P2E economy will become the foundational layer protocol of games
The largest P2E economic system is community-first.Author: Peter 'pet3rpan', employed at the crypto venture capital firm 1kx
Original Title: 《Play to earn economies as base layer protocols for games》
Translation: Xuejing, Chain Catcher
Player retention in games is everything.
Nevertheless, traditional game publishers optimize company profits at the expense of player value and well-being. They are able to do this because they have end-to-end ownership and control over the development, distribution, and management of games.
Electronic Arts (EA) is a prime example, as this game publisher has played a villainous role in the gaming community by prioritizing its microtransaction monetization model over player experience.
In 2017, EA released Star Wars: Battlefront II, where players had to either play for 40 hours to unlock a single character like Darth Vader or pay. The company's response to the backlash was the most downvoted comment in Reddit history, highlighting the hostile dynamic between publishers and gamers.
About 30% of the company's total revenue comes entirely from the sale of FIFA Ultimate Team (FUT) loot boxes, and leaked company documents indicate the company's priority in capturing microtransaction activity. EA claimed, "All roads lead to FUT," because "FUT is the cornerstone, and we are doing everything we can to push players into it."
EA's response on Reddit - the most downvoted comment in Reddit history
The core vision behind play-to-earn (P2E) is to address these issues by providing real player ownership of in-game assets and their surrounding worlds, ultimately creating greater stickiness and community retention.
Compared to the current global mobile game 30-day retention rate of 3%, we have already seen the first outstanding P2E ecosystem: Axie Infinity has achieved some initial success, with a D0-D90 retention rate of 40%.
The Problems with Web2.5 Games
Due to the success of Axie Infinity, we see a plethora of new P2E ecosystems attempting to replicate similar success. Nevertheless, many projects still aim for centralized control and coordination of end-to-end production of games, thus risking replicating the same structural misalignment found in traditional games.
These Web 2.5 games aim to leverage "crypto features" to achieve digital asset ownership through NFTs or financial ownership of economies via ERC-20, while simultaneously aiming to limit other denser ownership attributes (such as governance) in context and participation.
Typically, the teams behind Web 2.5 games wish to build highly refined but closed ecosystems, where the entire player experience is centrally controlled by a single organization. These projects consider themselves "game-first" and still optimize for Web 2 growth metrics, arguably sharing the same value extraction mentality as traditional game publishers.
Similar to CeDeFi, these games seek to build closed-loop, centrally controlled ecosystems on top of inherently open and permissionless crypto networks.
While we do not expect all P2E ecosystems to be decentralized from the start, we anticipate that Axie Infinity will undergo a more gradual decentralization process. However, we believe that this trend of Web 2.5 game development stems from a misunderstanding of the power of composability, interoperability, and decentralized coordination technologies.
Our Perspective
We believe that Web 3 games will outperform Web 2 and Web 2.5 games because they leverage community ownership, real economic value, and native composability to drive greater player adoption and retention. We argue that the Web 2.5 approach to building P2E ecosystems is insufficient to prevent value extraction from the community. This is because it will still primarily rely on a single coordinating entity that has end-to-end development and management of the economy and the ultimate participant experience.
Instead, we need to view P2E ecosystems as open-source public goods, where all aspects of the economy and surrounding game experience are built in an open environment.
Through symbolic incentives and community ownership, we can break down the role of publishers through a set of bottom-up contributors, participants, and guilds, which in turn drive world-building, product development, and governance. By making these responsibilities public, we no longer rely on a single company to achieve the goals of the entire ecosystem, but can leverage the open-source contributions of anyone on the internet.
We do not see P2E as standalone games or "applications," but rather as P2E ecosystems that establish self-sustaining virtual national economies that community members can trust, collectively operate, own, and build.
As an economy governed almost entirely by its citizens
Due to the impact of the current economy, the P2E dynamics surrounding games take on a new significance. These economies are not only places where community members play a role, but also where they have financial advantages, ownership of revenue-generating enterprises and valuable digital assets, and clear work and responsibilities.
We can view P2E economies as virtual nation-states. Their citizens will want to live in the most democratic nations, with the best opportunities (entertainment, work, socializing, culture). To retain their community members, these virtual economies must make decisions that have serious economic implications for their citizens in a fair and transparent manner, such as:
Economic policy: e.g., asset supply in games, balancing mechanisms
Monetization: e.g., value accumulation mechanisms, transaction fees
Treasury: e.g., which community initiatives should be funded?
Intellectual property: e.g., how should the ecosystem's intellectual property be licensed?
We believe that community-operated P2E economies will optimize functional governance, the "quality of life" for community members, GDP, and economic stability, rather than merely user growth. In turn, by making decisions that align more closely with the interests of community members, they can retain and attract better community members by providing a securely managed economy (public goods and sunk theme protocols).
As we spend more time in virtual spaces and are able to carry our identities, friends, and assets from one world to another, the analogy of virtual nation-states becomes increasingly real.
As a community distribution platform for an open-source builder and creator ecosystem, driving economic benefits
Unlike Web 2 games where data is stored in centralized databases, P2E economies can serve as open, interoperable SDK platforms where contributors can build in a permissionless manner. This allows us to view the economy as a foundational layer protocol upon which other community-generated games and experiences emerge, where each game and experience serves as a new user acquisition channel for the ecosystem while also driving existing community participation.
