Fun cannot save Web3 games

Author: Nick Metzler, The Old Yuppie

Hello, gamers and Web3 game developers:

My name is Nick Metzler. I am a token economics and governance designer at Framework Ventures, as well as an award-winning, lifelong game designer. I have designed board games like Jumanji and Hail Hydra that are played around the world, created challenges for CBS's Survivor, and recently (before Framework) outlined the initial token economic model for a 100% on-chain game.

In my spare time, I play games. Every type of game you can think of. Sports, escape rooms, video games, card games, casual mobile games, battle royale games, party games, tight 4-hour strategy board games, VR games, and more. Everything I do is about games. All the time. You could say I’m addicted. As a result, I have a unique perspective on the commonalities between many different types of games, including emerging media like blockchain games.

If you haven’t been living in the legendary Web3 rabbit hole for the past year, here’s a primer on blockchain games. Axie Infinity is one of the earliest cryptocurrency games, pioneering the concept of play-to-earn, almost like a job. Axie and similar games attracted massive attention globally (especially in the Philippines), driving a speculative bubble, even though their gameplay could be described as repetitive and headache-inducing.

Because Axie’s game mechanics revolve around token issuance and the creation of Axie assets, their supply greatly exceeded their demand, triggering a death spiral that diluted the prices of all tokens in their ecosystem. Critics scoffed that players wouldn’t reinvest their earnings because the games weren’t fun, leading to the saying "fun will save gamefi," as a sufficiently fun game would motivate players to reinvest rather than sell tokens.

I’m here today as an expert in designing fun games to say that making games fun may partially improve the sustainability of blockchain game mechanics, but it will never fully resolve most of their existing issues. In my humble opinion, builders should instead focus on solving economic problems, because a fun game, if poorly designed economically, will collapse, while a boring game, if well-designed economically, can iterate.

The real answer is to create a fun game that is also economically sustainable.

We already know how to make fun video games. Simply stuffing tokens behind fun Web2 games doesn’t solve the problems of blockchain games, because the motivations for fun are different. Just as the motivations for chess, soccer, and RPGs differ, the motivations for gameplay in blockchain games are also distinct from those in Web2 video games.

The motivation to play and the definition of winning create the feeling we call "fun," which is different from typical Web2 games. Web3 games are inherently financialized from the start.

What is fun?

To save you decades of immersion, here’s a brief but cheesy concept of fun.

Fun is a personal, subjective choice. It is a mindset.

If you believe something will be fun, it will be fun. If you believe something will be terrible or boring, then it is more likely to be so. No one can be forced to have fun, and everyone’s definition of fun is different, depending on their own life experiences.

Although individuals express fun differently, one fundamental universal form of fun in games is the idea that you can win the game.

If you realize you won’t win, the game becomes (usually) less fun—unless you’re a fervent destroyer. The more semantic definition of fun is the feeling of having meaningful agency to help define the outcome of the game (usually winning).

Currently, in P2E games, the idea of winning (and fun) is synonymous with making a profit upon exit. Clearly, not everyone can expect to exit with a profit, as that is unsustainable, which is why the industry narrative around blockchain games has shifted from "play to earn" to "play AND earn," refocusing on more traditional expectations of fun, with the money-making element being a secondary reward for playing well. But this hasn’t gotten us out of the predicament; the motivation to profit or play for value still exists.

In general, if the task of making money is effortless and profitable for players, that task will be completed en masse, and a market price for that skill will emerge, funded by payers and speculators. The rewards of that market rate can be expressed in internet value (ETH) or global reserve currency value (USDC). Thus, blockchain games are inherently financialized. Is this a feature? A bug? Or a fact?

If we want, we can make a fun game without all the profit motives. That’s a Web2 game. It has "Web2 fun."

Web3 game assets are inherently financialized due to their transferability, ownership, and undeniable impact on player psychology. This changes the definition of fun, which in this article will be referred to as "Web3 fun."

Price/value can be hidden, diluted, or obscured, so players focus on the "Web2 fun" of the game, but those profit-driven motivations will still exist. No matter how much "Web2 fun" the game itself has, the more predictable income players can derive from a Web3 game, the more it helps establish the level of focus on income.

