In-depth Analysis: How Should the GameFi Economic Model Be Designed

Original Title | Eight Thousand Words Long Article: How Should the GameFi Economic Model Be Designed

Author | CyborgDoggie, Consultant @RacingTime

Co-author: Daily Shen @RacingTime

Compiled by: Liu Quankai, Authorized for Reprint by the Original Author

Translator's Note: The platform token ETERNAL of the U-based gold mining game CryptoMines experienced a flash crash starting at 1 AM (UTC+8) on November 30, followed by a continuous decline. As of 1 PM (UTC+8) on December 2, it had dropped from a peak of $799 to $59, and has currently recovered to around $100.

On October 28, the author CyborgDoggie first introduced the Oracle protocol of CryptoMines and mentioned that the unlocking of 40% of the presale tokens could lead to a crash of ETERNAL. Two weeks prior, the author realized that without in-game consumption, hoarding tokens would only cause more panic as prices fell, and the Oracle protocol could not avoid a downward death spiral; at that time, many KOLs were heavily promoting Oracle protocol games (also known as gold standard games, i.e., U-based), leading to a large-scale FOMO for similar projects.

The tragedy of CryptoMines has now occurred, and CyborgDoggie regrets that the article did not spread in time, preventing players from receiving timely risk warnings. This article written by CyborgDoggie on November 24 about the Oracle protocol is worth a rethinking and review of GameFi by players.

1 Introduction

From chess to 4X strategy, traditional RPG tabletop games to AAA open worlds, games have never been merely entertainment but a platform for players to compete over limited resources. Therefore, game currencies with circulation value and utility value play a crucial role in user retention and the business cycle of games.

As a product of the combination of gaming and cryptocurrency, the tokenomics of GameFi projects is naturally suitable as part of the game economy, bringing the trading of game assets from the gray area into the bright sky, granting players unprecedented ownership and trading rights of items.

This article will review various tokenomics of GameFi projects and analyze their economic mechanisms, hoping to provide some insights for game developers and crypto investors.

2 Economic Elements of the GameFi Ecosystem

DeFi

Decentralized finance is a system where financial products are available on public decentralized blockchain networks, making them accessible to anyone without intermediaries like banks or brokers.

In GameFi projects, DeFi aims to enhance investor profitability, seeking to maximize the capital efficiency of participating in blockchain games, facilitating players to sell, rent their game assets, or place their tokens as liquidity providers (LP) in pools. Even if the game lacks playability, the use of DeFi attracts crypto-related players and gives rise to various casual games.

Nevertheless, decentralization is the biggest difference between GameFi and traditional games. In traditional games, game producers/designers often play the role of gods, designing storylines for players to experience the game while also acting as the central bank that releases and recycles game resources. Traditional games, due to their strong centralization, can promptly control game resources to prevent economic collapse, extending the game's operational cycle; however, on the other hand, game companies deprive players of ownership of their assets, and it is not uncommon for traditional game companies to arbitrarily shut down accounts or servers.

NFT

NFT digital assets represent real-world objects, such as art, music, and videos. They are typically bought and sold online using cryptocurrencies and are often encoded using the same underlying protocols as many crypto assets.

Most in-game NFTs are game items that include interactive NFTs and collectible NFTs:

Interactive NFTs can be applied to combat and upgrades, training, merging, casting spells, and inheritance, such as incubators, spirits, cards, avatars, advancements, training, and inheritance, to enhance player performance in the game. Collectible NFTs are detached from gameplay, involving entertainment scenarios and limited combat attributes, enhancing the enjoyment of ownership for players, such as land, skins, cosmetics, and badges.

Compared to ordinary NFTs, in-game NFTs have the potential for interoperability. Some gaming platforms have already achieved interoperability of virtual avatars, and some games collaborate to convert non-fungible attributes. Although some game pioneers envision interoperability of cross-game and cross-chain NFTs, there are still some issues to be resolved between blockchain technology and a smooth gaming experience.

FT

In GameFi projects, FT usually refers to the game currency used to define the potential resource value in the game, making the internal economy of the game possible. Currency, players, resources, and goods together constitute an economic system, where each element is interconnected. Players maximize their interests during the game, so the value of currency controls player behavior, determining what players do and for whom they do it. In-game currency plays a leverage role in regulating economic behavior throughout the game, linking different elements together and coordinating player profits.

