Interpreting the Development of the Chain Game Ecosystem from the "Government" Perspective: Taking STEPN, ILV, Axie, and Star Shark as Examples

Author: Jack Ding｜W3.Hitchhiker

Revised by: Marina, Evelyn｜W3.Hitchhiker

This article takes the most common dual-token model in the current GameFi field as an example to explore the feasibility of two ideas:

1. Keeping the gold-earning token stable within a certain range
2. Maximizing the price growth of the governance token

To illustrate with a simple analogy, if we compare the game to a small country, the gold-earning token represents the circulating currency of the country, U still represents the US dollar, while the governance token represents the country's sovereign fund. No country in the world, whether it has a fixed exchange rate system or a floating exchange rate system, allows its currency's exchange rate to appreciate indefinitely. One of the impacts of currency appreciation is that it makes exports difficult, which corresponds to the fact that external incremental funds cannot enter due to high thresholds in blockchain games, preventing newcomers from entering and leading to the collapse of the economic system within the ecosystem.

This is a viewpoint I captured on Twitter, which resonates deeply with me:

If you agree with my above viewpoint, you can continue reading.

First, let's look at:

The first idea: Keeping the gold-earning token stable within a certain range

The above image is a lifecycle chart of early GameFi that I drew. At the same time, there must be two forces in the market that cause the token price to rise and fall. Most early GameFi projects attracted continuous capital inflow and drove the first wave of price increase through high yield rates and low return cycles in the early stages. However, when early players continuously sell to take profits, leading to token inflation, and new funds are insufficient to absorb the inflation (the downward force continues to be greater than the upward force), the project will gradually head towards death.

So let's think about it: a country's token is also constantly inflating. How does the government solve this problem? I believe that a country can reduce inflation through the following actions:

1. Increase consumption C: Consumption is divided into survival consumption (daily living expenses) and spiritual consumption (luxury purchases);
2. Increase investment I: Investment is divided into investment in production materials and real estate investment;
3. Increase government spending: The government issues national bonds and invests in infrastructure, concentrating funds to do big things;
4. Increase the effectiveness of monetary policy, common operations of monetary policy include: adjusting the money supply, open market operations, and adjusting the reserve requirement ratio.

The above actions actually have certain guiding significance for blockchain games:

1. Survival consumption

In fact, the education of users on survival consumption in blockchain is already quite high. Our on-chain activities require paying gas fees, while most games currently operate on centralized servers, which reduces users' expenses in this regard. However, Illuvium introduced the concept of travel fees, where users need to spend travel fees to capture Illuvials (spirits) in the P2E area, and spirits are the cornerstone of players playing the game, so this part of the expenditure is categorized as survival consumption;

2. Spiritual consumption

This part is not difficult for most gamers to understand. The simplest example is skins in League of Legends; skins themselves do not provide any advantages in battles but still attract a large number of players to purchase.

Both of the above points require the game to have a certain level of playability. A game without playability cannot attract players, and players will not spend money in it. Players gain happiness and satisfaction (consumer utility) through the game, which is actually a form of yield, and this yield does not need to be realized through token inflation; instead, it may lead to token deflation due to increased consumption.

3. Investment in production materials

Taking Axie as an example, breeding new spirits for reinvestment is the simplest example. The key here is the length and complexity of the investment path. Axie's breeding path is relatively simple, and the profit points are also relatively easy to calculate. During the investment process, it is impossible to store too much inflationary tokens; it only reduces current inflation but potentially increases future inflation, which I believe is not a good method.

