Foresight Ventures: Reflections on the Healthy & Incentive Gamefi Tokenomics
Alex, Foresight Ventures Researcher
The healthy development of Gamefi tokenomics must satisfy to attract the input of external assets and diversified non-monetary gains. The key point of its design is to solve the cyclical contradiction between the new demand of growing players and the new supply of tokens and pay attention to the utilization efficiency of currency as well as game resources. Considering several factors such as players’ quantity, incentive mechanism, token circulation, in-game core asset, user profile, game guild, leasing, and other factors, you can get the most incentive and sustainable Gamefi tokenomics.
In the summer of 2021, the Gamefi craze started by Axie Infinity stormed the Philippines, making the concept of P2E (Play to Earn) familiar, but Axie eventually fell from the throne as its token price collapsed, and its tokenomics was to blame. The hottest blockchain game in 2022, Stepn, however, brought global users to the era of M2E (Move to Earn), announcing the opening of the X2E (X to Earn) model. So what is the core of a healthy Gamefi tokenomics? Before that, we need to clarify the relationship between Gamefi, P2E, and M2E.
As shown above, Gamefi is the largest in scope, just as Game in English includes both pure games such as hide-and-seek and sports competitions like football and basketball, so P2E is a subset of Gamefi. There are also M2E, B2E (Bike to Earn), and a series of other modes, which we put together with P2E under the framework of X2E. The difference between the two is that the action is different, one is running, and the other is playing; if we introduce Stepn into the racing mode, we will find that there are some points of similarity between the two, and the same logic can be applied to many other X2E ways. The F2P (Free to Play) mode is more focused on gameplay, where players can pay to get a better experience and potential revenue, so it is also a subset of Gamefi.
In addition, there are many blank parts in the above diagram because Gamefi is not only for ‘Earn’, or this kind of ‘Earn’ is no longer only for money in the narrow sense, but an asset, which can be tangible monetary assets, but also intangible non-monetary assets such as health, happiness, friendship, identity, Etc. This process is collectively called game-related Crypto financialization, known as Gamefi.
Prerequisite: Diversified Non-monetary Gains & External Asset Inputs
After understanding this crucial point, let’s explore why inchoate blockchain games like Axie Infinity are unsustainable. The most important reason is that it lacks external asset input and diversified gains, so it is just a zero-sum game that will only gradually die out and become a scam that most participants lose money except the early dropouts.
Most of the people who play Axie are not attracted by its gameplay but by the wealth effect, meaning that almost all the folks who are willing to spend the money to come to Axie first can make a fortune as long as they sell before others. The wealth earned by the initial players is the capital spent by the later newcomers entering the game; if you become the last poor man during the pass-the-parcel, then no outside money from new players enters behind you, and you will be left with no money. Therefore, a healthy and sustainable Gamefi tokenomics should first consider how to attract external assets. The input of external assets is purposeful. As for Axie, players just come to make money, indicating that they would leave with their wealth and more investments in the ecosystem. According to the character of a zero-sum game, players will go against their original intention in Axien and lose money. Thus the rapid demise of the game is doomed from the beginning.
On the other hand, Stepn still has countless new users coming in today, partly because it is still in an upward trend of making money, and there is a constant influx of new capital; but more importantly, at the beginning of the model, Stepn imported a non-monetary gain output to the model, which is health. It makes the return on investment include wealth for users and an essential incentive for their health by using stepn consistently, and this non-monetary benefit will make this Gamefi ecosystem not a zero-sum game because it generates a positive benefit called “health” in the Game. In addition, Stepn is gradually seeking more non-monetary gains to diversify its benefits. For example, as recently revealed in Stepn’s May podcast, it may involve more social play to help users build social networks, allowing people to make more friends and fellow runners, thus not just focusing on monetary ROI.
A sustainable and well-developed blockchain game must meet a significant premise in tokenomics design, which is that this game should give users non-monetary benefits, such as health, social, or entertainment. Otherwise, it is a pass-the-parcel scam built under the Ponzi scheme, not Gamefi.
