In this article, we dive into an intricate examination of the GameFi tokenomics model, designed to engage advanced readers, seeking a deeper comprehension of the mechanics and implications involved.
Short Summary
- The article will initially set out the overview of tokenomics. It includes the definition and significance with respect to the sustainability challenges faced by many GameFi projects.
- Upon covering the basics of tokenomics, readers are introduced to 4 GameFi tokenomics models including the NFT-based model, the Single tokenomics model, the Dual tokenomics model, and finally Platform in-game tokenomics model, discussing the pros and cons of each model.
- Finally, the article will explore the future of the GameFi tokenomics model, pointing towards potential development paths in tackling the sustainability challenge.
1.0 The Sustainability Challenge
One of the key challenges of GameFi, in fact, any kind of crypto project, is securing longevity. This is innately related to the project’s tokenomics model. How a token incentivizes participants to ensure long-term sustainability is at the center of tokenomics. A prime example of an elegant model is Bitcoin’s approach to block rewards and transaction fees, which has stood up to the test of time.
In the GameFi realm, the pursuit of economic incentives rather than gameplay has led to sustainability challenges, as players lack motivation to engage with games beyond financial gain. Sustaining these games requires a continuous influx of players and funds, bringing the sustainability of these tokenomics models into question. Consequently, the impact of cyclical downturns in the crypto market in 2022 has exposed weak projects with poor tokenomic models and playability. While sifting out weaker projects will ultimately foster a more robust ecosystem, the potential loss of hard-earned financial resources in such projects may create hesitancy among players to invest time and resources into other games.
Hence, it is crucial to understand how tokenomics works and what makes a good model, ensuring its sustainability. By grasping these principles, individuals can contribute to the creation of more robust and sustainable projects, thereby ensuring the growth and longevity of the crypto and GameFi ecosystem.
2.0 The Revolutionary Concept of Tokenomics
Tokenomics is a portmanteau of “token” and “economics,” often referred to as token economics. Originally, tokenomics referred to the method of reinforcing behavior through rewards in psychology, but in blockchain, it is widely used to describe an economic ecosystem based on tokens.
So, what is a token? A token can be seen as a unit that performs a function. Tokens can take various forms, such as Cyworld’s “acorns,” KakaoTalk’s “chocos,” casino “chips,” Monopoly money, or in-game currency; they all represent tokens. Generally, if a network has its own blockchain (mainnet), it’s called a coin; otherwise, it’s referred to as a token. However, this distinction is not set in stone and is not crucial. What matters more is understanding the role tokens play and why they are used.
Tokenomics aims to reinforce user behavior by providing tokens and using predefined rules to incentivize users to engage in specific actions within a project. It’s an incentive system to ensure project growth and longevity under a decentralized context without any central authorities.
Let’s take the example of Bitcoin, a digital currency that facilitates money transfers without the need for intermediaries. In this case, miners are incentivized to validate transactions by contributing their computing power and electrical energy, receiving rewards in the form of Bitcoin. This way, Bitcoin tokenomics successfully maintains a decentralized network of validator nodes.
3.0 Why does Tokenomics Matter?
Simply put, well-designed tokenomics is critical to success. The proper design, management, and execution of tokenomics allow project teams to create an efficient micro-economy around their solutions that facilitate the long-term growth of the ecosystem and the token’s price.
This goes the same for the GameFi space. No matter the team’s expertise and dedication, the potential of the concept, and the amount of funding collected from early investors and venture capitalists, bad tokenomics will likely lead to the ultimate failure of the GameFi project. Furthermore, from an investor’s point of view, tokenomics is a critical factor to consider, as it has a great influence over the future price of a digital asset as well as whether the project is capable of achieving the goals specified in its roadmap.
In the next section, we will explore how tokenomics models in the GameFi realm have been deployed and evolved to tackle the sustainability issue.
4.0 Evolution of Game Tokenomics Models
4.1 NFT-Based Model with a focus on Item Ownership Assurance
The GameFi ecosystem began its tokenomics journey as a simple NFT-based model, primarily applied to early-stage blockchain games like Cryptokitties in 2017 and Sorare in 2019. At that time, the Dapp ecosystem of Ethereum was not yet fully active, and the concept of NFTs had just emerged. Consequently, providing users with ownership of in-game items held more significance than the gameplay elements or in-game economy.