3 Token Economics in GameFi

There are two common types of tokenomics in GameFi projects: single-token and multi-token.

1. Single-token

The single-token system uses one currency for the in-game economy and secondary market, allowing players who purchase game tokens to enter the game and earn rewards by playing.

The advantage of a single-token system lies in reducing the difficulty of resource integration, facilitating player transactions, promoting the flow of funds within the game, and directly stimulating players to participate in the game for economic benefits.

However, the direct trading between a single in-game currency and fiat currency increases the secondary market's impact on the in-game economic system. When players buy large amounts of game tokens and lock their accounts, both the currency value and player profits increase, making the game very positive. However, this is not conducive to attracting new players to keep up with the upgrade pace of old players, creating significant inequality and affecting new players' participation. Conversely, when the currency is sold in large quantities and depreciates, players lose motivation to continue playing due to low earnings, accelerating the sale of game items and plunging the game into a death spiral.

Moreover, a single currency system is prone to inflation, especially when game guilds continuously produce resources, leading to token depreciation and causing fear among later investors, which is detrimental to the survival of the game itself. Additionally, the overall cycle design cost and maintenance cost brought by currency unification are relatively high, and there is no central bank to artificially regulate currency circulation. Therefore, when a problem arises in any link of the entire cycle, the entire bug cycle can collapse directly.

2. Multi-token

The multi-token system typically divides game currency into in-game currency and governance tokens. In-game currency serves as the primary reward for basic player actions such as daily tasks and PvE battles, playing a role in the game economic cycle, with unlimited issuance accounts; governance tokens are used to incentivize players' long-term commitment to community governance rights and higher token value in challenging tasks such as PvP battles.

In terms of game distribution platforms, currencies can be divided into in-game currency and platform tokens, with platform tokens occasionally replacing governance tokens, but the interconnectivity and liquidity between currencies are diverse.

The multi-token system reduces the secondary market's impact on the game, increasing the stability of the in-game economic system and achieving self-adjustment through resource integration. Although multi-token systems have a relatively high cognitive threshold for players, they have the following advantages compared to single-token systems:

First, the economic mechanism is easy to adjust during game operation. In games with multiple tokens, the value of a single currency can only affect specific resources, potentially impacting players' single-line earnings in tasks without causing system collapse. Second, currency exchange rates can be adjusted. If one currency experiences an economic downturn, designers can promote it through in-game operational activities, enhancing user stickiness or increasing consumption, which will raise the value of other currencies, boosting player confidence and encouraging them to continue playing and betting.

4 How Do GameFi Projects Balance In-Game Economy?

The game resources and currencies mentioned above are the foundation of the in-game economy, but it still requires an adjustment system to balance supply and demand, as games themselves involve complex numerical relationships.

In the real world, the demand for a certain commodity may saturate in the short term, but in the long run, the demand for commodities is infinite, as goods in the material world are always consumed over time. In contrast, game items become worthless without demand, as the value of game resources comes from player interaction and in-game consumption. Currency and resources are scarce, while resources are infinite, so if there is no good relationship between consumption and output in the game world, it will lead to economic collapse. If the relationship between consumption and output is not well established in the game world, the game economy will inevitably collapse.

Supply

(1) System Output

System output refers to the items obtained by players through gameplay, originating from system design and established in the early stages. Depending on different application scenarios, it can be divided into three main categories: characters, materials, and equipment. These three are not completely independent but are closely related in terms of resource synthesis and exchange.

Characters usually refer to the entities controlled by players in the game, often manifested as pets, spirits, heroes, avatars, etc. These resources are closely related to players, especially in (MMO) RPGs, MOBAs, EDU, TPS/FPS. Character attributes affect gameplay and influence players' gaming experience; in open-world and sandbox games, avatars have significant value in shaping player identity. In TCGs and SLGs, players typically do not have physical "characters" but control game resources as commanders, for example, consuming potions during gameplay to enhance intrinsic abilities such as health, experience, strength, etc. The consumption of potions and mana is irreversible.

Materials include combinable items such as modules and skins, allowing players to freely choose weapons, armor, runes, and other interchangeable equipment to enhance their performance in combat or consolidate their territory.

