What makes a sustainable (and sensible) crypto game economy?
A basic primer on game economy management for crypto games and how we get to sustainable crypto games.
In the first three months of 2022, crypto games saw a pullback from all-time-highs precipitated by concerns about the sustainability of Axie Infinity and broader market sentiment. As the crypto games industry slowly matures (and to be fair, we’re still in the very early stages), we can expect more shakedowns of poorly-designed games (if they make it to launch) and more experimentation in open game economy management as the industry evolves towards a sensible and sustainable model for crypto games.
Among the games that have stumbled, we see two common concerns:
In a pure P2E (Play to Earn) model, players don’t spend money (fiat or tokens) in the game, are rewarded with utility tokens for game activities, and cash out their P2E earnings in secondary markets. This only works as long as there’s another buyer who continues to believe that the token has value and is willing to buy it, and if one day that dries up, then someone is left holding the bag, ponzi-style.
It’s not easy to reconcile (fungible and non-fungible) token appreciation with in-game utility. If a token is used for in-game utility (upgrading/breeding assets), will the economy be sustainable if token price continues to appreciate (as speculative investors hope)? Or will token price stabilise once the game reaches some kind of steady state, and what happens to the attractiveness of the token (and future token price) then?
Both of these concerns point to key concepts in game economy management that might sound “new” to crypto but non-crypto game developers are already very familiar with:
The art of running a successful high-retention game comes down to sustainable game economy management. (It’s not as simple as issuing tokens and NFTs and “letting the market decide.”)
Much of game economy management is about managing inflation and deflation of in-game currencies (tokens) and items (NFTs), and that, in turn, is a matter of managing supply and demand (free market purists look away now).
Supply and demand are manipulated by faucets (how currency enters into circulation in a game - these can be sources to issue/mint/buy currency ultimately using new fiat, or activities that reward players with currency) and sinks (how currency leaves the game - these are things that players spend currency on in the game). Faucets and sinks are also applicable to items (or NFTs), e.g. looting mobs, crafting items and breeding pets as activities are item/NFT faucets, while ways in which players can expend items or burn NFTs are item sinks.
Beyond this, the basic principles of economics apply - oversupply of items (supply is greater than demand) leads to a drop in perceived value of items and item price deflation while undersupply leads to price inflation. Meanwhile, oversupply of currency (too much money chasing a limited number of items, or money supply increasing faster than the rate of item growth) leads to item price inflation and a drop in the currency’s perceived value (depreciation), while undersupply of currency leads to item price deflation and currency appreciation.1
While we’ve seen (and survived) wild swings of price volatility in non-game token markets where activity is limited to buy/hold/sell, excessive supply of or demand for in-game currency (utility tokens) and items (NFTs) leading to large changes in perceived value and price undermine playability (the ability of players to perform/sustain activities within a game that are part of story/character/item/skill progression which make the game fun to play) and therefore user retention of a game. This can kill a game, especially a (PvE or PvP) multiplayer game when player liquidity (that there are many other players to play with) is also a factor. The situation for crypto games becomes even more complicated when there’s an incentive to earn currency and not spend it in the game (i.e. when the P2E incentive is too strong), and when there’s an incentive for token and NFT prices to appreciate without limit (i.e. the speculative price appreciation incentive is too strong).
These issues contributed to the large correction in Axie Infinity’s token prices - too many highly productive P2E-motivated players earning SLP and not spending (oversupply of SLP), not enough sinks for SLP, oversupply of Axie NFTs with no way to burn/sink NFTs, etc. - which was extremely well covered in detail in Naavik’s analysis of the Axie Infinity economy. As supply of SLP continued to increase without adequate sinks, the market price for SLP fell, reducing the income of P2E players vs regular jobs and therefore their incentive to play, and reducing the inflow of new players. The lesson here? When the main motivation to play is to make money, players only retain as long as you pay them more than their opportunity cost.
Based on the above principles and pitfalls, what would I look out for in a sustainable crypto game economy (besides a team that’s experienced in traditional game economy design and management)?
