Author：@BriefKandle, ResearchDAO
Note: This article only represents the individual's opinion and unpaid subjective thinking to the industry, which does not constitute any investment advice. We also cannot assure the accuracy of every perspective from this article.
Intro：
Behind the financial aspect of DeFi and GameFi, the participants are playing a dynamic game by evaluating the average willingness of all participants to make certain actions (i.e., the average consensus among all players). Why is it not a mere evaluation but also a dynamic game? Because Player A's decisions will affect that of Player B which in turn will affect that of Player A. Therefore, players will experience the complexity of the game as the consequence of their decisions (or sometimes, expected decisions) will be experienced simultaneously for all players. The game would be multi-dimensional and happen in real-time, particularly in a market with sufficient depth and liquidity.
Participation in market actions means participation in gaming actions. After evaluating the average consensus of all players in the market, the winner has to choose an action that stays below the average consensus in order to claim victory. If a participant acts above the average consensus, she will lose.
This article discusses GameFi’s unique features and its innate system which are used by multiple parties in the game system to facilitate consensus reaching. Take GameFi’s various interest groups for example, including the developer, the guild, and the ordinary players. There are players in the game that has a panoramic view of the whole market. They may anticipate the actions taken by other players, be able to influence their point of view, and manage their expectations to gain an advantage during the game. Of course, many of us know how the game is going to end. However, the transition to equilibrium is more important than the equilibrium itself.
In this article, we will analyze Axie Infinity, the most exemplary GameFi, and YGG, the most significant guild in the GameFi sector. We hope in our efforts, you will gain an in-depth understanding of GameFi’s functionalities and innate logic.
Contents:
1. The Average 2/3 Game
- 1.1 Two players "guessing 2/3 of average" game: strictly dominated strategy is the lowest number "0."
- 1.2 Multiple players "guessing 2/3 of average" game: after evaluating the average of all players’ chosen numbers, the winner may achieve victory by providing a number 1/3 lower than the average.
2. The Consensus Game of DeFi + GameFi
- 2.1 DeFi: after evaluating the average consensus of all players towards the project, the winner may achieve victory by acting lower than the average consensus.
- 2.2 GameFi: NFT’s emotional value along with GameFi’s gaming functions makes it easy for the various interest groups to manage players’ consensus in the market. Different from DeFi’s adoption of the single token system, GameFi’s value is not only represented by its token price. The player interaction mode grows in complexity and the consensus game as well.
3. Axie Infinity
- 3.1 The economic model of Axie: players’ consensus is divided into three types of assets, and the consensus game focuses on maintaining the price of SLP.
- 3.2 Axie Team and YGG: YYG has more abilities and motives to manage players’ consensus, but still needs Axie to launch the adjustment measures about the economic model.
4. The Consensus Game Will Never Stop
1. The Average 2/3 Game: Evaluate Consensus And Win With Weakly Dominated Strategy
In his book, "Misbehaving" by the Nobel Laureate in Economics, Richard Thaler proposed an interesting game: guessing 2/3 of the average.
Participants were asked to pick an integer from 0 to 100. The participant with the closest number to 2/3 of the average of all numbers chosen wins the game. For example, suppose there are 3 participants guessing 20, 30, and 40, and the average is 30. Then the one who picked the number 20 is the winner.
1.1 Two Players "Mean 2/3" Game
In this game, if there are only two players, a strictly dominated strategy exists (which means no matter what the number the other players are going to choose, every player would have one best strategy to win the game). Choosing 0 has a higher chance of winning than choosing any number greater than 0.
For example, if the numbers the two players provide are 0 and 100 respectively, the average of 2/3 would be 50*2/3 = 33.3. The number 0 is closer to 33.3, so the player chose 0 wins.
💡 Reduced to its most essential form, the two-player game is actually a “whoever chooses a smaller number wins” scenario. As the game has a low degree of freedom, the player only needs to choose a smaller number than the other player to win the game. Therefore, to all players, the strictly dominated strategy is to choose 0.
