To build on the overview on web3 gaming from last month, we wanted to explore the basics of web3 tokenomics. GameFi is still a nascent sector, but it has already crossed $14 billion in global value, with some studies indicating future growth upwards of $50 billion by 2025. However, for this to succeed there needs to be continued refinement on how game tokenomics is structured to ensure sustainability.
Nearly every week, we see new crypto games released, but very few of them survive more than a few months. One of the main causes of this is poorly established tokenomics. Now this could be by design as we saw in late 2021-2022 with many DeFi clone type projects spiraling to zero. The more promising projects suffered from just not having a well-thought-out long-term strategy.
One of the core components of every blockchain-based project, including games, is tokenomics. This is especially true when it comes to investors who pay close attention to those sections of a project’s whitepaper to evaluate the game based on its tokenomics architecture.
So what are tokenomics and what are some key things to look for when evaluating a game? Let’s explore.
Tokenomics encompasses a variety of concepts, including playing, staking, trading, governance, and other mechanisms designed by the game’s development team. By implementing these concepts effectively, game developers can create a self-sustaining ecosystem that rewards players for their involvement.
One of the key benefits of a well-designed tokenomics system is the creation of a self-sustaining loop. This means that players are rewarded for their contributions, which encourages further engagement and creates a strong community around the game. This community can be a critical factor in a game’s success, as it can help to promote the game, attract new players, and provide valuable feedback to the development team.
To ensure the success of a game’s tokenomics system, it’s essential to carefully consider the various economic principles at play and how they interact with each other. This includes factors such as token supply, inflation, and distribution, among others. By understanding these principles, game developers can create a sustainable and fair system that benefits both players and the game.
There are essentially two main models we have seen projects build their tokenomics around, deflationary and inflationary.
Deflationary models will typically involve a fixed token supply, where the issuance of new tokens will decrease gradually over time. The decreasing supply usually pushes prices higher as tokens become scarcer. Bitcoin is the best example of a deflationary model.
Alternatively, an inflationary tokenomics model can be implemented which involves an unlimited cap of tokens. With this model, the token supply will only increase over time, but certain mechanisms can be implemented to limit inflation or potentially shift to create a deflationary system. A great example of this on Avalanche was the Treasure Under the Sea (TUS) token that was inflationary. The team put mechanisms in place to attempt to slow the inflation at various times through introducing different burning mechanisms for TUS.
Choosing between an inflationary or deflationary tokenomics model is an important decision for game developers as it can significantly impact the long-term sustainability of the game. Both models have their advantages and drawbacks, and game developers need to carefully consider the needs of their specific game and audience when designing tokenomics.
Inside of each of these models, there are two primary ways a team can approach slowing inflation. Throughout the last 18 months we have seen examples of all of these models and we would expect we continue to see teams incorporate these ideas into innovative ways to sustain a game economy.
- Buybacks: Periodically a team will purchase tokens from the market and burn them. This will remove a certain percentage of the supply and attempt to bring a better balance to supply and demand.
- Transaction Tax: Each transaction of a buy or sell would have a certain tax associated with the transaction. This tax would then be burned similar to the buyback model but occurs constantly.
Outside of the inflationary/deflationary models we witnessed the rise of the two (or even three) token system in numerous games over the last year. The two-token system aims to distinguish between a utility token and a governance token. For example, Crabada implemented this model with TUS as the in-game token and CRA as the utility token.
However, this system has faced some challenges. Both investors and players may struggle to grasp the advantages of holding one token over the other, and how they can benefit from the overall gameplay experience.
It’s crucial to educate users about the unique roles each token plays in the ecosystem. The utility token serves as a means of exchange for goods and services within the game, while the governance token represents voting power for decisions that impact the ecosystem’s future. By clearly defining these roles, users can make informed decisions on which token best suits their needs and goals.
It’s also essential to consider the potential risks associated with the two-token system, such as the possibility of the governance token becoming overvalued and negatively impacting the overall ecosystem. As a result, it’s important to carefully monitor and balance the distribution and use of both tokens.
Web3 games need to be easy to understand and play without the average player becoming confused or frustrated.
Sustainability (or lack thereof)
Designing and choosing the right tokenomics is not an easy task, and can easily distract a team by focusing more on how to value the token(s) instead of developing a fun and engaging game.
Developing an engaging and fun game is the primary goal, and it’s essential to prioritize this over simply focusing on token values. If the game fails to attract and retain players, it doesn’t matter how well-designed the tokenomics are. Therefore, it’s vital to focus on the gameplay experience and make sure it’s easy to understand and enjoyable for players.
While tokenomics play a crucial role in incentivizing player engagement, solely focusing on how much players can earn may attract a player base only interested in extracting value. This approach can lead to a death spiral for the token, as we’ve seen in some cases over the past few years.
To avoid this, game developers should design tokenomics that encourage engagement and reward players for their contributions to the ecosystem. This can be achieved by carefully balancing factors such as token supply, inflation, distribution, and other economic principles to create a fair and sustainable system.
In addition to basic tokenomics and sustainability, there are other factors that need to be examined before investing in a web3 gaming project. Some of these topics include evaluating the tokenomics distribution, token sale pricing and unlock schedule, a clearly defined governance model, more detailed utility examples, and reading and understanding the whitepaper. These topics are extremely important to evaluate as both a player and investor. In future articles we will take a look at each of these and how you can use the information to help guide your decision making process before investing or playing a new game.