The mechanism of the NFT-based model is relatively simple as there are no Fungible Tokens (FT). The structure is straightforward, and major economic activities are based on NFT issuance, while other user actions, such as item breeding and trading, rely on mainnet currencies like Ethereum. The advantage of this model is that game companies do not need to invest significant resources in designing and managing the in-game economy. This allows developers to save resources, and the game economy operates using the mainnet currency while granting the game company control over the in-game currency and providing users with item ownership through NFTs. From the user’s perspective, only the mainnet currency is required for NFT trading and enhancement.
However, this model also has clear limitations. Firstly, it does not fully guarantee users’ ownership of in-game currency as there is no economy built on its own FT. Users can only own items, i.e., NFTs, and the ownership of in-game currency still resides with the game company. Additionally, this model is vulnerable to external factors including price fluctuations of mainnet currencies like Ethereum. Moreover, it follows a business model similar to PFP (Pay-for-Play) collectibles sales, making it challenging for game companies to design a structure that generates continuous revenue.
This model remains a viable option for Web2 game companies that are hesitant to introduce in-game tokens. For example, NPIXEL, the developer of “Gran Saga,” has released the metaverse platform METAPIXEL on Aptos and is preparing various blockchain games, but they have stated that there are no plans for token issuance yet. Though specific reasons were not disclosed, it appears that they are cautiously approaching Web3 games through this model, possibly due to the absence of solutions for the challenges posed by open economies.
4.2 Single Tokenomics Model Ensuring Ownership of In-Game Currency
While Cryptokitties’ NFT-based model had limitations in constructing in-game economies, it gained significant attention within the Ethereum ecosystem. This was due to Cryptokitties’ remarkable success, proving the potential of blockchain games. As a result, games like Axie Infinity (with its single token structure, AXS), Decentraland (MANA), and The Sandbox (SAND) were born.
In the single tokenomics model, one token serves both as a utility token and a governance token simultaneously. Users acquire tokens within the game or directly purchase them from exchanges to participate in various economic activities such as purchasing and enhancing in-game items (NFTs). At the same time, token holders participate in decisions both inside and outside the game.
The primary advantage of this tokenomics model is its simplicity, making it relatively easy for game developers to create and maintain games while enhancing user experience by providing a straightforward understanding of the economic system and asset utilization.
However, it is still challenging to avoid the issues of open economies, such as asset outflow. In Web3 games, in-game assets can be freely leaked by investors, leading to token price volatility. As a consequence, users may incur losses and leave the ecosystem during periods of decreased game popularity or unfavorable investment conditions.
Despite its limitations, many popular games continue to utilize this model, especially in casual games where the life cycle of games is relatively short, and accessibility is crucial. For instance, in hyper-casual games like Arc8, there may be token price volatility due to investor involvement, but the focus remains on simple gameplay rather than complex revenue structures, enabling them to maintain over 10,000 daily active users.
4.3 Dual Tokenomics Model Minimizing In-Game Asset Outflow
The dual tokenomics model was developed to address the main constraint of the single tokenomics model, which is the issue of asset outflow. In the single tokenomics model, asset outflow occurs easily, leading to the token’s transformation into an asset primarily for investors or Play-to-Earn (P2E) players. To solve this problem, Axie Infinity introduced the SLP-AXS dual tokenomics model.
Before introducing SLP, Axie Infinity initially used a single tokenomics model. However, as the game’s popularity increased, there was greater selling pressure on AXS due to governance and staking rewards. To alleviate this issue, Axie Infinity introduced the in-game token SLP in August 2020, presenting the first dual tokenomics model. As Axie Infinity’s success grew in 2021, many other games also began adopting this model, making the dual tokenomics model a trend in Web3 games.
The dual tokenomics model utilizes two types of tokens: utility tokens and governance tokens. Utility tokens are in-game tokens that can only be acquired within the game and are mainly used for item trading and other in-game activities. On the other hand, governance tokens provide voting rights for governance decisions, typically traded publicly on exchanges with a fixed supply. Some projects like Kravada operate with three tokens, including two in-game tokens and one governance token, which can also be considered a variation of the dual tokenomics model.
The main advantage of the dual tokenomics model is to separate the demand and supply between in-game users and investors, thus preventing inflation of the utility token and in-game asset outflow. This is often called ‘currency distancing’. Through currency distancing, in-game users can enjoy the game without being affected by price fluctuations caused by investors, while investors can benefit from investing in the game. This will support a constant flow of new players by preventing high barriers to entry due to inflated utility-token prices. As such, separating the use cases might help to tailor a token to the right audience.