In short, what makes "Web3 fun" is the fusion of the fun of Web2 games with a new type of fun in Web3 mechanics, which cannot exist without operating on the blockchain. These mechanics, which could be written into their own articles, range from the combinability of incentives, risk mitigation, skill-based risk-taking, data analytics in games, governance as a game, consensus-based decision-making with permanent and immediate consequences, automatically compatible actions, programmable bot players, and self-executing code of smart contracts. There may be many more, but we haven’t thought of them yet.

In my view, the short-term answer to creating a fair and fun Web3 game is to make the value accumulation generated by the game generally slow, with variable drops for high-value items, requiring low initial buy-ins from players, being pro-social, and having an exciting nature. For a more predictable value stream, like work, players need to have a substantial impact on the game’s network effects through UGC (user-generated content), referrals, governance, collaboration, or other commercial contributions… just like work. These parameters lead to the expected value of the game no longer attracting profit-seekers while maintaining the scarcity and high prices of rare assets (for secondary market income), and linking most of the value transfer to the growth of the network.

While I have the above vision for a viable Web3 game, the financialization of marketable blockchain assets does indeed lead to some key issues for all Web3 games (including the suggestions above), all of which involve sustainable economics as a throughline.

• Inflationary token releases devalue token holders and the entire ecosystem (slowly losing value is not fun).
• Players extract value by selling for profit rather than "reinvesting" in the game… because when a simple, low-effort skill is profitable, it will be repeated until the money runs out (it’s no longer fun when profits decrease).
• Due to the instant global market, game assets can easily be reflexively speculated up and down, exposing players to the real risk of losing everything (losing value quickly is not fun, but it’s very fun when they appreciate).

In short, there are risks of token/asset devaluation, speculative downside risks, and player/guild/bot extraction risks. Since these three issues are all economic in nature and affect the fun of Web3, sustainable economics must be the focus of our problem-solving, rather than focusing on "Web2 fun" and expecting it to sustain. Once we solve these issues, we can build more complex mechanisms for truly timeless Web3 games.

Fixing Token/Asset Devaluation

To understand the core of this issue, we need to identify what incentives exist that cause this effect. Traditionally, faucets in game economies bring value to players in the game, while sinks are the outflows of that value in these games. However, in Web3, these faucets provide value outside the game and require players to return that value after "free" issuance. This issue persists between fungible tokens and NFTs (assets), so solutions may be relevant.
On the surface, the problem is clear: as P2E games issue new tokens to players completing tasks (the faucet), the circulating supply of tokens continually increases. Historically, many of these players immediately sell their tokens, inflating supply and driving down prices. This behavior exists in both fungible and NFTs. Ultimately, this repetitive player behavior erodes confidence in the project unless buying pressure exceeds inflation and player-driven sell pressure.

To counteract this force, many projects support staking mechanisms, attempting to limit the circulating supply of AMM by indirectly raising prices through holding (i.e., not selling). To incentivize staking, the issuance of tokens belongs to stakers. In practice, anyone who does not stake will be devalued, while those who do stake remain at a stable level.

Other projects have attempted to unlock all their tokens at once and then burn tokens over time, trying to drive prices up. However, this strategy skips the main purpose of unlocking and distributing tokens over time: the decentralization of power among token holders. Theoretically, the more people hold tokens simultaneously, the more resistant it is to the economic impact of individual sales. Additionally, if government regulations come, it may provide a layer of safe cover.

Understanding the above, we can conclude that the core of the token devaluation problem lies in the method of token issuance and distribution: when and how should a project appropriately distribute tokens to those contributors who will add value to the protocol, game, or network?

So, how do you persuade players to continue holding distributed tokens within the ecosystem rather than exchanging them for liquid assets after they are distributed?

The answer is "make a great game/product that people want/need to use, and they must hold/spend tokens to use it." Tokens need to become a prerequisite for experiencing the product, whether through spending tokens or holding tokens. When demand increases, and more people discover the utility of the product, token prices will rise.

