Is Play To Earn a Ponzi Scheme?

Not so long ago, play-to-earn (P2E) games were hailed as the next big revolution in the gaming industry, enabling gamers to play while earning a decent income. But today, many players argue that blockchain games left a sour taste in their mouths. Most of the games have been called ‘garbage’ or ‘outright scams’, as the distrust (and disgust) from the gaming community heightens.

These days, gamers see GameFi as nothing but mere fronts for Ponzi schemes. And while you’ve probably heard the term before, what exactly counts as a Ponzi? 

A Ponzi scheme is a widely used scam where a fraudster creates the illusion of possessing the ability to give extremely high returns to lure unsuspecting investors. Indeed, the initial depositors will receive significant returns, but they won’t come from profits like a normal business, but from investments from new investors. Obviously, this isn’t a sustainable scheme, so the scammer would have to relentlessly bring in new investors to the fold up until they can’t.

Once participation declines, the scheme will implode, leaving late investors unable to get their deposits back.

All things considered, do P2E games fit the definition of Ponzi schemes?

The short answer is no, blockchain games are not inherently Ponzis. But there are three sides to this argument. First, many blockchain games have broken tokenomics, premature releases, and incompetent developers, leading to a rapid decline in profitably, or worse, imminent failure. While they don’t fit the criteria of Ponzis, their faulty foundations can make it extremely difficult if not unfeasible for gamers to break even, which causes distrust among the community, some of which would label them as scams. 

Second, there are indeed P2E games whose entire structure heavily depends on Ponzinomics (Ponzi tokenomics). They are the worst in the blockchain industry, and we will help you avoid them later in this article as well.

Lastly, there are well-designed P2E games that, although not perfect, came into existence to genuinely offer satisfying gameplay and a viable income source for players. Projects like Gala Games that are focusing on making games fun are tirelessly developing the next generation of P2E.

Unfortunately, they represent the minority of today. And the present decline in both crypto and traditional markets has curtailed player earnings. This isn’t an isolated case though, as we’ve seen other sectors facing difficulties as well.

How Play-to-Earn Games Work

P2E games enable players to earn financial rewards while playing, but they also typically require them to purchase a non-fungible token (NFT) in order to start. If you cannot afford to buy an NFT, you can become a scholar and opt for a rental scheme, which has been widely popularized by Axie Infinity. As a scholar, a ‘manager’ lends you his account, which you can use to play games and earn while you split the proceeds.

A few blockchain games like Plants Vs Undead offer free starter packs, which are temporary NFTs with limited functionalities, allowing gamers to play without spending anything. But gamers will have to exert more effort to start earning in these types of games. 

The monetary rewards vary per game, but essentially, players can earn cryptocurrency by completing specific tasks such as winning PvP battles, farming in-game currencies, accomplishing quests, completing microtasks, winning contests, and acing the leaderboard, etc. In many cases, users can also earn outside the game by staking their NFTs or selling them at a higher price.

The cryptocurrencies to be earned are usually native in-game tokens, but some projects pay with pre-existing cryptos like Bitcoin, ETH, or Dogecoin. Earnings can either be cashed out or reinvested in the game. The latter usually comes with incentives, which is another reason why GameFi gets labeled as a Ponzi often.

Thanks to blockchain technology, gamers can fully own the items purchased or gained along the way, including avatars, pets, armors, weapons, skins, etc., which can be traded outside the games. Furthermore, these NFT-based items are arguably more likely to retain value than traditional game items since they are verifiably unique, which adds true scarcity.

Are Play-to-Earn Games Legitimate?

P2E games, in essence, remain to be legitimate in most jurisdictions as common laws typically allow their existence as web3 companies/DAOs, except for states that ban the use of cryptocurrencies like China and Bolivia.

Moreover, blockchain gaming remains a legitimate source of income for many players across the globe, particularly in third-world countries. In fact, Sky Mavis, the GameFi firm that develops Axie Infinity, encourages their players to pay taxes on P2E earnings and abide by the laws of their country.

One of the major reasons why GameFi is sometimes branded as unlawful is because some blockchain games either have broken tokenomics or are outright Ponzi by design. The former is usually the result of a poorly constructed game economic system, which doesn’t necessarily make it a scam, but it is an indicator of incompetence on the part of the developers.

Broken tokenomics and Ponzinomics are recipes for disaster, where in-game tokens typically plummet in value quickly, drastically reducing player rewards and preventing many from making decent earnings, or worse, forcing them to quit while not earning back their initial investment. We’ve seen this happen too often, even from platforms with decent gameplay.

