From the chess to the 4X strategy, the traditional RPG board games to the AAA open world, games have never been just entertainment, but a platform for players to compete around limited resources. As a result, in-game currency with circulation and use value playing a crucial role in the user retention and business cycle of a game.
As the product of the combination of game and crypto currency, the tokenomics of GameFi project suits the game economy naturally and brings the trading of game assets from the gray area to the light of day, giving players unprecedented ownership and trading rights over items.
This article will review the various tokenomics of GameFi project and analyze the economic mechanism, hoping to give some inspiration to the game developers and crypto investors.
Decentralized finance, or DeFi, is a system by which financial products become available on a public decentralized blockchain network. That makes them open to anyone to use, rather than going through middlemen like banks or brokerages.
Refers to GameFi project, DeFi aims to enhance the profitability of investors and seek the maximum funds that participates in blockchain games by a large portion to facilitates the player sell and rent their game assets or stake their coins in the pool as a liquidity provider. Even lacking of the playability of a game, DeFi utilization attracts players related to crypto investment and a variety of casual games are derived.
Nonetheless, decentralization is the biggest difference between GameFi and traditional games. In traditional games, the game producer/designer often acts as god, not only designing the storyline for the player to experience the game, but also acting as the central bank for releasing and recycling the game’s resources. Traditional games can control game resources in time to prevent economic collapse and prolong the game operation period because of the powerful centralized means; but game companies deprive players of ownership of their assets, and it is not uncommon for traditional game companies to deactivate accounts or shut down the servers at will.
NFTs (Non-fungible tokens) digital assets represent real-world objects like art, music, and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying protocol as many crypto assets.
Majority of in-game NFTs are game items that includes interactivity NFTs and collectible NFTs:
Interactivity NFTs can be applied in the combat and advanced, trained, merged, casted, inherited, such as incubator, sprite, card, avatar, being advanced, trained, and inherited to reinforce the player’s in-game performance. Collectible NFTs function out of the gameplay that is involved in recreational scenarios and limited combat attributes, enhance the pleasure of players’ possession like land plot, skin, cosmetic and badges.
Comparing with common NFTs, the in-game NFTs has the potential to be interoperable. Some gaming platforms have already achieved avatar interoperability and some games cooperate to convert the non-fungible attributes to one another. Though certain gaming pioneers envision the interoperability of cross-game and cross-chain NFTs, there are still some implementation problems on the blockchain technology and the flow experience of video game at the present.
FT in GameFi projects generally refers to the game currency used to define the value of the underlying resources in the game, making the in-game economy possible. Currency, players, resources, and goods together form an economy in which each element is linked to one another. Players maximize their own interests in the gaming process thus the value of currency controls players behaviors, determining what the player makes and for whom. In-game currency plays a role as a lever that regulates economic behavior throughout the game, links different elements into one and coordinates the profit of players.
There are two types of tokenomics that are commonly utilized in GameFi projects: Single token and Multiple Token:
Single token system adapts one currency both for the in-game economy and secondary market that the player who obtains the game token through purchase is accessible to the game and approaches “Play-to-Earn” by playing revenue.
The advantage of single token system lies in reducing the difficulty of resource integration, facilitating player transaction and promoting the flow of in-game funds, and directly stimulating players to participate in the game with economic benefits.
However, the direct transaction between a single in-game currency and fiat currency increases the influence of the secondary market on the economic system in the game. When players heavily buy game token and lock in their own account, the currency value and players profit will increase so that the game becomes highly motivated. However, this is not conducive to attract new players keeping up with the upgrade speed of previous players, which causes huge inequality and affect players’ participation. Conversely, when the currency is sold in large quantities and depreciates in value, players will give up keeping playing due to low revenue, accelerating the sale of game items and sending the game into a death spiral.
Besides, the single currency system tends to lead to inflation, especially with the involvement of game guilds that continuously produce, thus causes the depreciation of the token, which causes the fear of late investors and is detrimental to the survival of game itself. In addition, the design cost and maintenance cost of the overall cycle brought by currency unification are relatively large, and there is no central bank to artificially regulate the circulation of currency. Therefore, when there is a problem in a link of the overall cycle, the overall BUG cycle will directly collapse.
Multiple token system usually sorts game currencies into in-game currency and governance token. The in-game currency is the primary reward for basic player’s behavior such as daily quests and PvE battles, playing a role in the game economic cycle and having unlimited account of launch. The governance token is used to incentivize players’ longer commitment with the community governance rights and higher token value in tough tasks like PvP battles.
Referring to the game launching platform, currencies can be categorized into in-game currency and platform token, and the platform token takes the place of governance token occasionally but the relevance and liquidity between currencies are various.