Here are some starting points for thoughts on solutions:

• Make "Web2 fun" games, because if players want utility, they must hold and use it; be able to play fun games related to it. This is obvious and completely aligns with the narrative that fun games will solve this space.
• Instead of fully unlocking tokens through a vesting schedule, unlock them in batches as new accounts enter the ecosystem. Let the tokens be unlocked but in a "new player" pool managed by smart contracts. Incorporate it into game mechanics by distributing tokens when purchasing battle passes. Since players spend money to buy a battle pass, they are less likely to discard tokens and will instead use them.
• Have the treasury directly own all tokens. Then use a vesting schedule within the treasury, so that the circulating supply on websites like coinmarketcap reaches the maximum supply, which will avoid price devaluation when new tokens vest. This is somewhat like a shell game, but it avoids the feeling of losing value over time. Place inflationary rewards in a "unlock" pool managed by smart contracts, as mentioned in the previous point.
• As part of game mechanics, stake fungible tokens in the treasury to increase the chances of high-value NFT drops.
• This point needs clarification. What if some weapons or armor could allow attributes to be increased for profit using fungible tokens? The money earned doesn’t need to be direct; instead, it can generate additional game-making materials or increase the chances of finding rare loot drops in the game (which can also be NFTs).
• Allow staking in certain locations within the game to generate additional game effects, such as tougher enemies or opportunities to find rare Easter eggs.
• By temporarily hosting smart contracts, allocate locked tokens to high-value players in other games, which will only activate when game actions are completed. This is an airdrop with no immediate selling capability and allows for profitable partnerships with the NFT community.
• Whenever players complete certain levels or even games, governance can be infused into NFTs. Alternatively, NFTs can be burned to grant additional governance.

In short, the pressure to buy, hold/stake, spend, and burn needs to exceed the pressure to sell, inflation/issuance, and minting. Currently, the way to reach solutions is to continuously grow your user base, relying entirely on more players to sustain your asset prices, but as we’ve seen, this is not sustainable.
Instead, integrate some or all of the above mechanisms to avoid token devaluation and handle token issuance more effectively. As mentioned earlier, a significant part of this issue also lies in strategic token distribution; the method of getting tokens into the hands of those who will benefit game development the most. We will revisit this issue in the next section.

Fixing Value Extraction

Play a game, get rewarded! This was the allure of the first wave of web games. This is the siren song of the first wave of Web3 games.
…but people have been playing games for free.

Think about it, people are paying to play games.

Of course, if people are rewarded, they will play games.

Then these people will leave after being rewarded when there are no more profits to be made (because they will find other ways to profit, like other games or… jobs).

These players profit by extracting value in the form of game tokens. Game developers hope these tokens will circulate within the game economy, powering the gaming experience. However, we have seen a somewhat obvious reality that players instead sell the liquid tokens for more stable assets, profits, and extract that value from the game ecosystem to pay their bills. The act of selling tokens instead of using them within the economy lowers the prices of all game tokens on the open market, creating a cycle of decreasing prices.

The setup of the first wave of Web3 game economies is such that anyone can generate profits by engaging in low-skill activities. Profits come from demand on the other side, such as new entrants or speculators betting on future appreciation. When that demand runs out, the death spiral begins.

As long as a low-skill activity is profitable, it will be repeated until it reaches market price. If that skill has no real demand, the market rate will approach 0.

Never underestimate the human drive to find the best way to profit. No matter how obscure the game design, as long as it is profitable, someone will find and exploit that path. This is reflected in bots; they are merely extensions of human desire, programmed into a repeatable process.

Banning bots is not a solution either. There will always be a way for bots to extract value from the ecosystem. Even if a game can remove most bots, a human team can easily harvest an ecosystem, finding the most ideal ways to make money. These teams are some of the earliest guilds, organized around earning as much as possible from games.

It’s worth noting that guilds themselves are not a bad thing. They are just a natural result of extractive economies, and their role will change with different economic models. The problem lies in economic design.

To solve this economic design issue, the first step is to decide what should be rewarded with value. Then design this economy with thoughtful faucet placements that provide value when these actions are taken. Sources of value can include:

• Contributing IP to the game
• Increasing the game’s visibility
• Adding content to the game
• Partnering with other games
• And many more, the sky is the limit here, but it’s important to understand that players will tend to reward their actions in the most efficient way.
• Perhaps these faucets are controlled by companies, DAOs, or governing bodies rather than by game mechanics or code.

Sinks must be placed where that value is realized. Value can be based on entertainment, finance, utility, power, game growth, real-world goods, services, and more. Sinks should convert the value of game assets into non-game asset value (such as enjoyment, governance, or social proof).