Blockchain games need carefully designed tokenomics (it helps if projects hire an actual economist) that are long-term sustainable. Moreover, blockchain game developers need to consider the market cycles of the crypto industry, which is known to have booms and busts every few years.

And then we have real scam projects, which create games that have Ponzi tokenomics, where the earnings paid to players come from new investors. The next section will cover that.

How to Spot a Ponzi P2E Game

While no one can completely eradicate Ponzi schemes, people can look for signs of Ponzis behind a dazzling new “investment opportunity.” The number one tell-tale sign is when they promise or guarantee extremely high returns ー with little to no risk at all. These types are obvious to spot for most, but many still fall for them. To be safe, it’s best to avoid any project, gaming or not, that focuses on the financial aspects, especially if they have flashy and gimmicky marketing tactics.

A good rule of thumb would be to just avoid any gaming investment that’s too good to be true. That should be the first, step.

If a game passes your first layer of judgment, you must also determine whether it has sound tokenomics, which is a lot harder. First, you need to check the vesting periods of private investors. If the project has raised at least a million dollars and has no vesting or lockup period for private investors, then it is like going to dump hard. Even a six-month vesting period is too short. In a perfect world, vesting should be at least four years or longer in order to contain supply.

The next thing you should check is how the tokens are distributed to players. Does the gameplay mechanics encourage players to cash out their earnings right away? Are there any incentives at all for holding? Is there a burn mechanism to curtail supply if need be?

Depending on the answers, you might find that some of these games have Ponzi elements or simply have poor tokenomics. Either way, you’re better off staying clear.

Why Hardcore Gamers Don’t Like GameFi 

Gamers hate blockchain games because it has essentially reduced gaming to a job, shifting focus on the earnings as opposed to fun factor and gameplay satisfaction.

No wonder most blockchain games are not inherently fun to play, with the majority having boring, repetitive gameplays, unoriginal game mechanics, disappointing graphics, and the list goes on. Many hardcore gamers see NFT-based games as another milking cow for game developers to squeeze every last bit of profit from the gaming community.

And there is a lot of truth in that. When Axie came to prominence in mid-2021, every game developer in crypto wanted to partake in the P2E gold rush. We’ve seen new gaming studios materialize overnight, with amateur devs haphazardly launching blockchain games, some of which are outright copycats or simply terrible, thinking they could make a fortune just because Sky Mavis was able to do it. And as tragic as it is, they were right.

Over $4B in venture capital (VC) money alone was poured into GameFi in 2021 (yes, institutions can be idiots too). Retail investors had it worse since most of them bought at or near all-time highs. While gaming startups were able to bag enough funds to live out the rest of their days sipping martinis in the Bahamas, most of the investors (like myself) are left with huge losses as many gaming tokens have massively dropped in value, even below the private sale price.

We’ve already talked about the reasons why this happened (broken tokenomics, scammy tokenomics, terrible gameplay). Let’s dig deeper into that last bit as it concerns hardcore traditional gamers.

It’s not that all developers of struggling P2E games intended to scam investors in the first place. It happened at a time when there was massive exuberance around blockchain gaming. Many believed that the $200B traditional gaming industry would start migrating to P2E but the reality fell behind expectations. The promise that never came largely contributed to the depreciation of blockchain gaming assets, among other factors.

The fact of the matter is that blockchain games still can’t hold a candle to traditional games when it comes to quality, gameplay, and fun factor. Unless this changes, we can’t expect most of the hardcore gamers to come.

Is P2E Dead in 2022? 

Despite everything you’ve read, GameFi is not dead. Far from it. But the P2E space is rapidly evolving amidst the imminent global recession and failure of the first generation of games. In fact, blockchain games raised another $2.5 billion in Q1 of 2022, which indicates that either the space has learned nothing from last year, or maybe the next generation of blockchain games are more compelling.

Despite losing steam, P2E is still popular in developing countries as economic challenges are pushing people towards alternative sources of income. Considering this, we can expect earning profitability to remain the main driving force in drawing people in in the short term.

And despite the present challenges, blockchain gaming developers are not going to stop. Most individuals in the industry are convinced that blockchain is the game-changer of the gaming industry, empowering users to own the assets in their games and ushering in a new era of gaming interoperability where a multiverse of games can coexist, share a select number of items, and do other things that were never possible in traditional gaming. The vision is so ambitious and insane that traditional gamers cannot believe it is possible.

But it is.

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