The multiple token system reduces the influence of the secondary market on the game, increases the stability of in-game economic system and achieves self-adjustment through the integration of resources. Although multiple currencies have a relatively high cognitive threshold, compared with a single currency, it has the following advantages:
First, the economy mechanism is easy to adjust while the game is running. In a game with multiple tokens, the value of a single currency can only affect a particular resource, potentially affecting a player’s single-line revenue in a mission without causing a system crash. Second, the currency exchange rate is adjustable. If there is economic malaise of a currency, the designer can promote it by operational activities within the game to simulate the engagement or increase the consumption, therefore the value of other currency will rise and the confidence of the players will increase to keep playing and staking.
Game resource and currency mentioned above are the foundation of the in-game economy, but it still needs an adjustment system to balance the supply and consumption due game itself involves complexly numerical relation.
In the real world, the demand for a commodity may be saturated in a short term, but the demand for commodities is infinite in the long term, because commodities in the physical world will always be consumed over time. On the contrary, the game item can become worthless when there is no demand because the value of game resource comes from player interaction and in-game consumption. There are scarce currencies and resources, and there are infinite resources, so not having a good relationship between consumption and output in the game world is a recipe for economic collapse. The economy of the game will inevitably collapse if the relationship between consumption and output is not established in the game world.
System output refers to the items obtained by the player through the gaming behavior, which origins from the system design and is established in the early stage. According to different application scenarios, it can be divided into three main categories: character, material, and equipment. These three are not completely independent but strongly related to each other in terms of resource synthesis and exchange.
Character usually refers to the subjects controlled by players in the game, usually manifested as pets, sprites, heroes, Avatars, etc. These resources are closely related to players especially in (MMO)RPG, MOBA, EDU, and TPS/FPS. The attributes of characters influence the playing method and affect players’ game experience; while in open world and Sand Box games, Avatar has important value for building the player’s identity. Refers to TCG and SLG, the player usually does not have a physical “character” but instead he or she controls game resources as a commander.
For example, medicine is consumed during the game for the purpose of improving intrinsic abilities, such as health, experience, strength, etc. The consumption of potions and mana are irrevocable.
Material includes items that are combinable such as components, cosmetic, and the player is free to choose weapons, armor, inscriptions, and other interchangeable equipment to improve their performance in battle or reinforce their territory.
A variety of system resources optimize the player experience, encourage players to participate in the game to obtain more attractive resources with a sense of accomplishment or gain revenue from market transactions, combining with consumption mechanisms to achieve a complete in-game economy. But a complex resource system may raise the cognitive threshold for players, and a centralized character and equipment design may not yield good market revenue.
In traditional games, all the mechanism adjustment or game content update is carried out by game designer, so when World of Warcraft or Furnace Stone legend made flood resources or numerical unbalance between old and new items they abandoned the old version game. In the case of the GameFi, assets belong to players, and game developers are necessary for the asset appreciation. Players can also participate in the creation of game content therefore GameFi’s updates are divided into two categories: gameplay and content.
Gameplay updates are usually executed by the team about addition of new gameplay, such as PvP on top of PvE, new dungeon maps for players to explore, or tower defense expending to land construction. Gameplay updates involves delicate numerical balance and functions as an artificial means for economic control. While opinions from the player community can be taken into account, players are still far away from participating in the core mechanism design.
Content updating is more creative. The lore, premise, or character design are popular in player communities of RPGs and TCGs that connect the player emotionally, while in sandbox games it is more about the player using the engine to create equipment and Scenarios. The game team will also actively hold various competitions to encourage player engagement. Once the works of players are adopted, they will be identified as the final game content and developed by the team.
Player participation in game design and content updates is a major feature of decentralized games, so the coordination between the development team and the players benefit game playability, while also greatly engaging the community, increasing the intimacy and maintaining user retention.
Upgrade system in the game is an abstract form of reinforcement, where the player’s core attributes grow as they level up. Leveling up makes it easier and more efficient for players to perform basic tasks in the game, giving them an advantage over players with lower-level assets in battles or in pledged revenue.
The upgrade system plays a role in many aspects of the game, which can increase consumption and coordination of various resources. For example, players need to upgrade characters with magic, upgrade sprites with potions, upgrade weapons with drawings, upgrade buildings with ores, etc.
A variety of upgrade paths provides players with different choices and divides the responsibility of players and promotes the overall operation of the economic system through player cooperation to achieve the effect of resource circulation.
For game designers, the upgrade means to accelerate the competition between players especially in PvP games. Players are willing to involve more in the game and upgrade due to the competitiveness of the rank, which drives the growth of the other players forming in-game motivation.
However, it can also reduce the confidence of players if the upgrade process is too complex, such as taking too long to gather resources or the leveling advantage is not distinctive due to many players are leveling up at same time. Many games also use level breakthrough by increasing both rewards and resource consumption of upgrade, which mainly depends on player’s expectancy of the game because of the relative increase in the player’s resource utilization risk.
