number of entering players would continue to grow, meaning that the dividends each

player could receive would diminish. Early participants might profit, while new entrants would become victims (often referred to as "leeks"). This was a game where the big fish ate the small fish.

Ponzi-scheme-style blockchain games from the 1.0 era have been eliminated by the market. In the 2.0 era, represented by Axie Infinity, the dual-token economic model (governance token AXS and game token SLP) prominently featured the "play to earn" mechanism.

How does this game generate profits?？Players can earn game tokens and NFTs by playing the game. Both AXS and SLP can be bought and sold on exchanges such as Binance and Huobi. Additionally, in-game assets such as pet NFTs, land, and potted plants can be sold in the marketplace, with transactions denominated in ETH.

Under the premise that allows in-game currencies and items to be traded, letting the market determine their prices constitutes a relatively healthy game model. Here, it is necessary to mention the concept of Token Economy.

In traditional Web2 games, game developers control the game and determine the pricing of in-game assets, maximizing the protection of commercial interests. In-game items, tokens, and other assets hold no actual value outside the game itself. In blockchain games, all in-game assets can be tokenized and stored on the blockchain.

They are open to everyone, and their value is determined by the market. Simply put, if a sufficient number of users recognize the value of a certain token or item, its price will be higher.

In short, why can blockchain games be profitable? Players can trade in-game tokens/NFTs on cryptocurrency exchanges, converting them into other cryptocurrencies such as USDT, and then exchanging USDT for fiat currency. If a game attracts more players to enter, the ways for players to obtain in-game tokens/NFTs are either by purchasing them within the platform

or by buying them on exchanges. These constitute the buyers and sellers in the transaction.

Currently, in blockchain games, DeFi elements seem to outweigh Game elements. In the era of Blockchain Games 3.0, the more important focus should be enhancing the playability of the games. Only in this way can more players be attracted to participate.

The above provides a brief explanation of why blockchain games can be profitable. The cases mentioned above are all foreign blockchain game projects. In China, can blockchain games achieve "play-to-earn"?

At the press conference held by the Supreme People's Procuratorate on November 29, 2021, it was explicitly stated that "application software suspected of involving gambling has a significant characteristic, namely, the presence of withdrawal functions." The basic model of blockchain games is "play to earn," where NFTs or game tokens obtained by users in the game can be withdrawn as cryptocurrencies on exchanges.

Additionally, relevant legal provisions regarding games stipulate that services shall not be provided for the trading or exchange of game points, or for the disguised exchange of cash or property through methods such as "virtual currencies." Does this seemingly deal a fatal blow to the development of blockchain games in China?

Not necessarily. While there is indeed no fertile soil for the financialization of game tokens in China, the Chinese-localized version of NFTs—digital collectibles—has blossomed and been widely applied domestically. For example, "Legend of Mir - Flame Verdict," as the first domestic game product developed based on a consortium blockchain, achieved the digitization of game items and equipment into digital collectibles for the first time, allowing players

to conduct transactions on the Wasu Cultural and Creative Platform. Therefore, the author believes that NFT-based blockchain games still possess certain development space in China. However, it is crucial to note that while engaging in "play-to-earn," one must guard against the criminal legal risks of blockchain game platforms involving gambling. How to prevent this? Please refer to Attorney Shao’s previous article → "How Can Play-to-Earn Blockchain Games Avoid Becoming Gambling?》。

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