Game designers should be careful to avoid the trap of incentivizing sinks with pure economic value. This has already emerged/is emerging in the current wave of Web3 games. Take Axie Infinity as an example; it allowed their main assets to generate additional assets, leading to an oversupply of those same assets. Naturally, the prices of these assets fell due to oversupply, also known as NFT devaluation, dragging down the prices and assets of the entire game.

If a game continually expels its value without return, it will not last long. A low-skill, repeatable activity has no value to the game because there are no value recipients on the other side of the equation.

Paying only high-skill players also has its own set of problems. What value do these players provide to the game? If they are influential audiences, then they are providing cognitive value. While rewarding high-skill players may cost less than paying anyone and everyone, it is still essentially an extraction, with little value sent back to the game, unless all players spend all their winnings in the game.

Of course, paying for skill incentivizes players to improve their prowess in the game, but if you, as a player, lack skill, you won’t pay or play for long. Therefore, I personally do not expect the trend of "competitive payouts" to last long unless their funding comes almost entirely from PvP betting. This way, the game does not deplete its treasury funds through payouts; instead, payouts are provided by players, and the game can take a cut.

Perhaps the answer is simpler than we all realize. If the rate of value accumulation is extremely slow, and rare NFTs are indeed scarce because the materials/skills required to create/find them are time-consuming or expensive, NFTs will not inflate as quickly, and prices will remain more stable. Players will not be able to race on the profit flywheel because the money you earn is minimal. The focus will shift back to the fun of the game, and players may occasionally be lucky enough to receive legendary high-value loot drops. Game developers can still profit from taxes on high-value trades, while the core game loop is conducted with low-value materials in the economy.

If the above answer is not enough, here are some guidelines that can be used to manage value extraction:

• Effectively incentivize value accumulation to stimulate network effects
• Incentivize gameplay that can grow game content
• Reward managers who help grow the ecosystem’s value
• Reward not just thought shares. Attention wanes quickly. (s/o liquidity mining)

Speculation Fix…?

What causes speculation, and why is it a problem?

The reason is simple: high demand for limited goods supply, combined with open markets and the potential for price appreciation. During the upswing, speculation is great. Everyone loves to see the numbers go up, including game developers, who typically have a stake in the upswing with each secondary sale of NFTs. Thanks to the availability of data on the blockchain, enterprising speculators can (and do) leverage bots and algorithms to jump in when opportunities start to arise.

The forces driving speculation upward also drive reflexive downturns. For the casual gamers in the mass market, this is the scariest part; all you want to do is play a fun game, but next thing you know, you’re down $300 because you grabbed an old asset from a month ago while playing a different game you thought was fun.

So this is a tricky issue. Game developers want to speculate during the upswing, but it becomes a problem during the downturn.

In addressing this issue, I explored three directions.

1. The first approach is to somehow eliminate speculation entirely. Completely eliminating it would bring us back to where we are now with Web2 games. Both types of games will exist in the future, so blockchain games should leverage their differences to prove their worth.

That said, trying to eliminate speculation from blockchain games would be somewhat… absurd. In theory, designers could use non-transferable NFTs or non-blockchain assets, but wallets/accounts could be sold on the market. This would greatly reduce the liquidity of the sales process, which could reduce speculative bubbles, but it wouldn’t eliminate speculation entirely.

Non-transferable NFTs are essentially the skins that centralized game companies issue now, which cannot be transferred or sold. Ideally, non-transferable NFTs would be used for reputation in games, DAO governance in games, and social proof in the broader Web3 world, rather than sliding back into the one-way economy that exists in today’s video games.

2. The second approach is to use some economic levers to limit the space for upward or downward movement, such as guaranteed buybacks or guaranteed minting. Guaranteed buybacks of tokens or NFT assets may quickly deplete the treasury, accelerating the game’s demise. Guaranteed minting of tokens or NFTs may promote stability for a time, but when demand decreases, it will lead to token devaluation unless there is an equal burn.

If treasury funds are not used to buy back, how does the game guarantee a reduction in circulating tokens? Ideally, the game or company could capture the profits from all speculative activity rather than directly throwing it into the burning furnace on the other side. Perhaps a variable burn rate could be applied when players interact with a faucet that sends native tokens into the treasury, tracking token demand. The lower the demand, the higher the burn rate of the faucet itself. This would avoid expelling valuable assets from the treasury and effectively reduce supply in the market through natural behaviors in the game.

