Year of the Dragon is primarily played from a third person perspective; its gameplay is similar to its predecessors. The main objective of the game is to collect special dragon eggs which are scattered across 36 worlds. These eggs are hidden, or are given as rewards for completing certain tasks and levels. The worlds of Spyro are linked together by "homeworlds" or "hubs", large worlds which contain gateways to many other levels. To proceed to the next hub, the character must complete five worlds, gather a certain number of eggs, and defeat a boss.[3]: 1–8  Players do not need to gather every egg to complete the main portion of the game or gain access to new levels; in fact, certain eggs can only be found by returning to the world at a later time. Gems are scattered across the worlds, hidden in crates and jars. These gems are used to bribe a bear named Moneybags to release captured characters and activate things which help Spyro progress through levels. Gems, along with the number of eggs collected, count to the total completion percentage of the game.[3]: 8 
The player controls the dragon Spyro for most of the game. Spyro's health is measured by his companion Sparx, a dragonfly who changes color and then disappears after taking progressively more damage. If the player does not have Sparx, then the next hit would cause the player to lose a life and restart at the last saved checkpoint. Consuming small wildlife known as "fodder" regenerates Sparx. Spyro has several abilities, including breathing fire, swimming and diving, gliding, and headbutting, which he can use to explore and combat a variety of enemies, most of which are rhinoceros-like creatures called Rhynocs. Some foes are only vulnerable to certain moves. Spyro can run through "Powerup Gates", which give him special abilities for a limited period.[3]: 8–14 
Year of the Dragon introduces playable characters other than Spyro, known as critters,[4] which are unlocked by paying off Moneybags as the player proceeds through the game. Subsequently, the player plays as the character in specially marked sections of levels. Each critter has their own special moves and abilities. Sheila the Kangaroo, for example, can double jump, while Sgt. Byrd is armed with rocket launchers and can fly indefinitely.[3]: 10–11 
Besides the primary quest to find dragon eggs, Year of the Dragon features an extensive set of minigames, which are split off from the levels into smaller zones.[5] Some of the minigames were featured in Spyro 2: Ripto's Rage! and were subsequently expanded for Year of the Dragon, while others are entirely new to the series.[4] These minigames are played by Spyro or the other playable characters.[3]: 7–9