Recent data from DappRadar for Q2 2023 shows that blockchain gaming is looking really good. It’s not just about money; it’s also about other exciting things happening in the industry. People are getting more interested in free-to-play blockchain games. Despite a minor dip, Q2 witnessed an average of 699,956 daily Unique Active Wallets, underscoring the industry’s consistent presence.
Alien Worlds and Splinterlands stood out, as dominating examples on WAX and Hive blockchain activity, respectively.
The standout story, however, was investor confidence. Investments surged by 31% from Q1 2023, totaling $973 million.
In this article, we’ll explore GameFi complexities and the best accounting practices for accountants or accounting firms servicing gaming studios, ensuring seamless handling of on-chain transactions, financial reporting, and month-end closures.
What is GameFi? Redefining Ownership, Liquidity, and Composability.
GameFi, or blockchain gaming, stands out from traditional gaming in three fundamental ways, reshaping the industry landscape completely:
In GameFi, ownership takes center stage. Players gain unparalleled control over their in-game assets, breaking free from constraints from siloed and closed markets. This transformative feature empowers gamers to truly own and manage their virtual possessions, even in the case of the game going under, the player will always own their in-game assets.
2. Digital Asset Liquidity.
GameFi is really different from regular gaming when it comes to being able to trade and transact with all the cool stuff from any game. Gamers can now exchange their non-fungible in game assets with anyone, as these digital assets have an open market valuation and every transaction is recorded publicly in the main blockchain ledger.
This ensures authenticity and provides marketplaces to motivate demand to show liquidity for these game items. This makes players even more excited to spend their time and money on the game.
3. Digital Asset Composability.
Composability, a cornerstone of web3 gaming, lets game developers easily combine different things like cryptocurrencies and NFTs. In GameFi, this means studios don’t start from zero, and players own in-game items like characters and weapons.
In other words, Building games with digital asset items leverages the interoperability and permissionless nature of blockchain technology. This helps players’ items from one game work in another, breaking free from closed systems.
For Axie infinity, We enabled an enterprise grade solution that is scalable for their needs. We helped streamlined high level reporting and consolidating millions of transaction.
Saving their financial team countless hours.Richard Pasquin, COO of Cryptoworth
Accounting Challenges in Blockchain Gaming.
The dynamic and rapidly evolving nature of the blockchain space poses a series of accounting challenges, even for the most seasoned professionals. This complexity makes it a unique field for finance experts. Let’s explore these challenges:
1. Evolving Regulatory Landscape.
Blockchain gaming operates on a timeline that often surpasses regulatory frameworks and standards, leading to regulatory uncertainty. Creators and players commonly face challenges related to that legislation uncertainty and how it will impact their blockchain-based games. This lack of clear rules adds complexity to financial management, with organizations awaiting official categorizations from bodies like the SEC and the FASB.
The problem comes from cryptocurrencies being relatively new (as an asset class) and not having standard ways to report them in the books. This makes it hard to collect and organize data because different blockchains, systems, and exchanges report things differently.
2. Data Complexity and Currency Diversity.
Accurate data collection is crucial for reconciliation, but navigating it within blockchain gaming is intricate. Data spans various sources and currencies, complicated by multiple chains within the Ethereum Virtual Machine, alongside L1 and L2 rollups, each employing unique technology.
Adding to that complexity, there are the distinct ecosystems like Bitcoin, Solana, and Cosmos, each with its own token standards, liquidity pools, and smart contracts.
So, gathering and making sense of data from this complex environment is quite hard for accountants and finance teams.
3. Vast Data Volumes.
Blockchain gaming generates massive amounts of data. As these games get more popular, regular accounting methods, like using spreadsheets, aren’t enough.
Startups in web3, especially, deal with thousands of daily transactions, needing better and scalable accounting solutions. Handling this many digital asset transactions isn’t uncommon for crypto businesses. These transactions come from things like selling virtual items or getting commissions from sales on exchanges. Keeping all this data from different blockchains and marketplaces in one place is tricky.
