Gaming Tokenomics 101
Gaming Tokenomics is Challenging
Tokenomics, a combination of "token" and "economics," refers to the design structure of tokens treated as assets on blockchain protocols. It is used to describe the design of tokens that trigger specific actions among protocol participants and provide incentives through a series of processes.
The emergence and growth of Web3 gaming projects like Axie Infinity in 2021, along with the volatile fluctuations in token prices, sparked discussions about the sustainability of blockchain gaming. Delving into gaming tokenomics proves far from simple, and comparing it with tokenomics in other sectors highlights its complexities. For instance, in decentralized finance (DeFi), token holders primarily participate as "investors" in a single financial service, while in blockchain gaming, token holders' roles divide into "investors" and "players." Consequently, defining various activities for participants within the gaming ecosystem and guiding them positively with tokens becomes considerably more intricate.
Comparing it to traditional Web2 games, where in-game assets like currency were handled in a closed environment, blockchain gaming necessitates considering the possibility of tokens closely interacting with real-world assets in an open ecosystem. This factor makes the utility of tokens to be unpredictable, which causes tokenomics design to be a much more challenging task.
Below, we introduce fundamental concepts essential to understanding gaming tokenomics.
Roles and Types of Tokens
Tokens in blockchain gaming serve distinct roles based on their utility and can be categorized as governance tokens, in-game tokens, and NFTs (non-fungible tokens).
Governance tokens primarily allow investors to interact with the ecosystem outside of the game. They play roles in fundraising, providing liquidity incentives, distributing governance participation rights, and more. Examples include AXS in Axie Infinity and SAND in The Sandbox, which are distributed among stakeholders according to predetermined vesting schedules and a limited total supply.
In-game tokens are tokens used within the game environment for player interactions. They function similarly to fiat currencies within the game, facilitating item transactions and rewarding player activities. To retain utility, these tokens frequently adopt a design where their supply increases with growing player activity. SLP in Axie Infinity and GST in Stepn are prime examples.
NFTs (Non-Fungible Tokens)
NFTs represent digital ownership certificates for in-game assets like characters, lands, skins, and equipment on the blockchain. These assets can be combined to create new NFTs through "breeding" or upgraded by combining in-game materials. Land NFTs in The Sandbox and Axies in Axie Infinity are prominent instances.
Faucet and Sink Mechanism
In the world of blockchain gaming, the adoption of Play-to-Earn (P2E) systems has often led to the widespread use of in-game tokens like SLP (Axie Infinity) and GST (StepN) with unlimited supplies. However, the failure to sufficiently sink these tokens based on user activity resulted in an overwhelming increase in token supply, price crashes, and a subsequent exodus of players. The chart below illustrates the issuance and sinking trends of the prominent SLP token, revealing an excessive daily issuance compared to the amount being burned.
SLP Token Faucet and Sink Trend; Source: Nansen
Subsequently, discussions on gaming tokenomics shifted towards emphasizing the concept of "Faucet and Sink" mechanisms - answering the crucial question on how tokens are generated and burned. While this concept is not entirely new, it becomes crucial in preventing the devaluation caused by the increase in in-game assets, known as "MUDflation," which has been observed in traditional games like MMORPGs. Implementing Faucet and Sink mechanisms ensures that in-game assets can be created and removed from the economy in a manner that does not negatively impact the in-game economic system.
Boffin, a contributor at Page One, has presented five components that constitute the Faucet and Sink mechanism: Faucet, Inventory, Converter, Sink, and Trader. Below are brief explanations of each element:
- Faucet: The way new resources are generated within the in-game economy, often triggered by specific player actions.
- Inventory: Defines the limits on resources that players can collect and own.
- Converter: A mechanism to change some in-game resources into other forms, which can also be considered as a form of token sinking (Sink).
- Sink: The process of permanently removing resources from the in-game economy, which includes examples like the durability reduction of weapons or the consumption of health potions.