A variety of system resources optimize player experience, encouraging players to participate in the game to obtain more attractive and fulfilling resources or to gain profits from market transactions, achieving a complete in-game economy through consumption mechanisms. However, a complex resource system may raise the cognitive threshold for players, and overly generic character and equipment designs may not yield good market returns.

(2) Content Updates

In traditional games, all mechanism adjustments or game content updates are completed by game designers, so when World of Warcraft or Hearthstone causes a significant imbalance in the quantity of resources or old and new items, they abandon the old version of the game. In GameFi, assets belong to players, and game developers are a necessary condition for asset appreciation. Players can also participate in the creation of game content, so GameFi updates are divided into gameplay and content updates.

Gameplay updates are usually executed by the team, such as adding new gameplay, like adding PvP to PvE, allowing players to explore new dungeon maps, or increasing tower defense for land construction. Gameplay updates involve subtle numerical balancing and functions as a means of artificial economic control. While player community opinions can be considered, players are still far from participating in the core mechanism design of the game.

Content updates are more creative. Legends, backgrounds, or character designs are popular in RPG and TCG player communities, connecting players' emotions, while in sandbox games, it is more about players using engines to create equipment and scenes. Game teams also actively hold various competitions to encourage player participation. Once players' works are adopted, they are recognized as final game content and developed by the team.

Player participation in game design and content updates is a significant feature of decentralized games, so coordination between development teams and players is beneficial for enhancing game playability while also greatly involving the community, increasing intimacy and maintaining user retention.

Consumption

(1) Upgrade Mechanism

The upgrade system in games is an abstract form of enhancement, where players' core attributes grow with level increases. Upgrading allows players to perform basic tasks in the game more easily and efficiently, giving them an advantage in battles over players with lower-level assets or committed earnings.

The upgrade system plays a role in many aspects of the game, increasing consumption and coordination of various resources, such as players needing to use magic to upgrade characters, potions to upgrade spirits, blueprints to upgrade weapons, and ores to upgrade buildings, etc.

Diverse upgrade paths provide players with different choices, delineating players' responsibilities and promoting the overall operation of the economic system through player cooperation, achieving resource circulation.

For game designers, upgrades mean accelerating competition among players, especially in PvP games. Due to the competitiveness of rankings, players are willing to participate more in the game and upgrade, driving the growth of other players and forming momentum within the game.

However, if the upgrade process is too complex, such as resource collection taking too long, or multiple players upgrading simultaneously with no clear upgrade advantage, it can also diminish player confidence. Many games also achieve level breakthroughs by increasing rewards and resource consumption for upgrades, which mainly depends on players' expectations of the game, as the risk of resource utilization increases for players.

(2) Synthesis Mechanism

The resource synthesis system combines two or more resources into a single item or uses other resources to improve or change the core characteristics of existing items. As characters upgrade or explore, players can also unlock synthesis formulas for different items.

The synthesis system can be controlled or random:

For highly combinable materials like iron and stone, the synthesis process is usually controllable, allowing players to clearly grasp the required materials' mixing according to specific procedures, much like assembling Lego blocks or cooking according to a recipe.

For non-combinable objects like pets, heroes' core attributes, and skills, synthesis results are usually random, which may combine with the random minting mechanism in NFT sales, allowing players to replicate their original spirits and inherit some explicit and implicit traits to form their offspring.

The synthesis mechanism promotes trading among players and activates resource circulation due to the complexity of the synthesis process or random synthesis of new resources not aligning with players' expectations, encouraging players to complement each other and allowing in-game resources to adjust automatically to a relatively balanced state.

However, the synthesis system also has some drawbacks, as designers' adjustments to resources may lag. When market prices of items encounter issues, it may lead to resource waste, and only then can game designers realize that resource allocation may have problems.

(3) Loss Mechanism

In games, the loss mechanism refers to players actively stealing or destroying resources owned by other players, which are necessary for other activities in the game. This mechanism applies to the following situations:

First, it allows multiple players to interact strategically; second, the game system is essentially controlled by players' strategic preferences and aims to introduce feedback into the system.

Additionally, the loss mechanism can also affect market fluctuations in GameFi projects, as designers can hold PvP tournaments and clan wars to promote the consumption of building and weapon materials. In cases of oversupply leading to low prices, or when some high-level players have excess production but insufficient demand, introducing a loss mechanism helps balance in-game resources and consumption, stabilizing the economy.