Compared to Axie's inflation model, Star Shark has made certain improvements, specifically reflected in the following points:

• Changing breeding to synthesis
  This means that production materials cannot be manufactured by players but can only be upgraded, and the motivation for upgrading comes from the high SSS rewards in ranked matches and higher gold-earning efficiency (higher star-level sharks will have more energy);

Star Shark PVP rewards

• Creating a conflict between the optimal gold-earning configuration and the optimal PVP configuration
  The optimal gold-earning configuration for Star Shark is 3 1 1 1 1 1 1, which is a combination of one 3-star shark and six 1-star sharks. However, on March 25, Star Shark will introduce a grand prix mode, with a participation threshold of at least three 4-star sharks, each costing around $18,000 to $20,000. This is in stark contrast to the optimal gold-earning configuration, complicating and diversifying users' investments, thereby stimulating consumption.

From the above image, we can see that after the announcement of the grand prix, the daily synthesis consumption of SEA has significantly increased.

4. Introducing land to replace real estate to absorb bubbles

Many games launch land before they are developed, with prices being exaggerated. I actually do not endorse this behavior. First, excessive hype creates a high barrier for new players; second, if land is introduced when the game token experiences inflation, it will be a trump card to absorb the bubble. I wonder if Star Shark's land gameplay, set to launch in June, follows this line of thought; a purely P2E model will inevitably lead to decline. (Refer to my previous article)

5. Increasing government spending

Game project parties use part of their income for token buybacks. This gameplay is not new; the key point is how to increase the project party's non-ecosystem income. Currently, the only way I can think of is through hosting game tournaments to gain sponsorship and in-game advertising revenue.

6. Increasing the effectiveness of monetary policy

From my observations, apart from Stepn, most games have ineffective monetary policies. Axie's multiple adjustments to game output and breeding consumption have not changed the outcome of SLP's price decline due to high inflation.

In this regard, I believe the reasons are as follows:

In real life, only central banks have printing presses, so the central bank's control in this regard is absolutely powerful. However, games are different; every player in a game is a printing press, gold-earning players are high-load printing presses, and scripts are high-tech printing presses. Game project parties can only control the upper limit of daily output for each printing press but cannot control the number of new printing presses, the speed of production, or the cost of producing each token.

Three possible ways to enhance the project party's monetary policy strength (i.e., control over the gold-earning token):

• Foreign exchange reserve capability: Throughout the operation of the game, the project party's protocol will accumulate a large amount of income, including income from NFT sales and transaction fees from NFT trading. A significant portion of this income is collected in the form of ETH or U. Taking Axie as an example, during this process, it generated $165 million in transaction fees, while the total market value of SLP was only $673 million. If the project party could use this income for appropriate buybacks and control of SLP, could its lifecycle be extended? This behavior is not new in DeFi; for example, Sushi takes 1/6 of the 0.3% fee generated from each transaction for token buybacks.

• Production material production speed: From the game's perspective, controlling this part is relatively difficult because players' breeding behavior is spontaneous. However, Stepn and Star Shark can provide us with some insights. Stepn has recently become very popular, with its governance token GMT achieving an 8-fold increase in the secondary market, but the price of its NFT assets has remained stable at around 10 SOL since being listed on Binance. The daily new shoes fluctuate between 1,100 and 1,400, and such stability is inseparable from the project party's strong control capability. Additionally, when breeding shoes, there is a chance of twins, meaning that breeding once can produce two NFTs. I boldly speculate that this twins probability is continuously adjusted by the project party to control the profits of breeders, thereby keeping the daily new shoe quantity relatively stable and making the selling pressure of the gold-earning token GST relatively controllable. Star Shark, on the other hand, adopts a method where NFTs can only be sold by the official party, and users cannot breed on their own. However, currently, there are no restrictions on purchasing NFTs, and over 90% of the income from players purchasing NFTs will be destroyed, achieving a good deflationary situation for the token.