Despite the benefits that a two-token model can bring, there are some notable negatives. With use cases of a token being separated – it can lead to unnecessary complexity. The two-token model relies on constant balancing between the two tokens, as can be seen with Axie Infinity which relies on a constant adjustment in the breeding fees in SLP and AXS to maintain the demand of both. Furthermore, this complexity can lead to wrong expectations. So far, some investors have expectations of tokens being somewhat correlated where it shouldn’t be the case. Another underlying issue with a two-token model is that if both utility tokens and governance tokens are listed, it can ultimately lead to the same issue found in the single tokenomics model – in-game economic collapse due to a death spiral led by an asset out-flow. Axie Infinity and StepN are prominent examples of this.
Although there have been cases where listing both in-game and governance tokens led to the collapse of the in-game economy, the dual tokenomics model offered game companies a new option besides the single tokenomics model. This has led to many existing games adopting the dual tokenomics model, as well as the majority of games released afterward.
4.4 Platform In-game Tokenomics Model: The Potential of Multi-IP Onboarding and Creator Ecosystems
The Platform In-game Tokenomics Model first emerged in 2017, driven by the need to establish creator ecosystems for web3 native projects. Initially, this model was developed with the intention of building game publisher platforms. Platforms like Engine, Gala, Immutable, and others utilized platform tokens to construct game content creator ecosystems, with some of them even creating their own mainnets.
However, the model gained significant attention in 2022 when Web2 game companies began transitioning into Web3 games. Following the remarkable success of WeMade’s Mir 4 in 2021, many Korean web2 game companies entered the web3 space one after another. Notable gaming companies like Netmarble, Com2uS, and Nexon adopted the Platform-Ingame Tokenomics model, leveraging their various IPs to do so.
The Platform In-game Tokenomics Model is characterized by the interconnection of a single platform token with multiple game-specific in-game tokens. While the Dual Tokenomics model pairs governance tokens with utility tokens in a 1:1 relationship, this model expands it to a 1:N relationship. The platform token acts as the base currency and manages the in-game tokens as top-tier tokens for each game.
This model can be broadly divided into two types based on the utility of the platform token. The first type is when the platform token possesses the utility of a publisher token. In this case, the platform token primarily offers utility for cashing out in-game tokens and purchasing NFTs or game items through an in-game token exchange. Representative examples of these publisher tokens include GALA, MAGIC, ISK, MBX, and NEXON.
Netmarble, for instance, has issued MBX tokens on its original blockchain ecosystem, MARBLEX, in partnership with Klaytn mainnet. Currently, there are 3 blockchain games running on MARBLEX including A3:Still Alive, Ni no Kuni: Cross Worlds, and The King of Fighters: ARENA. The in-game tokens can be staked in return for MBXL (bridge token) which can be subsequently converted into MBX and KLAY(mainnet).
The second type is where the game platform is transformed into a mainnet. In this approach, the platform token not only serves as a publisher but also gains additional utility in maintaining the network’s security. Immutable X, WAX, and XPLA are representative examples of such mainnet-based platform tokens. This model expands the value chain of web2 game companies, where the publisher platform is responsible for games, while the mainnet platform takes charge of infrastructure.
In both cases, users acquire in-game tokens through gameplay and need to exchange these tokens into platform tokens before selling them on exchanges for cash. Additionally, when users want to purchase additional items within the game, they first buy platform tokens on exchanges and then exchange them for in-game tokens within the platform for usage. This way, the Platform In-gamet tokenomics model facilitates the creation and operation of in-game economies through organic interactions between platform tokens and in-game tokens within the platform.
The strengths of this model can be divided into three points.
- Currency Distancing
- Stabilized in-game economy
- Construction of creator systems
Firstly, the model retains the advantage of “Currency Distancing” from the Dual Tokenomics model. Users would need to exchange in-game tokens into a publisher token, before cashing out the in-game tokens. This ensures that in-game tokens are utilized within the game.
Secondly, game companies can accumulate the value of different games and various IPs into the platform token, thereby establishing stability. As in-game tokens are exchanged with the platform token based on a predetermined ratio, this ensures the stability of the in-game economy as well.