4. Multitude of Wallets.
One of the common misconceptions in accounting for gaming firms is the number of wallets involved. Companies may initially believe they have only a handful of wallets, but upon closer examination by accounting teams, the reality unveils many more. In practice, there may be 30 to 50 different wallets contributing to the financial picture, a messy challenge for tracking and reconciling transactions across platforms.
Cryptoworth’s has streamlined millions of transactions for web3 gaming studios ⤵
Navigating these accounting challenges requires innovation and adaptability from accountants. In the following section, we’ll explore best accounting practices to streamline financial reporting, and month-end closures for on-chain transactions in GameFi.
Best Practices for Succesful Crypto Accounting.
Efficient crypto accounting is the linchpin for successfully navigating the complexities of GameFi. It ensures transparency, compliance, and financial precision. Here are five indispensable best practices to consider:
1. Revenue Recognition and Earnings Tracking.
Select the appropriate method, either FiFO or WAC, based on local regulations for accurate revenue recognition. Implement a comprehensive system that captures diverse revenue sources. This includes earnings from various tokens, in-game collectibles, and cross-branded partnerships. Achieving precise tracking and pricing of earnings are vital to financial transparency.
2. Record Cost and Expense Tracking.
Thoroughly map all expenses, from creative team and freelancers to software development and infrastructure fees (e.g., storage, node service, game engines). It’s crucial not to conflate EBITDA with cash availability. Maintain records of operational overhead before committing cash that may not be readily available. This distinction is vital for sound financial management.
3. Inventory Management and Gain/Loss Calculations.
Calculate realized gains and losses following GAAP or IFRS guidelines when assets are disposed of. Ensuring accurate asset valuation, whether through sales, trades, or ecosystem utilization, is crucial for maintaining regulatory compliance. Transparent and compliant gain/loss calculations are essential for financial accuracy.
4. Strong Portfolio Tracking and Monitoring.
Ensure data completeness and automate the determination of Fair Market Value at the time of each transaction, considering specific fiat currency values. Continuously monitor the fair market values of assets, tracking associated changes on a monthly basis when closing accounting books. A dynamic understanding of asset values is crucial in the ever-evolving GameFi landscape.
5. Detailed Record-Keeping for Audit Readiness.
Maintain meticulous records of every transaction related to revenue, expenses, and asset movement. Accurate bookkeeping is not just about financial precision; it also impacts audit readiness. Being proactive in maintaining comprehensive records ensures you’re well-prepared when audits become necessary. A proactive approach minimizes compliance risks and facilitates a smoother auditing process.
By adopting these best practices, organizations can navigate the challenges of crypto accounting in GameFi effectively. These practices not only ensure financial accuracy but also position companies for transparency, compliance, and long-term success in this dynamic and evolving sector.
Cryptoworth: Your GameFi Accounting Authority.
Our team has been actively involved in the Blockchain Game Alliance, demonstrating our commitment to advancing blockchain in gaming. Drawing from our work with industry giants like Axie Infinity, we offer specialized crypto accounting tools, reducing month-end closing times.
Cryptoworth offers comprehensive asset tracking for many digital assets standards, whether they are fungible, semi-fungible or non-fungible assets. We’ve built seamless GameFi ecosystem integration across multiple blockchain gaming networks like Wax, Hive, Klaytn, Polygon, Ethereum and 130 more. With SOC 2 Type II and SOC 2 Type I certifications, Cryptoworth secures your data for crypto accounting, empowering you to be the champion of digital asset finance with ease.
In the ever-evolving GameFi landscape, Cryptoworth stands as the trusted expert in crypto accounting. Are you ready to save time from chaotic spreadsheets and data gaps?
Cryptoworth is the platform is the ultimate solution for efficient crypto accounting. It automates tracking, classification, and integrates seamlessly with your existing financial systems, empowering even small finance teams to master digital finance.