• Try to keep the production cost of each token consistent: Previously, P2E games like Axie, Star Shark, and DXCT could mostly complete daily gold-earning tasks in bulk through scripts, with studios only incurring costs for a few kilowatt-hours of electricity and script fees, while ordinary players might need to spend 1-2 hours of gaming time to complete daily gold-earning tasks. Compared to the output of ordinary players, the bulk gold-earning output from studios undoubtedly has a greater impact on the market. Due to their low token production costs, they sell a large amount of tokens, leading to a cliff-like drop in token prices. In response, Stepn has adopted GPS positioning, where the movement process/user status/movement results can mutually verify each other. Aiko (the designer of Stepn's economic model) said, "If you can't even achieve 'proof-of-move', how can you ensure the fairness of 'move-to-earn'?"

Of course, we believe that future games will become more complex, with many potential arbitrage links, not limited to just the breeding aspect. However, I believe that at least the efficiency and risk of arbitrage in different links should be proportional, as risk itself is a cost.

The above is my humble opinion on how project parties can maintain the stability of gold-earning tokens. The idea of government-like project parties may not align with the decentralized spirit of blockchain, but the users facing blockchain games in the future will certainly not be limited to the current ones. Do new users really care that much about decentralization? Perhaps they are more eager for a stable game ecosystem where they can earn money and happiness.

The second idea: Maximizing the price growth of the governance token

Before discussing this issue, let's consider where the value of a game's governance token comes from.

I believe the value of a game's governance token comes from two parts: use value and consensus value.

• Use value is easy to understand; most game processes require the participation of governance tokens, such as breeding in Axie and synthesis in Star Shark. This part of the token is genuinely used and consumed by players in the development of the game. For example, as of March 23, the cumulative breeding income for Axie was 21.88 million AXS, while the current circulation of AXS is 77.24 million, with a usage rate of 28%. This means that only about 1/4 of the tokens have real usage demand, and I believe the remaining 3/4 of the value comes from consensus value.

• Consensus value, which can also be called expected value or speculative value. I believe this part of the value is invisible; it comes from the market's expectations for the project, possibly derived from the value of 2.67 million holding addresses, the value of the Ronin chain, and the recognition of its future scalability. The existence of 2.67 million holding addresses itself has flow value, which is why Axie has become the leader in P2E. I believe consensus value equals flow value; the more flow and users a protocol can attract, the greater the help for its future development, as the world of Web2 has already told us that flow is everything. How to attract more flow and encourage more players to participate is something to think about, but it is inseparable from a stable internal economic system, which is what we discussed in the first point; living longer can attract more flow!

Many early game projects saw the price increase of governance tokens lag behind the increase in NFT market value. Taking Star Shark as an example, the current circulation of the SSS token is about 3.23 million, while the game has been running for three months, with a cumulative synthesis consumption of only 86,000 tokens, resulting in a usage rate of only about 2.6%. When the game is in its early stages and consensus value has not formed, such a low usage rate will not lead to price increases. Axie also experienced this situation in its early days; before July 2021, its governance token AXS had small price fluctuations and was in a state of accumulating users. On July 1, the project party adjusted the breeding cost, increasing the AXS consumption from 1 to 2 per breeding. Coupled with the accumulation of a certain number of users, AXS's price skyrocketed afterward, becoming a legend in blockchain games. Whether other games will experience the same storyline, I do not know, but it is worth imagining.

Just as governments must make efforts to regulate the economic market, blockchain game project parties also need to implement appropriate "policies" to stimulate the balanced development of the game ecosystem. If blockchain game projects want to thrive for a longer time while providing playability, they need to continuously think and explore more effective methods. In fact, the stability of gold-earning tokens and the price increase of governance tokens are interdependent and inseparable. A stable price system for gold-earning tokens is conducive to attracting more users, bringing stronger consensus value to governance tokens, while stronger consensus value will further attract funds and players to invest in the game's ecosystem, making the price of gold-earning tokens more stable.

Just like the mission of blockchain games is to explore the infinite possibilities of NFTs as creative infrastructure, subverting existing content and value-sharing models, and co-creating and sharing with the community, so that creativity and value can thrive again in the community, GameFi is just beginning, and their future holds infinite possibilities.