1.2 Multiple Players "Mean 2/3" Game
When the game has more than two players, we face a more complicated situation because the existence of new players would force all players to rethink the action and behavior of the other players. The winning strategy switches from a strictly dominated strategy to a weakly dominated strategy.
A rational game player will reason like the followings:
- In the beginning, I can make a reasonable assumption: players’ choices of 0-100 would follow a normal distribution with the mean to be 50. And 2/3 of 50 would be 33.3. Therefore, in order to win, I will choose the number 33 to be my answer.
- Based on the previous reasoning, I can dig a little bit deeper: if some of the players had the same kind of reasoning as I did above, they will provide the number 33 as their answers, meaning that the actual average would be slightly less than 50. Of course, if every player makes the same reasoning as above, the actual average becomes 33. To win, I will 22 as my answer (i.e., 33 *2/3 = 22).
- After a process of elimination, the answer would gradually come closer to 0. In the end, integer 0 would be the final answer, and the game reaches Nash Equilibrium.
💡 Compared with the two-players game, the multiple-players game has more degrees of freedom. Its essential mechanism is to anticipate the average number of all players. Simply choosing the smallest number 0 will not win the game.
Moreover, for the multiple-players game, the essential point is not the game will in the end reaches Nash equilibrium.
💡 The essential point is how far the current system is from reaching Nash equilibrium, taking into account all players within the game. The answer depends on the level of information asymmetry within the system and the transmission speed of information among all players.
For example, first-time game players follows a distribution diagram as shown above: with more than 6% of players choosing 33 and less than 6% choosing 22, the winning number was 19. Imagine if these players play the game for the second time, the winning number would become closer to 0. When all the participants realized that 0 would be the final answer to win, none of the players would be the loser. Ironically, the game will be simultaneously over without a winner.
Therefore, for the players who want to win, there are several things that need to be considered:
- How to evaluate the consensus of all players;
- How to win by behaving below the overall consensus;
- How to interact with other players or influence the entire community's choices.
As a classic game in the field of finance, the game paradigm of "guessing 2/3 of the average" is reflected in the game of blockchain players' perceptions of project information, token price expectations, and future business operations. In the following chapters of this article, we will explain in detail how the consensus game is played in the DeFi and GameFi sectors by various players, including ordinary users, project team, whales, and game guild.
2. The Consensus Game in DeFi & GameFi
In the first part, we discussed strictly dominated strategies in two players guessing 2/3 of the average. But the actual dynamic game takes place in the multiple players game. Players need to evaluate the consensus of all players, which is the average number of numbers in the market, and the final winner only needs to give a number that is lower than 1/3 of everyone's consensus. The consensus game in DeFi is in a similar form.
2.1 DeFi
💡 DeFi participants need to evaluate the overall consensus towards the DeFi project with all the information to be gathered in the market. Consensus can be reflected by a number of factors, including the average value of market behavior or by the current trend of token prices.
When the swap form of DeFi integrating DEX and AMM emerged, the market liquidity was greatly improved. Consequently, market actions could be directly implemented by users' opinions, and the token price directly reflected the quantified market consensus.
However, the token price cannot fully represent the average consensus of all players towards the project. The concepts involved in DeFi are more complex than the game of "guessing 2/3 of the average". The project team of DeFi can directly participate in the design of the game system and continuously introduce new concepts, values, forms of cooperation, and capital injections in the operation cycle, including but not limited to:
- Design sustainable Tokenecomics;
- Implement effective business operations;
- Maintain community building;
- Increase project value;
- Improve projection of project future value;
- Ride on the macro market trends, etc.
💡 DeFi project teams are adept in leveraging the unique DeFi mechanisms to improve players’ evaluation and expectations towards the project, increase the average consensus among market participants, and ultimately extend the project life-cycle (i.e., delay Nash equilibrium).
2.2 GameFi
GameFi has a similar gaming mechanism. But unlike DeFi's single token system, GameFi has added the following two crucial features:
- 1）Introduce multiple Token systems + multiple asset pools and NFT marketplace
- 2）As an interest-earning asset, NFT brings players additional emotional value (i.e., non-financial products). Moreover, the rarity grading and functionalities of NFT itself introduce new ways of managing the market consensus.
