The Web3 gaming sector is facing a crisis as regulatory challenges and a sharp decline in venture capital funding lead to widespread closures. In the second quarter of 2025, at least 8% of active Web3 games shut down, highlighting the fragility of the play-to-earn model and the illusion of digital ownership. This downturn follows a 93% drop in venture capital investment and increasing market saturation. The regulatory crackdown has classified real-money transactions in these games as financial services, necessitating costly compliance with counter-terrorism financing (CFT) and anti-money laundering (AML/KYC) regulations. Magnus Söderberg of Triolith Games notes that small studios are particularly hard-hit, unable to bear these expenses. As a result, tokens like Nyan Heroes' NYAN have plummeted, with NYAN falling 40% in a single day and 99% from its peak. Industry experts suggest that outsourcing compliance or leveraging smart contracts could help meet regulatory demands.