How will mining work as this is an ERC20 token if I'm not mistaken?
PKT is ERC20 token, you are right. Mining in Playkey is a little bit different: instead of calculating hash, miner shares his powerful computers, servers with gamers and receive PKT as a payment.
don't you think Ethereum smart contracts is too slow for a game mechanics ?
Playkey will temporary use offchain solution to speed up transactions inside the blockchain. PKT is only for payment between users and service providers, and doesn't affect gaming experience at all.