Chain Game 2.0: Designing Self-Evolving P2E Game Economies

Author: Alex, IOSG Ventures

In my previous article "P2E is Unsustainable -- Seeking the Next Axie Infinity," I predicted that the economy of the first-generation P2E games is likely to collapse in the short term. This prediction has been validated, as Axie Infinity's revenue has dropped by over 95% from its peak. I believe that P2E as an industry is slowly entering a "building phase," and I have strong confidence in the development of Crypto games in the next 3-5 years. After talking with over 200 Crypto game founders in the past six months, I would like to share some insights here. First, let’s quickly review the reasons we are optimistic about Crypto games:

• We believe that interactive entertainment will dominate the attention economy in the next decade;
• We believe that Crypto games will lead the prosperity of the creator economy due to improved incentive mechanisms.

Based on these two arguments, we offer the following advice to every P2E founder who shares the same vision, to help everyone avoid some pitfalls encountered by predecessors. In summary:

• Token economics lead the iteration
• Downplay the role of NFTs in the core economic model, and design the game economy around governance tokens.
• Decouple 'play' from 'earn'. Allow players to play for free, and do not make substantial upfront investments a barrier to gameplay.
• Refine value distribution based on players' individual performance and risk tolerance (staking levels).
• Embrace public IPs and build diverse dynamic economic systems around them.

The Iteration Mechanism of Token Economics

Eric Ries' "The Lean Startup" somewhat sparked the internet revolution. The concept of "Agile Development" was first proposed by Eric in 2011. Why have internet companies developed so rapidly over the past few decades? Because they abandoned the traditional waterfall model of closed-door development and began to embrace techniques like MVP and A/B testing. Internet companies no longer shy away from mistakes but choose to embrace them. They learned how to make mistakes faster and correct them more quickly. The emergence of Agile Development has increased the evolution speed of internet products by an order of magnitude. When I worked at Tencent, it was common to iterate a version every week.

For Crypto games, this industry is just getting started, and PMF has not yet emerged. Founders will inevitably make mistakes in their pursuit of success. It is almost impossible for any team to perfect the token economy in a game on their first attempt; however, most games only have one chance to try and fail. In fact, games like Axie Infinity and Thetan Arena have already encountered the aforementioned issues. Taking SLP as an example, the initial design of this token aimed to explore new cold-start customer acquisition channels. After the rise of the P2E narrative, the SLP token economy has proven to be unsustainable in the face of a massive user base. However, if Sky Mavis wants to make changes, they need to be extremely cautious, as these tokens are real assets in the hands of users. A slight misstep could lead to a public relations crisis.

I believe that rapid iteration is extremely important for exploring new directions. On the other hand, as founders, they also need to be accountable to the community. So how do we resolve this conflict? Here, I propose an alternative idea.

In traditional games, there are different servers. For MMORPGs, each server is akin to a country, with its own independent economy and player ecology. Many Asian games, such as Legend, have spawned a plethora of 'private servers.' The publishers and managers of these 'private servers' are often independent organizations outside of the game developers. Different 'private servers' have different rules and even different business models. However, in the long run, the operation of Legend's private servers has flourished, and the revenue generated by private servers far exceeds that of the official servers.

Drawing on the operational model of Legend, as Crypto game developers, what if we only issue a main token representing the game's intellectual property and governance rights, while allowing third-party operators/guilds/traditional game whales to release their own auxiliary tokens to run their economies on independent servers? Consider the game itself as Layer 0, while publishers/guilds/whales act as Layer 1. For example, if YGG wants to participate in a game, they could establish a server and manage it with their own MIRYGG token, while MC, Perion, or other companies could adopt a similar strategy. Ultimately, the guilds would be responsible for setting the rules, such as what the entry thresholds are, how much players can earn, player unlock times, and anti-cheat rules, etc. This architecture has two main benefits:

• By allowing guilds and publishers to run their own instances, we create a dynamic of cooperation/competition among them, leading to faster global iterations to discover the best token economy. For example, if Perion's innovative design in revenue sharing succeeds, other guilds can quickly establish new servers based on that innovation.
• This architecture allows game developers to no longer be overly concerned about P2E market cap management. The primary focus of game developers should be to create engaging and attractive player experiences. If founders are preoccupied with handling people's doubts and complaints about the payback period, it will be difficult for them to fully invest in game development.

The Problems of NFTs in Games

NFTs are now at the core of almost every game economy, but I believe there is a systemic risk of abuse of NFTs in games. Our logic for investing in Crypto games is that they bind the interests of various roles in the ecosystem (players, developers, investors) through token economics. Ironically, under the existing model, incentives are largely misaligned. Due to aggressive token issuance strategies, developers and private investors primarily hold governance tokens, while guilds and players hold NFTs. In the long run, the development team has no motivation to painstakingly manage the market value of NFTs and auxiliary tokens. Since the team and investors do not hold Axie NFTs, its floor price has already dropped from a high of $400 to $15.

Solution: Games should build their economies around their core governance tokens. Players should be able to earn such tokens just like the founders, and the number of tokens rewarded should be related to their contributions (Axie Infinity is moving in this direction, trying to reward more players with AXS rather than SLP). Players' earnings should unlock offline, just like the team. Additionally, NFTs can be used more creatively in games. Vitalik proposed borrowing the concept of "soul binding" from World of Warcraft. Furthermore, 'permanent death' and 'honor medals' are also worth considering as NFT design mechanisms.