As a result, starting in 2022, more and more Gamefi began to focus on the gameplay and playability of the project itself, and there was a boom in investment in 3A blockchain games. At the same time, it also brought the X2E model because the model can at least attract X-focused enthusiasts so that they are willing to pay for the hobby or relevant rewards, rather than only with the mentality of “I’m here to make money” to cash out.
There is another way the game itself can allure external asset investment to grow the monetary assets in the game ecosystem. This method generally includes but is not limited to IP operation, advertising implantation, professional tournament operation, and game co-branding. For example, traditional Web2 Moba games such as Dota2, League of Legends, and Honor of Kings have their own global tournaments and have developed Esport industrial chain, accumulating huge profits by selling skins and other peripherals. This path is more suitable for F2P games and requires them to set up the corresponding ‘breakthrough mechanism’ — so that players who are willing to pay for F2P to get a better game experience or game identity. For instance, although Genshin Impact’s players spend little on monthly subscriptions, they get enough excess in-game revenue to probably gacha the new avatar in a seasonal pool with the help of a minimum mechanism, enhancing the comfort level of players considerably and deciding to pay for the free game. The game that follows this path must aim to become an oligopoly game in a particular region or even globally to have the potential to attract external assets to invest. In other words — the requirements for gameplay are incredibly high.
Since Gamefi is still in the early stage of development, there are no games that can stand out due to gameplay, so it is not easy to raise external investments. But I believe that with time, there will definitely be games that meet players’ needs of gameplay and make some players willing to pay the premium rather than earn profits, and meanwhile, the ecosystem can be funded by external sponsors to replenish.
After avoiding the pure zero-sum game, Gamefi still has many problems. The most difficult and significant one is how to prevent the death coil when the token price drops. It is not essentially a game problem but an economic supply and demand problem for tokens.
Key: Solve the cyclical contradiction between the new demand of growing players and the new supply of tokens
Here we still take Axie Infinity as an example. As shown above, at the very beginning, the surge in the number of new users made the demand for currency rise rapidly and drove the development of the game itself to make it known outside of the fixed area quickly, and then absorbed more users; the influx of new players took over the old players’ demand for cashing-out, and due to the rapid growth of players’ market, the amount of currency it consumed far exceeded its production, therefore the token price was soaring in the early stage. However, due to the severe over-issuance of currency, even if the team tried to increase the difficulty of farming and the rate of consumption in the game to regulate the demand for currency, the token distribution was so fast that APR dived, causing the price to slump. This phenomenon still could not stop the long-term panic selling due to the fear that the currency price would continue to fall and even squeezed the minting of Axie NFT, the way of token consumption. Hence, the demand side of its currency consumption was squeezed, and the balance of supply and demand was broken again. Eventually, the economic model failed with the decrease in token price and users, leaving only a death coil. (as shown in the chart below)
The following core points are summarized to solve the problem:
Core point 1: Pay attention to the changes in the number of players, focus on the dynamic adjustment during the period of a player surge, and control the growth rate of players and the rate of money supply; excessive over-issuance of currency is undesirable, so hold the inflation rate by the fixed total amount
The collapse of Gamefi tokenomics is usually after a short-term influx of a large number of users when the currency supply suddenly increases several times. However, the increment of users cannot match the growth, resulting in the game currency, which has increased dramatically due to a large number of users, going through a phase of sell-off (as shown in the figure below), and eventually, players lose confidence and quit due to the collapse of the currency price. So we need to impose certain restrictions when the number of players is skyrocketing to avoid the number of players growing too fast, which is dangerous, especially when the game has not developed a consensus of core players; and we also need to adjust the way of acquiring currency and the cap to make the supply and demand can be balanced. Axie Infinity did not restrict the entry of players after the fire, resulting in a large number of professional game guilds entering in batches. Although the short-term could usher in a thriving scene, the currency supply mechanism did not adjust in time, and finally ‘mine and sell’ model made Axie into the plunge, losing new users to take over and falling from the altar. Stepn, on the other hand, has been steadily expanding using invite-only codes and actively adjusting its rules to match the currency supply with the growth in the number of players, avoiding as much as possible the ‘mine and sell’ model during the high-growth period. Although adjusting the rules is suspected of being too centralized, it is a necessary means to maintain the game’s healthy development in the early stages.
