Interpretation of P2E Projects: Token Economy, Governance Models, and Challenges Faced

Author: Sherry Wang, NYU Violet Venture Club

This article interprets the paper SoK (Summary of Knowledge): Play-to-Earn Projects. The English version of the paper was co-authored by Tsinghua PhD student Jingfan Yu, Shanghai Jiao Tong University PhD student Mengqian Zhang, NYU Stern School of Business Professor Xi Chen, and Tsinghua University Professor Zhixuan Fang. The English version is published on arXiv (https://arxiv.org/abs/2211.01000). The Chinese version is written by Sherry Wang from NYU Violet Venture Club, with proofreading by Essie Yang.

This article discusses Play-to-Earn projects from the perspectives of economics, governance, and implementation, analyzing how blockchain technology can benefit Play-to-Earn projects through token circulation and decentralized governance. It classifies the implementation of Play-to-Earn projects based on varying degrees of robustness and transparency, and further discusses potential security and social challenges in future research regarding attacks, token economics, and governance.

Article Overview

01 Token Economics

02 Governance Models

03 Implementation Methods

04 Challenges Faced

00 Introduction

The development of blockchain, especially the emergence of Fungible Tokens (FTs), Non-Fungible Tokens (NFTs), and Decentralized Finance (DeFi), is witnessing the rise of the GameFi market. GameFi, short for Game Finance, operates on blockchain and aims to combine the fun of gaming with financial elements. Unlike traditional games, GameFi projects, relying on underlying blockchain technology, are characterized by system robustness, high transparency, wide token circulation, and decentralized governance.

Play-to-Earn (P2E) games are typical GameFi projects. As the name suggests, in P2E games, players can earn token rewards while playing. In-game assets (such as virtual land, characters, and character skins), currencies (such as gems, points, and coins), etc., can all be represented in the form of crypto tokens, and various DeFi projects provide secondary markets for their trading. Ownership information, transaction details, and the smart contracts of the games themselves are stored on the blockchain. Game companies can either use public chains like Ethereum directly or build their own private chains.

The P2E model has attracted significant attention from the market and investors. By September 2022, over 900,000 active wallets interacted with P2E game projects, sending over 20 million transactions. Axie Infinity is currently one of the most popular DeFi games, allowing players to collect, breed, battle, and trade digital pets called Axies while earning token rewards. The total NFT trading volume for this game exceeds $2 billion, peaking at 2.8 million monthly active users. However, on the other hand, the high returns and high entry costs of P2E games have also drawn criticism, with some claiming these projects exhibit economic bubbles, and others even labeling them as crypto Ponzi schemes.

As the first systematic review of P2E projects, this article will analyze P2E games from the perspectives of economics, governance, and security, and explore the challenges they face.

01 Token Economics

As mentioned earlier, P2E games typically have multiple tokens. For example, Axie Infinity uses a dual-token model with two main tokens: AXS and SLP, where AXS is the native governance token of the platform with a limited total supply, while SLP has an unlimited total supply primarily for player use in the game.

The tokens in P2E games serve several functions, including funding, payment, governance voting, incentivizing players, incentivizing investors, facilitating the trading of user-generated content (UGC), incentivizing user contributions to the system, and serving as stake proof for consensus, among others.

Table 1 summarizes the token designs of some popular P2E games. It can be observed that each project can be characterized by its token design, such as whether different tokens are used to incentivize players and investors, whether governance tokens can be obtained through gameplay, and whether there are tokens that cannot be earned through gameplay, etc. In the game, a single token can serve multiple purposes, and multiple tokens can be assigned the same function, allowing game developers to combine tokens with various characteristics to design unique projects that address the complexities of the gaming ecosystem.

02 Governance Models

Using project tokens as a medium, P2E games typically undergo an evolution from centralized to decentralized governance. Initially, game companies are the sole token holders, selling some game tokens to investors during the Initial Coin Offering (ICO) phase to raise funds. Generally, investors are willing to participate mainly because they expect the tokens they purchase to appreciate in value and yield high returns. On the other hand, if these ICO tokens also serve as governance tokens for the project, investors will gain potential rights to manage the game in the future.

As the game is built and operated, various game tokens are continuously generated and distributed among participants. Simply put, players can mint NFTs in the game and rent or sell them on the market, while investors can stake their tokens to earn interest. In this process, the system extracts a certain transaction fee from related economic activities and allocates it to a public account, which can be distributed to participants in the game ecosystem when needed. Besides ICO tokens, NFTs or other project tokens may also serve as governance tokens. Therefore, in the second phase, players will also hold governance tokens, but at this point, the project is still managed by the game company.

Ideally, the system will eventually evolve to the third phase, where governance is fully managed by governance token holders, including players and investors, delegating governance rights to the community. Participants will make decisions about the game's development through voting, such as whether to add a new feature to the game or how much prize money to set to incentivize its implementation. Thus, in this phase, players can additionally earn money by participating in game achievements. The original game company, as a governance token holder, will participate in project governance as a player or investor and earn more tokens through interactions with the game, staking tokens, or contributing.

03 Implementation Methods

P2E projects have various types of data that need to be stored, such as game protocols, player behaviors, user-generated content (UGC), asset ownership, and various proofs.