By doing so, we can provide developers with the opportunity to build and deliver games to a vibrant community from day one.
In the Axie Infinity ecosystem, this might look like funding new mini-games to help drive certain goals of the Axie ecosystem, such as: better player onboarding experiences, where mini-game creators receive real-time token rewards tied to their game's success rate. By avoiding reliance on a single team and building in an open environment, games can broaden the width of product insights and develop products in a more scientific and engineering-based manner.
This ecosystem approach can be applied to all other operational areas of P2E ecosystems, from community development to world-building and knowledge craftsmanship (think community psychedelic novels or other derivatives typically prohibited from monetization in traditional models). Grassroots capital allocation can emerge through large-scale community financing mechanisms, such as quadratic funding, or even player-owned associations managing certain responsibilities and tasks, like the Axie P2E scholarship association that helps drive allocations.
As players gain greater control and mobility in the metaverse, we believe interoperability will become the core driving force for cross-world distribution. The more open and integrated these economies, games, and worlds are, the more creativity can emerge through experimentation and permissionless integration, thereby expanding the top of the P2E ecosystem funnel. We believe that interoperability is not just about "bringing your sword from one game to another," but can exist in various forms:
- Cosmetics and visuals (VRM avatars, cross-world visual traits, etc.)
- Player world interactions (on-chain physics engines as shared standards for FPS games, maintaining asset integrity across worlds, such as plants that need to be watered in the same way across multiple worlds)
- Economic (allowing users to buy and sell assets using tokens from other games, or receiving discounts for using tokens from other games/worlds)
- Reputation (credentials that can be verified across worlds)
- Achievements (completing bonuses in games X and Y to unlock badges)
- Economic sinks and faucets (destroying assets from games X and Y together to create unique skins/cosmetics)
- IP (seeing knowledge and characters from a P2E world in another virtual world)
- Access (in-game items that allow virtual access to virtual spaces in multiple worlds)
We believe that the opportunity cost of not building interoperability will overshadow the net costs of doing so.
Playing games can save costs like sinks and faucets
When the value flowing into a system exceeds the value flowing out, economic sustainability and growth occur. In game design, the mechanisms that influence the flow of value in the economy are sinks and faucets:
- Sinks remove a supply of an asset from one economy (e.g., SLP is burned through breeding fees in Axie; generally, breeding is incentivized to build stronger teams and achieve higher returns)
- Faucets inject asset supply into the economy (e.g., earning SLP through completing tasks or battles)
For economic sustainability, sinks need to remove more token supply from the economy than the faucets inject into the system; otherwise, as supply increases, there will naturally be downward pressure on prices.
An example of future token sinks could be the introduction of vertically integrated upgrades for Axie body parts purchased with SLP, whether aesthetic upgrades or rarity-related upgrades. Currently, the only SLP sink in the game overly relies on horizontal asset production, where Axies can gather and breed new Axies, but the quality and overall appearance of each Axie remain unchanged.
Vertically integrated token sinks
We can expect to see such adjustments in other emerging P2E games as they commit to economic sustainability. We can anticipate that communities will crowdsource games and other player experiences as new sinks or faucets to stabilize the player economy.
We may even see other allied virtual nations integrate another economy's sinks or faucets into their native experiences to assist another P2E ecosystem facing economic instability.
The Rise of Minimum Viable Games
We believe that the largest P2E ecosystems in the future may initially appear small and rudimentary.
By viewing P2E economies as the economic and social foundational layer of the entire game ecosystem, we argue that building P2E ecosystems is less about game development and more about world-building, culture, and incentive design for the underlying economy.
While we agree that well-designed games will attract and retain the largest player bases in the long run, we do not believe you need to launch a highly polished game from the start to achieve success, but rather a minimum viable game (MVG) sufficient to complete the economic value accumulation loop.
One advantage of crypto is the ability to launch a token economy immediately from day zero and start building minimum viable economic value accumulation mechanisms long before a fully polished end-user experience is ready. This contrasts with the waterfall development approach traditionally adopted by game studios from the outset.
The path to launching a minimum viable game might look like this:
Create a world that others want to belong to (design game concepts, design lore, aesthetics/visuals, create stories, design in-game assets)
Allocate ownership of that world to the community (mark future in-game assets as NFTs and distribute them to early potential community members and players)
The community launches a token to guide ecosystem development
The community raises funds into a shared treasury
The community launches a minimum viable game with a token sink
The minimum viable game removes tokens from supply (this needs to be driven by player world interactions, where players have the incentive to utilize them, e.g., players should believe that burning tokens is worthwhile)
As tokens are removed from circulating supply, the economy gains more value
Value is reinvested into the game
Create better game and token sinks
Repeat steps 7 to 9
We believe that by building the complete economic value accumulation loop early on, P2E ecosystems can construct games in a more streamlined and iterative manner, with lower upfront launch costs.