Therefore, the currency supply should be slowed down as the number of players rises. It is recommended that a fixed distribution system for the total amount of game currency should be implemented, with the official formulating the total amount of tokens to be distributed daily or monthly, and then macro-regulating according to the ratio to control the inflation rate of tokens every month and make the supply of tokens rise less quickly than the number of players, thus extending the life of the game. Because once the number of new players cannot match the supply of currency, it will quickly lead to devaluation of the money with nowhere to consume, which triggers a vicious death coil of accelerated exit.
Core point 2: Diversify and complicate the reward mechanism by introducing probabilities so that the reward APR cannot be 100% established
Axie and other similar games will definitely turn into a ‘mine and sell’ mode because players have already calculated the formula and return cycle before they start to enter, and they enter to be able to get profits by selling later. Therefore, in order to make players better motivated to participate in the game, we should create a variety of incentives so that the APR of players under different motivations is difficult to calculate directly. For example, in many Moba games, the ranking mechanism is introduced, and reaching a certain level can be rewarded with a corresponding skin; in some MMO games, the ranking of instance dungeon is carried out, and the top ranking team each month can be rewarded with an additional title and a bonus to the future rewards. These rewards are no longer pure monetary rewards but buffs; these non-monetary rewards will make players better integrated into the game and make APR difficult to simply calculate.
What’s more important is the introduction of probability. Why is traditional MMO games’ economy less likely to collapse than the current blockchain games? Because one of the significant features of MMO games is that the drops of equipment are random. No one can accurately calculate how much I can earn if I buy good equipment to get more gears by the victory of instance dungeon. The specific pricing of all items will be placed in the in-game marketplace for pricing, so it is difficult for players to determine the actual cost. However, the project team can clearly calculate the actual cost of gears through the background data, and it is this information gap allows the project to better macro-control to stabilize the game’s economic ecology.
Core point 3: Exert the currency system to curb inflation, establish widely recognized savings and a closed loop of the internal circulation of money, and introduce parameters such as time, quantity, and the degree of seniority of users for taxation considerations
A distinction needs to be made between the governance token and the heavily consumed game token because the governance token should be significantly more challenging to obtain than the latter, and the governance token needs to have scenarios where it has to be consumed at critical stages of the game to make it available for internal circulation as well, fully exploiting its empowerment and thus staying inside the game to slow down the pace of the game and extend its life. Besides, the game token must be relatively independent of the governing token. If the inflation rate is too fast, it can be handled flexibly by adjusting the ratio of the two tokens needed for consumption to achieve an economic ecological balance within the game. A savings object similar to gold should also be established so that it can fight inflation in the game. When people encounter inflation in the game tokenomics, they can exchange it for the savings object, which will more effectively keep the money within the game’s ecology instead of rapidly exiting it and help stabilize the price and ecology of the tokenomics.
It is essential to establish a more diverse consumption and acquisition mechanism except for PVP/PVE, or it will only cause the speed of currency acquisition is much faster than the speed of consumption; therefore, the game needs to form a closed-loop so that the distributed token can be consumed in sorts of scenarios, such as upgrade system and multi-system system. (e.g., weapon system, rune system, herald system, talent system, Etc.) The higher rewards for consumed characters provide a positive incentive to consume wisely. Both Axie and Stepn, as well as the other Gamefi, are currently too simple to consume tokens and have high-level objects for players to pay high costs for high rewards, as evidenced by Stepn’s gem slots and Axie’s Runes & Charms, which have had little success, so players will only sell them for cash. And the design of MMORPGs could be learned to mimic multiple consumption mechanisms. (as shown in the figure below)
In-game exchanges of all kinds should be established within the game, including equipment and currency exchanges, and a tax should be levied on players who want to cash out to replenish the treasury. Additionally, the project team encourages gears’ transactions to be settled with game currency as much as possible so that the game token stays in the game ecosystem, and establishes a staking mechanism that provides monetary and non-monetary diversified rewards to inspire players. As a result, the currency remains in the system to form a closed loop. For the sale of equipment, the following considerations can be taken into account to differentiate players and make them more willing to stay within the ecosystem.