P2E projects can be divided into fully decentralized implementations and hybrid implementations that combine decentralization and centralization, depending on whether they use centralized servers. For the former, considering the storage costs brought by the growing game data, it is usually only required that all nodes jointly maintain key data such as asset ownership and UGC hash values, while other data is only stored by some nodes. For the latter, introducing centralized servers to store and process some data can facilitate game companies to continuously iterate and modify game designs. Moreover, since the hybrid architecture has much lower requirements for network throughput and data processing speed, it can provide better performance and gaming experience.

In addition, the original text also categorizes whether the project relies on public chains, whether there are permissioned access, consensus design, and the connections between subsystems, summarizing them briefly in Table 2. Different implementation methods have their pros and cons, reflecting the design principles of the project, such as trade-offs between decentralization, transparency, robustness, and performance.

04 Challenges Faced

Currently, the design and implementation of P2E games still face numerous challenges.

Security Challenges

Like other blockchain projects, P2E games may also encounter security issues. Accounts that are not highly decentralized and hold large amounts of funds (such as cross-chain bridges and public accounts in games) are vulnerable to hacking. A typical example is the attack on the Ronin chain (a private sidechain of Ethereum) relied upon by Axie Infinity on March 29, 2022, where the private keys of more than half of the consensus nodes were compromised, allowing the attacker to transfer a large amount of cryptocurrency to the Ethereum chain via the cross-chain bridge, resulting in losses exceeding $625 million.

Since game protocols are publicly deployed on the chain in the form of smart contracts, some design and implementation vulnerabilities can also be maliciously exploited by participants. For example, in Cryptozoon, players can purchase an "egg" in the game to hatch a ZOAN NFT with random rarity. To obtain the desired NFT, attackers check the rarity of the ZOAN obtained when triggering the hatching function. If the level is too low, they roll back until they obtain the rarest ZOAN. By combining randomness with rollback, attackers severely undermine the fairness of the game.

In addition to the aforementioned private key leaks and smart contract vulnerabilities, P2E projects also face risks such as ICO scams and inaccessible NFT content.

Economic Challenges

High transaction fees on the blockchain and potential users' unfamiliarity with blockchain technology may create barriers to attracting gamers. To address this issue, P2E projects can deploy games on public chains, private chains, and centralized servers simultaneously, building cross-chain bridges between them to allow players to join the game at a lower cost.

As more players join, participants will receive an increasing number of game tokens, especially those that can be easily obtained through gameplay and have no limit on total supply (such as SLP in Axie Infinity). This may lead to a continuous decline in token prices, potentially causing players to abandon the game collectively. To maintain stability, designers typically adjust game designs to reduce the supply of these tokens or introduce new activities to increase their consumption. More fundamentally, attracting different risk-tolerant investors and players with varying gameplay costs can be achieved through careful design of token models, exchange mechanisms, etc., thereby attracting more funds and users.

In the blockchain, users can easily borrow flash loans. Therefore, anyone can create multiple accounts and transfer tokens between them. These virtual transactions can generate huge trading volumes and cause price distortions: some statistical websites (such as CoinMarketCap) rank P2E projects based on trading volume, with higher trading volumes leading to better rankings and greater exposure to potential investors and participants. Additionally, the prices of a set of similar NFTs are calculated based on the average of their sale prices, and high-priced virtual transactions will affect the valuation of these NFTs. However, there is currently no effective mechanism to address NFT virtual transactions.

Governance Challenges

As mentioned earlier, P2E projects experience both centralized and decentralized phases. Currently, the proportion of projects that have fully achieved decentralized governance is low, and research is needed on when to transition to decentralization and the efficiency and fairness of decentralized governance.

During the centralized phase, decisions are primarily made by game companies, but there are tokens in P2E projects that are only owned by players (such as SLP in Axie Infinity). Since game companies do not hold such tokens, they may make decisions that harm the interests of these token holders. For example, game companies may update the game, restrict the use of these tokens, or issue new tokens to attract new players while devaluing existing tokens. Furthermore, most P2E projects do not clearly specify in their smart contracts when and how to enter the decentralized phase, and game companies may use decentralized governance as a gimmick while indefinitely delaying the time for power decentralization.

After entering the decentralized phase, P2E projects will widely adopt proposals and majority voting schemes, allowing any participant in the game world to propose and vote on matters, with their votes weighted according to the tokens they hold. In this process, challenges such as voting security and privacy, governance efficiency and fairness, and how to avoid the "tragedy of the commons" must be faced and resolved during the decentralized phase. For example, when allocating tokens from a public account, players holding a large number of tokens have the incentive to support decisions that benefit them, leading to the rich getting richer, which contradicts fairness.

Moreover, looking across the P2E market, many projects claim to allow players to truly own their digital assets in the game world. The implementations of these projects vary, but there is currently no clear definition of "ownership," nor are there standards for assessing the quality of project designs. Clear industry standards are urgently needed to help create safer, economically sound, and well-governed P2E games from the outset.

Column Author Profile:

The NYU Violet Venture Club is a club focused on blockchain and Web3 entrepreneurship and investment, guided by Xi Chen, a tenured professor at the Stern School of Business.

Disclaimer: The author retains copyright of this article. Please indicate the original source when reprinting. The articles by column authors at ChainCatcher represent the independent views of the authors and do not represent the position of ChainCatcher.