💡 Being able to continuously injecting value is the most significant advantage of GameFi: players’ evaluation towards GameFi project are greatly influenced by emotional factors and the innate gaming value. Besides, project valuation is not necessarily directly related to its token price.
When playing the games of DeFi and GameFi, project teams, whales, and institutions often have a clearer vision than ordinary players. A better position along with higher risk tolerance gives them more initiative and leverageable advantage in the game. Equiped with abundent market information and capitals available to influence the market behavior, these players are able to accumulates in-game assets quickly, affect the average expectation and consensus of all players, and in the end decide their own winning objectives.
As to the ordinary players, they often cannot make optimal decisions due to an insufficient understanding of market information. As far as the game's outcome is concerned, most players cannot maximize their benefits. Careless decision-making is the norm. And sometimes, players are coerced into the vicious competition between the project team and whales.
3. Axie Infinity
Take Axie Infinity as an example. When the GameFi project endows its NFTs with the value of interest-earning assets, the rise of the game guild becomes inevitable. The three-party consensus game among the guild, project team, and ordinary players has become more complicated. Because of Axie Infinity's own characteristic dual-token system and its NFT economic model, the consensus goals of market participants are scattered, which provides the project team and guild with more maneuverability to inject project value into the community.
3.1 Axie Economic Model: Dual Token + NFT Asset Pool
💡 By building a sustainable economic model and a manageable consensus system, AXS could continue to create project value, and aid the Axie NFTs to expand SLP usage scenario. Ultimately, market consensus will primarily focus on the price of SLP.
Axie Infinity assets are divided into three categories:
- AXS: A total supply of 270 million eco-governance tokens, with 100% of AXS tokens in circulation by 2026.
- SLP: The consumption tokens required for Axie Infinity gaming activities. It has no supply cap, and is also the primary source of income for players. Players can obtain SLP through daily characters, battles, PVE-adventure mode, PVP-arena mode, daily rewards, etc.
- Axie NFT: The primary method of gaming content. Within Axie Infinity, it is an interest-earning asset that can generate SLP, and is also one way to burn AXS and SLP tokens.
As a card battling game, Axie Infinity gameplay requires players to combine a team of three Axie NFTs to earn SLP through the PVP/PVE battle mode. SLP can be used for upgrade and reproduction of Axie NFTS. Excess SLP can be sold in the secondary market, where most players are able to earn their source of income.
In Axie Infinity economic model, AXS and Axie NFT are more valuable (in long-term) than the unlimited supplying SLP.
- AXS: massive amount of AXS are controlled by the Axis team.
- Axie NFT: massive amount of NFTs are held by YYG. NFTs are similar to the means of production. YGG rents Axie NFTs out to farmers who use NFTs to farm gold. In retrun, YGG takes a percentage of the gold being farmed.
The asset price will go up until its new demand can not continuously support its supply. In reality, players burn AXS and SLP to generate Axie NFTs which are then used to generate SLP. However, SLP does not have many ways to reduce inflation, causing SLP to bear all the selling pressure of all three assets.
Given the highly inflationary economic model of SLP, it is inevitable that SLP will continue to fall. When the amount of incoming new players starts to decrease, the demand for Axie NFT also decreases. If there is not enough SLP to absorb the increase in supply, SLP price will fall, which will further bring down the producing rate of NFTs (assuming producing NFTs bears transaction costs). The growth rate of Axie NFT will become 0.
Although SLP price continued to rise during the 2021 DeFi summer, it only lasted 4 months. After its peak in July, SLP never goes back to its prime.
Indeed, the decline in SLP price is an inevitable yet eventual trend. But as stated before, the Nash equilibrium is not the most important issue for us. As direct participants in the market, we are more concerned about the following questions:
- How to evaluate the consensus of all players.;
- How to take action below the average consensus to win;
- How to influence other players or even the project consensus in the whole community.
Due to the limited space left in this article, we will only discuss YGG for now. We will discuss other relevant topics in our subsequent articles.