- Time: The longer you sell the equipment after acquiring it, the lower the tax will be
- Quantity: The more quantity sold within a certain period, the higher the tax will be
- Seniority: The more hours a player has spent and the more honors they have earned, the more tax relief they will receive
Core point 4: Core assets must be introduced into the replacement mechanism or durability upgrade mechanism, not once and for all
Core assets must be upgraded or become a perpetual money printing machine that will greatly damage the tokenomics. So a mechanism for core assets to consume money is needed to achieve dynamic equilibrium and curb inflation.
Axie’s demand for interest-bearing assets in the middle and late stages is getting lower and lower because the demand for Axie upgrades is low, which causes the extra Axie NFT to be sold in the market all the time and affects the game’s currency consumption mechanism. So when different versions change, the game makes sure to introduce tools to guide players to have the will to replace their core assets, achieving the purpose of consuming the original assets, effectively extending the life of the game and improving player retention.
If gears’ replacement is too fast, it is possible to adopt an upgrade consumption mechanism so that core assets can meet the requirements of the current version of the game in the short term, but it is necessary to add a durability limit to ensure that there will still be a large market demand for core assets in subsequent versions. It will promote the internal circulation of the economy.
A model for reference would be to:
- Adopt a leveling mechanism for both equipment and avatars so that players must upgrade their equipment to get a better game experience
- A cap on gear upgrades so that after a specific version, players must replace new equipment instead of infinitely patching
- As the game version changes, a certain degree of numerical inflation is carried out to encourage players to replace their equipment
- Necessary rare and high-level equipment cannot be obtained directly by participating in a game but should be synthesized through multiple materials
The above four core points are all thought from the perspective of monetary supply and demand balance, but we still need to realize that Gamefi is an ecosystem based on the actual needs of players, and more practical problems may be formed in its development. Therefore, in order to better fit the actual situation and help improve the efficiency of currency and game resource utilization, the following additional core points are proposed.
Core point 5: According to the user profile, meet different needs, establish a small society with a clear division of labor to operate, form a healthy pyramidal structure, and create a culture of self-identification
For different user portraits (as follows), develop different game modes and types, diversify the rewards rather than just the token, and motivate the player’s inner vanity. (Only individual players are considered here, and game guilds are not discussed for the time being)
Whales’ presence is overwhelming crucial in MMORPGs, which can bring in a great inflow of external funds to support the positive cycle of the whole game regardless of the return. The tokenomics should be designed for different user profiles to stimulate their payment power as much as possible. For example, the benefits of output and repair costs are also different for various instance dungeons participating. The probability of failure of high-level dungeons will be greatly increased. However, you can experience the latest gameplay and have the opportunity to get higher-level equipment so that players can enjoy being admired by others when communicating with others, which will make players with strong payment power such as Whales willing to pay to get psychological pleasure and form self-identity. In contrast, low-level dungeons should consider increasing the tedium rather than difficulty so that players will be able to complete but not so much. Instead, the materials generated can be used as the initial materials for the whole tokenomics, and promote the progress of high-level equipment. In addition, we should also consider setting different modes in the game according to the contribution degree to increase the game experience of different players, not only regarding the paying players. The total value of game items created by the bottom players may not be less than the top players because their processing layers make the items generate a premium and be sold, driving the whole ecology.
In addition, players may have different identities and senses. Designing different mechanisms to make various types of players have a sense of belonging and identity to the game will be the key for Gamefi to enter the social field. When something in Gamefi can give you more symbolic meaning or spiritual connotation, such as the first pass list in Warcraft and the ‘Unswerving’ skin in League of Legends, the game has an inner culture, which makes players willing to bring in external funds and pay a premium and own it. Last, the game can develop for a long time.