F2P is not perfect, but it is the only path to 10 million DAU

Web3 applications should promote healthy behavioral network effects through fair, refined, and linear value distribution. But currently, Crypto games do not do this. Taking Axie as an example, users receive zero rewards before obtaining scholarships (or spending thousands of dollars on NFTs). After obtaining scholarships, scholars receive certain rewards daily based on the amount of assets. However, their actual income growth in their lifetime only occurs once (when they obtain the scholarship), and there is no growth thereafter (perhaps from 50 SLP to 60 SLP). The high entry barrier is terrible for user acquisition.

Solution: Crypto games should consider a model of 'free-to-play' and 'pay-to-earn.' Every user should have a fair opportunity to enter the game. Their ability to earn rewards should be linearly related to their mastery of the game and their risk tolerance. PVP games built on fun and fairness, with a tiered competitive threshold, are a great example.

This design has several benefits:

• It allows more players to meaningfully participate in the game economy, rather than just serving as cogs fulfilling duties.
• It lightly integrates DeFi into the closed loop of players' gaming experiences, making investment and risk management part of the ordinary player's gameplay.
• For the sustainability of the game ecosystem, attracting real gamers is far more important than attracting speculators. Long-term retention relies on players, not those speculators and gold farmers.
• Combined with the previously mentioned 'governance token-centric game design,' this can greatly increase token demand. Because for most players with limited budgets, token investment is far more favored than NFT investment.

Do not sacrifice user experience for game economics

From a game design perspective, due to the poor coupling between economics and gameplay, players' gaming experiences are largely sacrificed. Taking TCG (Trading Card Games) as an example, there are generally two main components that constitute the core experience for players:

• Opening packs + building decks
• Playing with the decks

However, in most Crypto TCGs, this organic symbiotic relationship is artificially disrupted. Guild managers mechanically purchase treasure chests, draw cards, and then build decks around them. The managers then distribute the decks to scholars, leaving scholars with the sole task of playing with the given decks. This leads to a disconnection between players and the core game loop, and the playability of the game quickly diminishes. The pack-opening mechanism can be said to be the most critical aspect of TCG revenue generation. As a former guild manager, I can appreciate the joy that opening packs and resource allocation brings me. However, as mentioned earlier, depriving players of a complete gaming experience is unreasonable and will weaken the willingness of casual players to spend on the game.

Solution: Once again, it is emphasized that relying on sacrificing players' gaming experiences to stabilize the financial mechanisms of the game is unsustainable. Existing P2E games should couple and recombine core gameplay and economic mechanisms, attempting to achieve a better balance between 'play' and 'earn.' In fact, traditional games have faced similar issues. In the early days, F2P games designed their paid items to be overly powerful, which, while boosting sales, led to a poor experience for the vast majority of non-paying players, forcing them to quit and indirectly accelerating the death of the ecosystem. Modern F2P games have learned from the lessons of their predecessors. For example, in Genshin Impact, the game design allows both non-paying and paying players to have a complete experience, with paying players simply having a lower time cost in the later stages. Crypto games also need to undergo similar iterations. Introducing more non-paying players into the game is a trend, as they bring tremendous value in terms of CCU, free promotion, and long-term LTV. To make an interesting analogy, if every soccer ball costs $5,000 and every basketball costs $10,000, we probably wouldn't have a $700 billion sports market today. Skyweaver is a brave attempt at F2P Crypto gaming. Although Skyweaver has not yet revealed their token design, the project has clearly stated that 100% of the cards in the game can be obtained for free, without any payment.

Stake-based PVP may achieve great success

Due to high rental costs, taxi drivers often take very few breaks, and working non-stop has become commonplace for them. Crypto game players currently face a similar issue. Due to the continuous depreciation of NFT assets and opportunity costs, players feel obligated to "play" after acquiring assets. Not playing for a day feels like a loss; how many people can truly enjoy the game under such pressure?

Solution: The mechanisms that incentivize player contributions should focus more on rewards rather than penalties. Players should have the right to choose to join or exit high-risk, high-reward competitive games at any time. Another approach is to abandon the potential for NFTs to bring eternal returns. For example, like Thetan Arena, which increases the durability attributes of NFTs. Or simply completely abandon functional NFTs and design games around fairness and stake-based PVP. NOR, developed by Consortium9, is a pioneer in this direction.

Activating the Creator Economy with an Open IP Policy

BAYC is a great example of open IP effects. Similarly, for Genshin Impact's IP, miHoYo has also adopted an extremely lenient policy. miHoYo not only allows third-party developers to use Genshin Impact characters to develop games but even allows them to profit from derivative products. As a result, Genshin Impact quickly established an active and influential community. Compared to other web2 companies, I greatly respect their bold attempts. I believe every Crypto game should explore more deeply, not just allowing creativity but also incentivizing and rewarding such attempts.

Currently, all P2E economic models can be categorized into two types: 1. Ponzi models 2. Casino models. Clearly, both types of models are based on zero-sum games. On the other hand, the creator economy can be understood as a positive-sum game. High-quality content creators can capture higher returns, while ordinary content creators lose time costs; in the long run, the overall efficiency of the market continues to increase. If we can enable more players to become valuable creators and contributors in the game ecosystem, P2E may have a chance to establish itself long-term. MixMob is a great case; to empower players and creators, they are making many innovative and bold attempts. In MixMob, player-designed NFTs will be cleverly integrated into the P2E economic system.

In Conclusion

We are very optimistic about the long-term development of Crypto games, even though we have seen many issues in the industry in the short term. Just as in 2011, everyone questioned whether mobile games were a false proposition, current Crypto games are also facing challenges in public opinion. Regardless, we hope to explore uncharted territories with outstanding founders and lay a solid foundation for a new paradigm.