The resource synthesis system is to combine two or more resources into the one single item, or to use other resources to improve or change the core traits of the original item. As the character upgrades or explores, the player can also unlock the synthesis formula of different items.
Synthesis system can be either controlled or random:
For materials like iron or stone that have high composability, the synthesis process is usually in control, and the player can clearly master the blending of required materials according to certain procedure, just like assembling Legos or cooking from a recipe.
For non-assembled subjects as pets, heroes’ core attributes and skills, the synthesis result is usually random, which potentially combines with the random mint mechanism in NFT sales, allowing players to reproduce with their original sprites and inherit some dominant features and recessive features form their offspring.
Synthesis mechanism promotes the trade between the players and actives the resources circulation because the combination process is complicated or random synthesis of new resources are not in line with players’ idea, thus it encourage players to complement each other and makes the in-game resources automatically adjusted to the state of relative balance.
However, the synthesis system also has some disadvantages, that is, the adjustment of resources by designers may lag behind. Game designers are able to aware of resource allocation problems when the market price of an item becomes problematic that may lead to resource waste.
Loss Mechanism applies in gaming by intentional design that a player’s initiative to steal or destroy other player-owned resources, which are necessary for other activities in the game, applies to the following situations:
First, make multiple players to interact directly with each other strategically; second, the game system is essentially controlled by the player’s strategic preferences and wants to introduce feedback into the system.
In addition, loss mechanism also affects market volatility for GameFi projects that designers can hold PvP tournaments and clan wars to promote consumption of buildings and weapons material. In situations that prices are low due to oversupply, or some high-level players are over productive but there’s not enough demand, introducing loss mechanism helps balance in-game resource and consumption and stabilize the economy.
Moreover, the depletion of resources can make the same type of resources scarce and show a higher price in the market. The consumption of limited token can also make the currency in circulation deflationary and thus increase the price.
The drawbacks of attrition are obvious, especially in GameFi projects where items are more expensive than traditional games. Many players are afraid to join the game because of the intense competition like MMORPG which may cause loss of their funds or suspect the it is a way for the development team to make fortune.
Token lock mechanism
Total value locked (TVL) is a significant metrics in DeFi because blockchain services are developed on peer-to-peer networks, there is no central authority to govern, build, or improve the ecosystem. Therefore, cryptocurrency investors themselves receive consideration for building these networks from the bottom up with their coins and tokens.
For a GameFi team in its whitepaper stages, the executive team or community may work on deciding what allocations of tokens should be divided up into different initiatives and departments, such as development, marketing, operational costs, and so on. If a team has a foundation or other entity that is in control of funds, it may also decide to create an allocation for a token treasury to be utilized as specified by the team or community.
In certain situations, the allocations are distributed over time as part of a block reward or over a vesting period or cliff. In order to support the long-term development costs of the game and the rewards to players during the game’s operational phase, avoiding the impact of the withdrawal of large amounts of funds on the in-game economy, the allocation of tokens for the GameFi projects includes two kinds of lock mechanisms: hard-lock and soft-lock.
Hard-lock is determined before the official launch, including token lock distribution, liner or nonlinear unlock scheme, withdrawal restriction, NFT minting, etc. Hard lock-ups often involve unlocking money at different stages of funding, with the team itself committing to a long lock-up as a guarantee for game content development, while angel or seed lock-ups ensure that a large amount of money will not be suddenly withdrew damaging the game economy. Hard lock-ups give players expectations about the value of the game currency.
However, the disadvantage of this is that the market tends to fluctuate at each unlocking point, causing some uncontrollable losses. For example, there is a huge influx of players during the public offering phase thus the price drops sharply after the transaction costs exceed the actual value due to the high slippage, or there is nervousness about a large sell-off just before a large amount funds is unlocked.
Soft lockers are mechanics that use gameplay to create token-lock, usually involving the locking of player abilities or game supplies for a period of time (also known as “cooldowns” in traditional games) to increase TVL and player revenue.
The advantage of soft lockers is that it is connected with core gameplay. The long term soft-lock procedure last for several days, such as sending an expedition team out on a mission, leaving a hero in camp, or incubating eggs. A short-term lock lasts from a few hours to a day to restore a sprite’s health or cure the wounded. It’s worth noting that traditional gamers are mainly averse to cooldown because it limits their play, but GameFi projects, players are willing to lock their heroes in order to increase revenue during off-game time.
In the meanwhile, soft-lock is similar to idle game mechanism that weakens gameplay and interactivity to cater to players who don’t have time, and to some extent limits the level of the game experience, creating a tendency to disregard the core gameplay of the game.
Oracles are entities that feed real-world data to a decentralized systems. In the decentralized environment, oracles are prominent with blockchain-based products. They give blockchains the ability to interact with off-chain data.