Moreover, resource depletion can make similar resources scarce, exhibiting higher prices in the market. Consuming limited tokens can also cause deflation of circulating currency, thereby increasing prices.

The drawbacks of the loss mechanism are evident, especially in GameFi projects where items are more expensive than in traditional games. Many players fear joining games because intense competition, such as in MMORPGs, may lead to their funds being lost or suspect this is a way for the development team to profit.

Exchange

(1) Token Locking Mechanism

Total Value Locked (TVL) is an important metric in DeFi, as blockchain services are developed on peer-to-peer networks without a central authority to manage, build, or improve the ecosystem. Therefore, cryptocurrency investors themselves consider using their currencies and tokens to build these networks from the bottom up.

For GameFi teams in the white paper stage, the executing team or community may be committed to deciding which tokens should be allocated to different plans and departments, such as development, marketing, operational costs, etc. If the team has a foundation or other entity controlling the funds, it may also decide to create allocations for the token treasury to be used as designated by the team or community.

In some cases, allocations may be distributed over time as part of block rewards or during vesting periods. To support the long-term development costs of the game and rewards for players during the game's operational phase, avoiding the impact of large fund withdrawals on the in-game economy, the allocation of tokens for GameFi projects includes two locking mechanisms: hard lock and soft lock.

1.1 Hard Lock

Hard lock is determined before the game officially launches, including token lock-up allocation, linear or non-linear unlocking schemes, withdrawal restrictions, NFT minting, etc. Hard locks typically involve unlocking funds at different stages of funding, with the team itself committing to long-term lock-up as a guarantee for game content development, while angel or seed locks ensure that large amounts of funds are not suddenly withdrawn, disrupting the game economy. Hard lock allows players to have expectations of the value of game tokens.

However, the downside is that the market often experiences fluctuations at each unlocking point, causing some uncontrollable losses. For example, during the public offering phase, a large influx of players can lead to high slippage, causing transaction costs to exceed actual value, resulting in a significant price drop, or concerns about large-scale sell-offs before a large amount of funds are unlocked.

1.2 Soft Lock

Soft lock is a mechanism that creates token locking through gameplay, typically involving players' abilities or game items being locked for a period (also known as "cooldown" in traditional games) to increase TVL and player income.

The advantage of soft lock is that it is connected to core gameplay. Long-term soft locking procedures can last for several days, such as dispatching exploration teams for tasks, keeping heroes in camps, or hatching eggs. Short-term locks last from several hours to a day to restore spirits' health or heal the injured. It is worth noting that traditional game players mainly dislike cooldowns as they limit their performance, but in GameFi projects, players are willing to lock their heroes to increase income during off-game time.

At the same time, soft lock is similar to idle game mechanics, weakening gameplay and interactivity, catering to players who do not have much time to play games, which somewhat limits the depth of the gaming experience and can lead to a tendency to overlook the core gameplay.

(2) Stability System

2.1 Oracle Protocol

An oracle is an entity that provides real-world data to decentralized systems. In a decentralized environment, oracles perform prominently in blockchain-based products, enabling blockchains to interact with off-chain data.

The data transmitted ranges from NFT prices, combat and mining outputs, to skill rewards, etc. Oracles in games provide high-confidence services to dynamically balance game tokens around set values, allowing players' rewards to be adjusted according to relatively reliable currency exchange rates, such as stablecoins pegged to the US dollar or local tokens of the chain where the game is established.

The oracle mechanism reduces the impact of currency prices on the supply of game resources, allowing players' earnings to remain within a relatively balanced range. Players can develop habits of long-term participation in the game within a limited fluctuation range. At the same time, the oracle mechanism also balances the thresholds for new and old players, creating more retention of old players and continuously attracting new players, increasing the overall liquidity of the capital pool.

However, the binding of oracles to other currencies, in a sense, abandons the value of its game tokens, relying on continuous player participation and stablecoin support. The internal economic system lacks adjustment capabilities and does not fundamentally solve the problem of a single token entering a death spiral. CryptoMines is currently in such a predicament. The game should have a well-thought-out recycling mechanism to encourage players to reinvest when currency prices fall, as well as a highly adaptable soft lock mechanism to prevent players from selling off currency in large quantities.