Lastly, it enables the construction of creator ecosystems, a key aspect of web3 games. Web3 games aim for a bottom-up community-centric approach rather than top-down development by centralized developers. By using this model, a platform token can be used to establish an ecosystem fund, facilitating the development of bottom-up game projects. Web3 native projects like IMX and GALA have actually implemented this and launched ecosystem funds of $250 million and $1 billion, respectively, to support game developer education and attract new game projects.
However, this model is not without its flaws. The first limitation is that having multiple games running simultaneously on one platform may not completely resolve the issue of transaction delays. Due to this, Web2 game companies may opt for operating each game on separate private chains. However, this approach compromises on the core value of web3, which guarantees user ownership, and has been criticized for resembling web2.5. The second limitation is that the value of the platform token is often linked to popular games. In other words, the token’s value is determined by the success of popular games, which may result in in-game tokens of less popular games having excessively high value or facing unfavorable exchange rates compared to the number of users, potentially negatively impacting the in-game economy. In summary, the high correlation of the platform token’s value with popular games may lead to the economic decline of less popular games.
Currently, this model is being widely adopted by Web2 game companies, especially those in Korea. Large gaming companies possessing various IPs are expected to select the Platform In-game Tokenomics Model as the industry standard, and it will enable other gaming companies seeking entry into this market to leverage their IPs effectively.
5.0 The Future of GameFi Tokenomics
Debating which tokenomics model is superior may be meaningless. Instead, each tokenomics model will continue to be chosen by game companies based on factors such as the genre and characteristics of the game, as well as the number of IPs they possess. The NFT-Based model remains effective for Web 2.0 game companies or game projects that value NFT issuance. The Single Tokenomics model also appears to be valid for casual games with relatively short life cycles. Though there may be some susceptibility to in-game economic fluctuations due to external factors, as seen in the current status of the Polygon gaming ecosystem, several examples of simple tokenomics designs in various casual games have successfully lowered user entry barriers.
For future AAA games that utilize major IPs, the Dual Tokenomics model is expected to dominate, and in-game companies with multiple IPs, the Platform-Ingame Tokenomics model is likely to prevail. Especially in the case of MMORPGs and other games with sophisticated in-game economic designs, a clear separation between in-game tokens and governance tokens is deemed necessary.
In the end, all the models offer separate approaches that can work well depending on the specific design characteristics. Game tokenomics continues to evolve, but there are still challenges that need to be addressed. Just as popular games like Axie Infinity and StepN experienced the collapse of in-game economies when the growth of the game reached a plateau, systematically managing the asset outflow while guaranteeing full user asset ownership remains a challenge. So how can this be achieved? In the last section, the article will put forward two approaches actively discussed in the GameFi community.
6.0 Addressing the Sustainability Challenge
6.1 A Gradual Open Economy
It may be desirable for blockchain games to transition from a closed economy to a gradual open economy. Rather than immediately applying an open economy from the initial game release, it may be preferable to design the game in the Web2 context. After the economic scale has expanded sufficiently, the integration of in-game tokens, governance tokens, and NFTs can be considered. Subsequently, measures such as currency distancing can be explored to minimize the outflow of in-game tokens. This approach enables a fair distribution of initial tokens to genuine game users and builds resilience against speculative demand that may arise in the early stages, thus minimizing the risk of the collapse of the in-game economy.
6.2 ‘Sinking’ of the Governance / Platform Tokens
Giving utility functions to governance or platform tokens may similarly prevent asset outflow. Let’s take the example of the pledging system in League of Kingdoms. Having launched in 2021, one of the most notable features in the League of Kingdom is the LOKA pledging system. LOKA, despite being a governance token, can directly influence the in-game economy, such as resource generation for the token holder’s continent(server), through pledging. Continents that have locked up more LOKA tokens receive greater rewards compared to others.
This approach may raise concerns about an increase in investor influence. However, the sink of the governance token is expected to contribute to the long-term sustainability of the game. Moreover, when applied in conjunction with a gradual open economy, some level of control over the investor influence can be achieved.
7.0 Closing thoughts
Since Bitcoin’s inception in 2009, tokenomics has evolved significantly, with developers exploring diverse models that have led to both success and failure. While Bitcoin’s enduring tokenomics model has stood the test of time, others with poor tokenomics have stumbled.
Understanding tokenomics is crucial if you want to get into crypto. However, keep in mind that your assessment should consider multiple factors collectively. Tokenomics, coupled with other fundamental analysis tools, aids in making informed evaluations about a project’s potential and its token’s value.
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