Transmitted data can range from price of NFTs, output of battles and mining, to skill bonus, etc. In-game oracle provides a high confidence service to balance the game token around a set value dynamically so that the players’ rewards can be adjusted along with the exchange rate of a comparably credible currency, which is a stablecoin pegged to one (1) Dollar USD as $USTD or the native currency of the chain which the game built on.
The oracle mechanism reduces the influence of currency price on game resource supply, so that players’ revenue can be maintained in a relatively balanced range and players can cultivate the habit of keeping remained and engage with the game for a long time due to limited fluctuation of income. At the same time, the oracle mechanism also balances the threshold of new and old players, creating retention of more old players and continuing to attract new players to increase the liquidity of the overall fund pool.
However, the oracle binding to other currencies in a sense abandons the value of its game token and relies on continuous player participation and stablecoin support. The lack of adjustment ability of the internal economic system does not fundamentally solve the problem of single token entering the death spiral. There should be a thoughtful recycling mechanism to encourage players to reinvest once the currency price drops, and an adaptable soft-lock mechanism to prevent players from selling in large quantities.
Buy and sell mechanism usually refers to the automatic buying or selling triggered by the official detection system when the price of the game token fluctuates significantly with the reserved funds to restabilize the market.
In order to protect the value of a player’s assets when setting a price range, it is common to buy at 5%-10% of a price decline until they return to normal. On the other hand, though the limit on currency price increase should be relaxed to ensure that players who invest for a long time can make profits, it is still necessary to prevent arbitrage and players from selling inventory then leaving the game at the peak of currency price, the floating range can be approximately 10%-15%.
The automatic buy and sell mechanism is able to isolate some speculators from entering the game at the beginning and maintain the ecological balance. A solid growth of the currency price within the control can also be used to expand the content, attracting real players who enjoy about the gameplay.
On the contrary, this kind of centralized price regulation does not conform with the trend of decentralization because game developers are entitled to adjust the value, which may limit the free development of the player ecosystem, but it is a paradigm of the transition from traditional games to decentralized and autonomous games in web 3.
The economy can reach a state of equilibrium within a certain range after the above setting. However, due to the profitability of GameFi (Play to Earn), some guild players may produce a large amount of resources and not consume them; as the same person has no limitation to register multiple wallet addresses in the cryptocurrency market, one player can log in with multiple accounts to gain game rewards, which may lead to resource flooding and price drop in some games.
An inflation of goods and money is predictable in a free ecosystem with clans if its designers set the output and consumption of resources more precisely. Therefore, it is necessary to influence players’ production conduct through trade restrictions to balance resource supply. In general, there are two ways to restrict trading: one is to limit the number of transactions, and the other is to increase the cost of transactions. The team needs to guarantee that the coins in the total pool enter in slower than they are withdrew, otherwise it will cause inflation (without changing the consumption of goods produced).
The built-in market checks how many assets a player lists each day, and if some players frequently list bunch of same goods the account should be limited on trading to prevent malicious bots damaging the economic balance.
Auction is also a method to limit the transaction by taxation. The team needs to guarantee that the coins in the total pool enter in slower than they are withdrew, otherwise it will cause inflation (without changing the consumption of goods produced). Therefore, in auction transactions, the use of “transaction fees” as the basis of the “automatic stabilizer” to balance. Automatic stabilizers function as follow: the auction house charges a transaction fee that decreases along with the total output decreasing, and increase as the output increasing to weaken the players’ willingness to trade.
However, this is bound to affect the liquidity of game resources. Without attractive core gameplay, it is likely to lead to poor circulation of items, and leads players worry about depreciation over time because of lacking item pricing in the market and sell in large quantities to default the risk.
One lesson from traditional games is that economically balanced games expand their player for a long time and make early game assets more valuable due to the scarcity. Thanks to multiple financial and technical mechanisms, GameFi projects now have more complex resource systems and better self-regulation. While price fluctuations in the secondary market are inevitable, the team are better equipped to maintain in-game economic balance therefore games will be able to retain players with engaging gameplay and early investment on the assets.
While some traditional gamers are resisting the financialization of games, games and investment can be organically integrated through game mechanics, and a long and stable in-game economy can weed out speculators and leave only investors who appreciate games and players who contribute to the community. Games with adaptable mechanisms can improve the finances of some people through strategy and competition, and also allows investors to benefit from asset liquidity and appreciation.
The combination of traditional games, with their powerful internal economic regulation mechanisms, and virtual currencies on the blockchain, with their infrastructure to maintain price stability, could create countless new paradigms. However, GameFi is still in its early stage, and there is a large number of players exploring the edge of traditional genres, who are seeking a GameFi project with more sound mechanisms to bring them in, activating and enriching the market; in return, blockchain and crypto currency will restore the asset ownership and additional labor value to players, ultimately reaching a win-win situation.