Additionally, the volatility of speculation can be reduced through lower rates or revenues, thereby diminishing the speculative excitement triggered by opportunities to make quick money through actions in the game (see: breeding Axies). While this won’t completely eliminate speculation, it may dilute the catalysts.

3. The third approach is to incentivize or suppress speculation on a subset of NFTs in the game by providing NFTs. Theoretically, this could prevent a contagion where a drop in the floor price leads to the collapse of the entire game. Choose a small subset of NFTs and give them value through extreme scarcity. Other NFTs in the ecosystem can be of low value and make up the bulk of the game/economy. Low-value NFTs may be numerous, effectively lowering the perceived value for everyone due to their availability. By relegating speculative NFTs to a corner of the economy, it may not trigger contagion to other parts.
   Since NFTs are inextricably linked to finance, we may never escape speculation in blockchain games. If everyone knows this from the start, perhaps it won’t be a problem.

However, in most cases, this financialization absolutely increases the risk of holding game assets rather than selling them after each play session. Unfortunately, this is negative for the stability and economic growth of games.

Speculation also creates strange incentives. If a game’s assets are overvalued, players who enjoy playing the game now have to choose between selling their assets for profit or keeping their assets to continue playing the game. This is quite strange. I’m sure we will see attempts to solve the speculation problem, but I’m not sure it will be eradicated.

The trickiest part of this issue is rooted in maintaining the motivation for speculation. The network effects of the game ecosystem and players in the game benefit from speculation. Speculation is only a bad thing during downturns because it carries very real risks of bringing a community or game to zero.

Furthermore, speculation is not unique to blockchain games. It will persist in every industry with NFTs and open markets. Since it is theoretically impossible to eliminate speculation, my suggestion is a wallet plugin that assesses the riskiness of the ecosystem by considering factors such as smart contracts, the time games have been on the market, price fluctuations, supply, reputation, etc., and warns consumers. This way, consumers can adjust their preferences based on their individual risk profiles while keeping the market fully open.

From an economic and game mechanics perspective, reducing player yield compared to other Web3 games should decrease opportunities for speculation. Perhaps some games will exist merely as speculative tools to attract traders, while robust games focused on long-term development will not attract speculators due to their lower profit potential. While this won’t completely solve the problem, as speculation cannot be stopped, it does leverage game theory and opportunity costs to mitigate negative impacts.

Bearish and Bullish

Games are already a risky endeavor. Many fun games fail and are unprofitable. Web3 games do not solve this issue; they add additional financial risks on top by allocating extractable value to players. This will mean the demise of many Web3 games. Web3 games can be reflexively speculated downwards, even with a super Web2-fun loop, great art style, killer marketing, and top-notch execution. An open economy is a nasty problem.

Speculation and high asset prices elevate games to stratospheric heights, which can then be distributed back to players in the form of payments. But money doesn’t appear out of thin air—it always comes from somewhere. The more money a game pays out, the more it must acquire through purchases or through secondary market speculation royalties.

While I hesitate over these three wicked problems of Web3 games, I remain optimistic. I believe there will be some amazing things happening in this space.

• The shared risks and shared ownership in peer-to-peer markets allow niche creativity to flourish.
• Composability and open-source code make development faster and safer.
• Interoperability extends value further, paving the way for specialization and universal intellectual property.
• Speculative opportunities attract attention and generate successful narratives.

Tokens are an incredible tool to overcome the cold start problem of network effects. Achieving network effects is valuable in itself, so it’s worth paying value to achieve it. Somewhere in the Web3 yield farming cycle, we forgot why we were paying value in the first place.

• Economically flawed boring games will zero out or be farmed by guilds.
• Boring games that can solve economic issues will have a chance for long-term development, but they won’t achieve glory; they will persist for years, which is despairing for developers.
• Fun games without a strong, sustainable economy will burn brightly in the speculative trash heap and then die.
• Fun games that solve economic issues will thrive and prosper, building strong communities and recognizable IP, even penetrating into culture.

The solution is not simply to make fun games. It is to combine fun games with sustainable economics, becoming a place that many enjoy over time, and offering the prospect of monetary rewards for a few—those who contribute to the game’s network effects.

We have not yet solved these issues, but that is what makes Web3 exciting. I hope this article sparks some thoughts for you about this nascent field. Games are currently at the forefront of sustainability in Web3, but the solutions we find here will permeate nearly every industry in the world—this is worth our continued effort.