Core point 6: Game guilds are double-edged swords, amateurs should be encouraged to form guilds spontaneously, and there are restrictions on professional game guilds
The game guild is the soul of MMORPG games because it can quickly make bonding between ordinary players and let them experience the fun of a new digital continent, which is the core of RPG. Therefore, we should motivate guilds that players organize because this will bring positive external assets to the game and then promote the game’s development. Like Stepn, it can even start to enter the social field and firmly grasp the players.
For professional guilds, there can be restrictions to make them reliable producers. Because the purpose of the professional guild is only one, that is to earn excess profits by selling. Then we should find a way to restrict it from developing in the game with peace of mind for a certain period. Because the upper-level players of the game need a massive amount of materials, a professional mining guild can just act as this producer so as to avoid a situation where materials are in shortage. However, at the same time, professional guilds should be restricted by means of time, durability, stamina, Etc., to avoid excessive exploitation of game resources and the collapse of the game economy and ecology.
Core point 7: The leasing of the economic system
When Gamefi develops to a certain extent, the form of leasing will be derived, even from the very beginning. Because the existence of NFT makes the in-game assets separate from the game platform itself and belong to the player himself, this change of ownership allows players to transact their equipment to exit freely. And leasing is to lend out your equipment and let others play the game, and then you can collect the rent. As shown below:
With the leasing model, people will choose to collect rent rather than sell outright if the cumulative benefit over time is more excellent than outright selling. However, the leasing model makes those players who enter no longer players, but only gold machines, because they have to rely on tokens to cover the cost of renting NFTs by themselves, which leads to a certain amount of selling pressure. Therefore, restrictions on the rental model are necessary to limit the number of rentals and increase taxes. But meanwhile, we also note that rental players undertake the infrastructure construction of the game. They are the key force driving MAU and DAU, and they can generate some basic materials to revitalize the entire market.
In addition, there may be a high-end rental market in the future. This part is more conducive to the game ecology because the player’s demand for a sense of game experience may be far greater than the demand for monetary benefits. For example, in MMORPG, some advanced dungeons require high-level weapons and equipment to be played, while many advanced dungeons have a weekly limit, which can only be done once a week, so the cost of buying and selling advanced equipment is very high, and the liquidity is inferior. Then to use it reasonably, you can rent advanced equipment to users who need it and charge it on a per-time basis. For example, in a traditional MMO: Dragon Nest, players who cannot pass the advanced dungeon often choose to hire players with superior equipment to carry on the advanced dungeon; paying players only need to spend money but do nothing, then have the opportunity to get premium gears without any gaming experience. If there is rental equipment, paying players can also experience the thrill of advanced dungeons, which increases the non-monetary revenue output of gameplay, similar to renting high-rank accounts. High-end leasing solves equipment liquidity problems for mid-to-high-end players and also provides feasibility for low-end players to quickly update and iterate. In the long run, leasing is more sustainable and can introduce non-monetary gains compared to buying and selling developed accounts. Hence it is a win-win solution.
人は何かの牺牲无しに何も得るこどはできない.何かを得るだめには等同の代価が必要になる （A person cannot get anything without sacrifice. To get something, the same price is required.） — — “鋼の錬金術師“ （FULLMETAL ALCHEMIST）
In conclusion, many Gamefi tokenomics try to cover up their zero-sum game nature with fancy mathematical formulas and dazzling Ponzi blinds, but as in Fullmetal Alchemist’s law of equivalent exchange: ‘A person cannot get anything without sacrifice. To get something, the same price is required.’ In order to produce a healthy and motivating tokenomics, we should seek the Alpha of the innovative non-monetary gains based on a full understanding of the gameplay to usher in the summer of Gamefi. Otherwise, you will always only see the Pond’s game where the suckers get whacked.
“From Alpha to Origin, the Rise and Fall of Axie Infinity: A Player Decision Model Perspective” — Real Player DAO (RPD) — LK & Professor Cao
“Game Feature: The Great Cause of National Founding — From Slavery to Independence. In a game ecosystem with property rights, human rights, and the right to free capital in and out, where will P2E design go?” — Folius Ventures — Aiko & / Jason Kam