2.2 Buy/Sell Triggers

The buy/sell mechanism usually refers to automatic buying or selling triggered by an official detection system when the price of game tokens fluctuates significantly, reserving funds to stabilize the market again.

When setting price ranges, to protect the value of players' assets, buying usually occurs when prices drop by 5%-10% until normalcy is restored. On the other hand, while the upward limits of currencies should be relaxed to ensure that long-term investing players can profit, it is still necessary to prevent arbitrage and players from selling off inventories at peak prices and leaving the game, with this price fluctuation range being around 10%-15%.

The automatic buy/sell mechanism can initially isolate some speculators from entering the game, maintaining ecological balance. The steady growth of currency prices within a controllable range can also be used to expand content and attract players who genuinely enjoy the game.

Conversely, this centralized price regulation does not align with the trend of decentralization, as game developers have the authority to adjust values, which may limit the ecosystem's free development for players, but it represents a paradigm shift from traditional games to decentralized and autonomous games in web 3.0.

2.3 Trading Limits

With the above settings, the economy can reach a balanced state within a certain range. However, due to the profitability of GameFi (Play to Earn), some guild players may produce large amounts of resources without consuming them; since there are no restrictions on the same person registering multiple wallet addresses in the cryptocurrency market, one player can log in with multiple accounts to obtain game rewards, which may lead to an oversupply of certain game resources and price drops.

In a free ecosystem with clans (guilds), if designers can set output and consumption resources more precisely, then the inflation of goods and money can be predictable. Therefore, it is necessary to influence players' production behavior through trade restrictions to balance resource supply. Generally, there are two ways to limit trading: one is to restrict the number of trades, and the other is to increase trading costs. The team needs to ensure that the speed at which tokens enter the total reward pool is slower than the speed at which they are withdrawn; otherwise, it will lead to inflation (without changing the consumption of produced goods).

The built-in market will check the number of assets listed by players daily, and if certain players frequently list a bunch of the same goods, their accounts should be restricted from trading to prevent malicious bots from disrupting economic balance.

Auctions are also a means of restricting trading through taxation. The team needs to ensure that the speed at which tokens enter the total reward pool is slower than the speed at which they exit; otherwise, it will lead to inflation (without changing the consumption of produced goods). Therefore, in auction transactions, using "transaction fees" as "automatic stabilizers" to balance. The role of automatic stabilizers is as follows: the transaction fees charged by the auction house decrease with the reduction of total output and increase with the increase of total output, thereby weakening players' willingness to trade.

However, this will inevitably affect the liquidity of game resources. Without attractive core gameplay, it is likely to lead to poor circulation of items and cause players to worry about facing item depreciation over time, as there are no pricing for items in the market, leading them to sell items in large quantities to avoid risks.

5. Conclusion

One lesson learned from traditional games is that games with economic balance can continuously attract players for a long time and make early game assets more valuable due to scarcity. Thanks to various financial and technical mechanisms, GameFi projects now have more complex resource systems and better self-regulation. Although price fluctuations in the secondary market are inevitable, teams are more capable of maintaining economic balance within the game, allowing games to retain players with engaging gameplay and early asset investments.

While some traditional players resist the financialization of games, gaming and investment can organically combine through game mechanics, and a long-term stable game economy can eliminate speculators, leaving only those who appreciate the game and contribute to the community. Adaptive mechanisms in games can improve the financial situation of some individuals through strategy and competition, allowing investors to benefit from asset liquidity and appreciation.

Traditional games have strong internal economic regulation mechanisms, while cryptocurrencies on the blockchain have the infrastructure to maintain price stability; the combination of the two can create countless new paradigms. However, GameFi is still in its early stages, with many players exploring the boundaries of traditional themes, seeking GameFi projects with more sound mechanisms to activate and enrich the market; in return, blockchain and cryptocurrencies will restore asset ownership and the additional labor value of players, ultimately achieving a win-win situation.

Original Title:

“Redemption of GameFi: The Design of In-Game Economy Mechanism”

Original Link:

https://racingtime.medium.com/redemption-of-gamefi-the-design-of-in-game-economy-mechanism-39e500afeef3