Axie Infinity perfectly embodies the concept of a minimum viable game, as its first major boost occurred before the breeding and battling components were released:
December 2017: Concept and development began
February 2018: 900 ETH Origin Axie fundraising (~$720,000)
May 2018: Breeding game launched (introducing a faucet)
October 2018: Idle battling game launched (introducing a sink)
January 2019: 3200 ETH initial land sale (~$400,000)
December 2019: Card battling game launched
May 2020: 4600+ ETH completed first quarter land sale (~$1,000,000)
November 2020: AXS token strategic sale ($860,000)
April 2021: Ronin Chain migration
September 2021: AXS token staking
Despite having over 2.5 million daily active users, Axie Infinity's roadmap is far from complete. Axie Infinity's focus on community building and its iterative development approach demonstrate how MVG can guide large-scale virtual economies.
Building P2E Ecosystems in a Community-First Manner
Driven by our practical experience in building token networks, we believe that the most successful and vibrant P2E ecosystems will prioritize community and culture over games.
We believe that the right world-building, culture, and incentive design are key tasks in constructing a thriving P2E economy.
World-Building - "Let's build a world together."
Under the minimum viable game model, shared world-building in early P2E communities becomes a significant driver of participation. Therefore, we hope to see more P2E ecosystems adopt a content-first approach (e.g., Loot, Treasure, CryptoManga). We can expect that early user acquisition in P2E ecosystems will resemble skilled dungeon masters co-creating a D&D world with the community, especially when no games are ready or even being built at the time.
One example is Loot. Driven by a desire for fair distribution of text-based NFTs and innovative potential, dozens of developers saw the opportunity to co-build a new digital economy. In the following months, 86 community projects emerged to expand the possibilities of Loot, including new derivatives, tools, and guilds around items, maps, knowledge, and visuals.
While we currently lack player-driven world-building tools, we anticipate innovations in the coming years. We suspect that as humans transition from content creators to curators, generative AI technologies will play a crucial role. We view world-building as a collaborative process that nurtures a community of potential players and other contributors even before the game begins.
Cultural Building - "Come for the culture, stay for the ownership."
People enter communities because they resonate with the community culture, and they stay because they become owners of the community. By demonstrating integrity around a set of values and principles that incentivize others to emulate, culture is strengthened. It is co-created within a community, making it crucial to manage early communities effectively.
While traditional metrics emphasize "how many players your game has," we believe P2E ecosystems need to focus on "who the players and contributors are." Therefore, we highly encourage P2E ecosystems to carefully curate their early community members and participants. This can be achieved through manual whitelisting and other measures, such as limiting participation through loyalty commitments or contributions.
"In the early days, one thing was important - many of our community members were 'all in' and needed Axie to succeed. Now, NFT community members are also susceptible to the 'VC effect,' where they have too many eggs in too many baskets and care less about any one project. There was no diversification at that time. Additionally, the huge demand also created a need for lottery and other witch attack defense systems, which made it difficult for people to get the allocations they wanted." - Jiho (Axie Infinity)
The right culture will enable teams to leverage the fact that P2E games increase coverage as communities, allowing like-minded participants to have an impact within the economies they belong to and enabling them to accumulate ownership in the worlds they help create.
Incentive Design - "Reward valuable contributors"
While culture may initially attract community members and contributors, they will only stay if their work is fairly compensated and fosters a sense of ownership.
Chart from "The Dilemma of Community"
When designing the distribution of in-game assets and shared economic benefits, game studios should ensure that the most valuable community members and contributors are rewarded for their relevant work and commitments. When this contributor feedback loop repeats, trust, loyalty, and enthusiasm will emerge.
We believe that symbolic incentives are a scarce resource and should be allocated judiciously and elitely to the most valuable community members. We hope to see more experimentation around token ownership and in-game asset distribution models. For example:
- Only guilds with a certain scale or collective "XP" can purchase exclusive assets like virtual land
- Certain in-game cosmetics can only be obtained by passing rigorous knowledge exams that demonstrate a deep understanding of the game
- Completing tasks (in-game or other community bounties) is a way for players to whitelist their exclusive items, which can serve as "badges" marking their earned reputation
We believe that P2E games should be cautious when designing incentive structures based solely on gameplay. By doing so, they risk skewing their membership towards mercenaries, who are more likely to jump from one game to another in search of higher rewards (similar to high-yield farmers jumping from one DeFi protocol to another). We argue that P2E economies should design their incentives to focus more on retaining loyal community members rather than being used to drive pure user acquisition.
Conclusion
We believe that the most successful P2E games will first build a great culture, community, and vibrant economy, rather than flashy graphics and large amounts of funding.
We are just beginning to understand how to build in an open environment. Our mission at 1kx is to be the most helpful investor for builders who want to create the next big project to win the ecosystem.
If you are building something in this space, we would love to chat~
"If you want to go fast, go alone. If you want to go far, go together."
Acknowledgments:
Co-written by the 1kx team: Dmitriy Berenzon, Justin M (AcceleratedCap), Michael Hua, Nichanan Kesonpat, Peter (pet3rpan), Christopher Heymann.
Thanks to everyone who helped us understand P2E, including Jiho, Michael Arnold, James Young, Ryan Foo, and Meta.
