LONDON (REUTERS) - Mr Jarindr Thitadilaka says he made as much as US$2,000 (S$2,700) a month last year from his collection of digital pets, which he would breed and send into battle to win cryptocurrencies.

The 28-year-old from Bangkok was playing Axie Infinity, one of a new breed of blockchain-based online games - dubbed "play-to-earn" - which blend entertainment with financial speculation.

These games can make for lucrative business amid the hype around non-fungible tokens (NFTs) and virtual worlds, attracting millions of players plus billions of dollars from investors who see the games as a way to introduce more people to cryptocurrency.

In Axie Infinity, users buy virtual blob-like creatures with varying attributes as NFTs - digital assets whose owner is recorded on the blockchain - for anything from tens of dollars to hundreds of thousands.

Players can then use the pets to earn money by winning battles, as well as creating new pets, whose value depends on their rarity. The assets can be traded with other players on the platform, which says it has about 1.5 million daily users.

"It's not just a game any more. It's more like an ecosystem," said Mr Thitadilaka. "You can even call it a country, right?"

The dangers of this speculative ecosystem, and the largely unregulated crypto gaming industry, were brought into sudden focus last week when Axie Infinity was hit by a US$615 million heist. Hackers targeted a part of the system used to transfer cryptocurrency in and out of the game.

Axie Infinity's Vietnam-based owner, Sky Mavis, said it would reimburse the lost money through a combination of its own balance sheet funds and US$150 million raised by investors including cryptocurrency exchange Binance and venture capital firm a16z.

Sky Mavis' co-founder Aleksander Larsen told Reuters that if he could do things differently, he would have focused more on security when growing the game, which was launched in 2018.

"We were running 100 miles per hour, basically, to even get to this point," he said. "The trade-offs we made maybe weren't the ideal ones."

The hack - one of the biggest crypto heists ever - shone a light on play-to-earn games, a young world largely unknown outside crypto and gaming circles that is becoming big business.

Players spent US$4.9 billion on NFTs in games last year, according to market tracker DappRadar, representing around 3 per cent of the global gaming industry. Although demand has cooled since a peak last November, gaming NFTs have still racked up US$484 million in sales so far this year.

Investor interest in NFT-based games has also ballooned, with projects attracting US$4 billion of venture capital funding last year, up from US$80,000 in 2020, Dapp-Radar said.

"There are so many users who want to interact with the tech," said Mr Larsen, adding that Axie Infinity's revenues exceeded US$1.3 billion last year. "It's like, you found a new continent... like finding America all over again."

Haves and have-nots

Adding layers of complexity, unofficial financial networks have also emerged around these games, as some players leverage their coveted in-game possessions for further gain.

Mr Thitadilaka decided last July that he wanted to make more money than he could by simply playing on his own, so he and his friends formed what is known in gaming lingo as a "guild". They allowed their NFTs to be used by people who want to play Axie Infinity for free without investing in an asset, and took a cut of any winnings in return.

This model is commonplace across play-to-earn games.

Mr Thitadilaka said his guild, GuildFi, grew into a network with 3,000 Axie Infinity players who split their earnings with the asset owners 50:50.

Mr Thitadilaka now runs GuildFi as a full-time job and the company has raised US$146 million from investors.

South-east Asian countries such as Thailand and the Philippines have emerged as some of the hottest global gaming hubs.

Ms Teriz Pia, 25, who lives in Manila, quit her job as a pre-school teacher last June after her brother founded a play-to-earn gaming guild, Real Deal Guild.

Now, she said, she makes as much as US$20,000 a month through her network of more than 300 players across multiple games, plus other crypto assets.

For Axie Infinity, Ms Pia lets her players keep 70 per cent, while she takes a 30 per cent cut. In another play-to-earn game, Pegaxy, where players buy and trade NFTs of virtual horses to compete in races to win crypto tokens, she splits it 60:40.

"I don't call them workers. I just call them my friends, or my scholars," she said. "The salary in the Philippines if you're a teacher... I'm a college graduate... it's not enough. I never imagined that I could earn this kind of money."

But Ms Pia cautioned that it is a dangerous business. "There's a lot of risk. When I'm investing in a new game... being a member of Real Deal Guild, we have a partnership team, we have researchers, but at the end of the day, it's still crypto, it's still a risk."

One of the biggest play-to-earn networks, Yield Guild Games, said it had 10,000 Axie Infinity players as at the fourth quarter of last year, who kept 70 per cent of their earnings and received US$11.7 million in total.

Australian-based Corey Wilton, 25, founded Pegaxy, which he said has about 160,000 daily users. He estimated that 95 per cent of users of play-to-earn games participate as "renters", generating revenue without owning the assets, while 5 per cent are asset owners.

'How people get hurt'

Legal experts warn there is no safety net for players who effectively invest in risky assets, leaving them highly vulnerable should a project fail or the market for the assets dry up.

As global regulators seek to get to grips with cryptocurrencies themselves, there is little oversight of NFTs, or the relatively niche offshoot of play-to-earn games, which typically use in-game crypto tokens that can then be cashed out into traditional money.

Mr David Lee, cryptocurrency associate at London-based law firm Fladgate, said: "Storing any value in projects like this is risky... There are no guaranteed values of either the token or the in-game asset as their value is often determined by supply and demand in the market.

"This means there can be significant volatility in the price and, if the project becomes less popular or is abandoned, then there is a potential for the assets to become worthless."

Yet, advocates of these games say success is built upon a combination of factors such as skill, strategy and luck.

Mr Wilton said: "There is definitely money to be made, but there is also money to be lost here. Play-to-earn should not be confused with charity, that's how people get hurt."