- Trader: Involves exchanging resources with other players or NPCs, encompassing both player-to-player and player-to-NPC transactions.
Applying these elements to StepN, the gaming tokenomics flow can be represented as follows:
Illustration of GST Tokenomics in Stepn's Growth and Decline Phases; Source: DeSpread Research
Types of Gaming Tokenomics
Gaming tokenomics can be broadly divided into two categories: the "In-Game Economy" and the "Business" sectors. The former revolves around directly interacting with players through in-game tokens, while the latter involves interactions with project-related stakeholders, foundations, and investors through governance tokens.
Example of Web3 Game Framework; Source: DeSpread Research
Tokenomics types can be further classified into "Single Token Economy" and "Dual Token Economy" based on whether fungible tokens (FTs) are separated within each sector. In a Single Token Economy, one type of FT fulfills both roles, while in a Dual Token Economy, independent tokens serve distinct purposes in each sector.
Single Token Economy (e.g. Nine Chronicles)
In this approach, a single FT serves two roles and has multiple utilities within the gaming ecosystem. For instance, NCG (WNCG on the Ethereum chain) in Nine Chronicles functions both as a token for purchasing and utilizing in-game items and as a means for project funding or mining program rewards.
Dual Token Economy (e.g. Axie Infinity)
In a dual token economy, separate tokens fulfill distinct roles within each domain. For instance, SLP primarily serves as an in-game token for rewards and Axies' breeding materials, while AXS functions as a governance token for project funding, staking rewards, and ecosystem fund management.
Unraveling the Clues of Sustainability in EVE Online
The notion of shifting away from the P2E (Play-to-Earn) mechanism and embracing a sustainable gaming tokenomics is constantly being discussed. However, as of yet, no project has definitively solved these challenges. Unlike the closed economic systems of traditional web2 games, web3 games are characterized by an open economy, where tokens - the core assets shaping the in-game economy - are closely interconnected with external markets. Despite this difference, they still function as in-game currencies like those in Web2 games. One can find good examples of sustainable tokenomics from games that have maintained stable economies over long periods.
EVE Online, a space-themed MMORPG game launched in 2003, is a notable case in point. Its in-game economy revolves around the currency ISK, and since its launch, the total supply of ISK within the in-game economy has increased only by approximately eightfold, maintaining a healthy level of virtual economy stability.
Analyzing EVE Online’s example could potentially provide solutions for sustainable gaming tokenomics, especially in terms for designing the Faucet and Sink mechanism. As we conclude, we'll cite the characteristics of EVE Online's economy from DeSpread Research.
Features of The EVE Online Economy
Source: DeSpread Research
- Typically, MMORPGs are known to supply users with more in-game currency as their characters grow. However, this is not the case in EVE Online, where PVP (player versus player) combat is available almost everywhere. In the case where a character faces its own death, items are burned. This mechanism suppresses the rate of inflation.
- The game charges for monthly subscriptions, which are represented as in-games items called “PLEX”. Subscriptions cat act as a firewall against bots, which may produce excess ISK in the in-game economy.
- Since PLEX is treated as an in-game item, it is also possible to purchase it by earning ISK through gameplay. Players who want to play EVE Online for free produce ISK to buy PLEX sold by other players. This process has the effect of burning ISK in exchange for transaction fees.
- Almost all items are produced and traded by players, and the game focuses on controlling the amount of currency through NPC rewards.
- Boffin, ‘Designing Better Game Economies’
- Do Dive, ‘Do Dive into Web3 Games: Token Economy and Content Design’
- Do Dive, ‘Web3 Game Tokenomics Endgame’
DeSpread, founded in 2019, is a consulting firm specializing in Web3 & blockchain. Consisting of practice leaders with many years of practical know-hows in all fields of Defi, NFT, Metaverse & Gaming, Network Validation and Web3. DeSpread provides solutions and go-to-market strategies to grow the protocol by actively participating in the ecosystem.
Writer: Do Dive, Head of Research at DeSpread
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