3.2 The Axie Team And YGG
The role of YGG in the explosion of Axie Infinity cannot be ignored. YGG is responsible for operating the community, introducing and educating new players, cultivating players’ demand, and tapping into the gaming potential of NFTs. When YGG held massive Axie NFT and SLP, the main responsibility of operating user consensus shifted from Axie team to YGG guild.
From the perspective of risk management, Axie team holds massive amount of AXS tokens. Compared with SLP tokens, the economic model and distribution method of AXS makes its price less likely to dip dramatically. That being said, to extend project’s lifecycle, Axie team does not want SLP to fall. However, such demand is more urgent for YGG since it holds even many Axie NFTs and SLP tokens.
From the perspective of consensus management, mainaining SLP price is also one of the essential tasks of YGG in community governance. The YGG members are mainly middle and low-income people in Southeast Asian countries. The close interpersonal ties in Asian cultural circles make consensus management optimization possible. Through the offline development and governance of the community, the guild can effectively manage the expectations of gold farming workers and gradually convert gold farming workers from producers of SLP to users and recipients of the final NFT.
💡 YGG holds high-quality NFTs in the market. Axie NFT is not only an interest-earning asset but also represents its gaming experience. To some degree, by controlling the NFT market, YGG improves the average consensus of players and provides extra usage scenarios for both Axie NFTs and SLP tokens.
But as the project approaching its impasse, YGG’s control over SLP become gradually weakened. Up until recently, Axie team released its SLP adjustment as the followings:
- Adjust Axie NFT reproduction formula: SLP cost increased 3 times, AXS cost reduced to 0.5.
- Eliminate SLP reward in daily mission for players ranked after 800th place.
- Eliminate SLP reward from adventure mode; reduce SLP reward in PvP mode; the higher the MMR, the higher the SLP reward.
- Increase more SLP usage mods.
- Gradually reduce or even cancel rewards in daily missions and PvE modes.
Although the abovementioned methods have increased the amount of SLP burned and reduced the market circulation, the official guidance of Axie has led to an increase in the price of SLP.
However, reducing the distribution rate of SLG so as to increase its token price is not going to last long and is guaranteed to get backfired. Ordinary users know it, and so do Axie team as well as YGG. When the token demand and price can only be increased by reducing production, the average consensus of players towards the project will decline.
💡 We know it as a fact that decline would only bring more decline, just as players know they are in a "guessing the 2/3 of average" game and must find an exit at 1/3 lower than the market consensus.
4. The Consensus Game Will Never Stop
In the words of Richard Thaler, The numbers given by the participants represent that in the case of information asymmetry and the limited speed of information dissemination, the final winning conditions need to depend on the player's degree of information acquisition and judgment based on the information obtained.
With each elimination round, information will be further dissipated in the system. Until the end, when all the participants are "omniscient" and when all the participants realize that the integer "0" is the final answer, the game ends until a new game starts again and new players come in.
For Axie development team and other participants with more complex identities within the community, they have a better understanding and estimation of the direction and ultimate outcome of the project when they play games against normal participants. At the same time, they have a panoramic view of the consensus of all players, enabling optimized consensus management. They can continue introducing external funds, creating new game methods, converting speculators into value investors, and finding new applications for token and in-game assets.
Moreover, Axie Infinity is actively exploring new identities. The launch of Ronin side-chain and its native infrastructure, along with the development of multiple new projects, has transformed Sky Mavis (the parent company of Axie Infinity) from an application developer to an infrastructure provider. In other words, game players from the current “game” are able to seamlessly participate in the next round of new consensus games.
In every game of consensus, there will always be an end, but at the same time, new consensus games will keep emerging.
Everything may come to an end, but the lessons learned along the journey are valuable. Whether it is DeFi or GameFi, there will inevitably be short-lived projects in the process of the development.
But the consensus game is always there. As game participants ourselves, we will hold on, hoping a new rounds of dapps will be able to break through.
Please stay tuned to our follow-up reports. GameFi projects will grow in complexity and diversity, but we are committed to describing the gaming behavior in a simple, quantifiable way.
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