Does the game have sufficient levers that can be used to finely balance the economy and does the developer know how to use them? These levers include currency reward/loot drop rates, parameters in item crafting, pet breeding and other activities that the developer can adjust to produce/consume more or less currency/items in the economy, and parameters that might affect the utility and value of items in the game, bearing in mind that this might mean nerfing much loved items/characters.2
Does the game have sufficient (and well-balanced) faucets and sinks to balance production and consumption activity in the game? Faucets for earning utility tokens and minting NFTs are often abundant and dominant in P2E games, with earning used as an incentive to bring players into the game. But in many cases, these faucets are not balanced by adequate sinks - ways for players to spend their earned tokens, things for them to buy or activities that consume tokens that provide players with value (fun, vanity, progression, etc.) in the game, so that they’re not just cashing out their earnings (which keeps those tokens in circulation, resulting in item price inflation and token depreciation as the earned tokens accumulate in the economy).
Are there enough players spending in the game and is there a balance between spenders and earners? A game that over-focuses on P2E will have a vast majority of earners playing to accumulate (and cash out) tokens without a proportionate number of spenders to consume/expend the growing supply of tokens. How well does the game appeal to players who want to play for fun (P4F) and are willing to spend in the game to increase their fun? Is there an equilibrium state (and optimal game design) where a proportion of players play for fun, spend in the game and enjoy it, while a proportion of players play to earn by undertaking earning activities that provide value to the whole game and community (including spenders)?
In each of the above, I haven’t said what the right balance or proportion is because, in all honesty, we don’t know yet. Despite that, I believe it’s solvable (by learning more about players’ in-game motivations and behaviours, adjusting levers and iterating towards a balanced game economy) and some experienced developers are beginning to figure this out.
So what’s the long game for sustainable crypto game economies?
One scenario is that crypto becomes a valuable add-on to traditional games. A sustainable crypto game still needs to have a fiat economy or a crypto economy supported by “traditional players” who play and spend for their own enjoyment, unperturbed by the earning incentive, while P2E becomes a feature in the game which some proportion of players partake in, creating value for spenders in the process. These complementary populations of spenders and earners enable value exchange within the game, perhaps precipitated by a DAO-based emergence of new in-game roles3, and with earning built into the game world/narrative. How much headroom this mode of (P2E) play has to make an impact on a game’s overall financial outcomes depends on how far the balance can be pushed towards P2E while maintaining a sustainable game economy and how much consumption the P4F population can absorb. We’re still in the process of figuring out how big this can be - maybe 1.1x, maybe 10x. But remember that even a 10% gain in a $200B industry is no small change.4
Another scenario is a transition from P2E to Play-to-Own (P2O). As Alpha Finance points out, “games that depend solely on the P2E model will not last long if more users aim to extract money from the system than invest in the game. This signifies that "growth" is not the absolute solution towards the sustainability of P2E games.” Developers can build sustainable demand by seeking to create intrinsic and emotional value and utility in owning, upgrading and expanding in-game NFT assets, with said utility and value validated by external market demand, and a community that truly loves the game and is willing to invest in the game to receive emotional gains (much like traditional games), and that desires to be long-term participants in the economy with NFT assets as representations of their ownership and participation, like we see in successful NFT communities and even the traditional art market.
One last scenario I’ll leave you with is that the most successful crypto games, essentially self-contained crypto economies, evolve into platforms/ecosystems aggregating populations of players across different games/activities and value exchange is sustained across different games/activities within the ecosystem - a model that games like Treasure/Magic, Sandbox and even Axie Infinity seem to be shifting towards, and perhaps one for a future article.
This quickly becomes an oversimplification when we introduce an open currency market where currencies are traded for each other. Economic models tend to make simplifying assumptions, but insofar as game economies are simplified simulations of real world economies and supply and demand of currency and items to be used in the game are the key drivers of their perceived value in the game, the model suffices to point out the more basic complexities.
Again, free market purists and Central Bank haters - look away.
If the game becomes governed by a DAO, the community of players may move to create more and new in-game roles that deliver value to the game/community and are rewarded for it, prototypes of which could be item crafters like blacksmiths, tailors, etc. Think traditional NPC (non-player characters) roles fulfilled by P2E players.
Mordor Intelligence estimates the global gaming market to be worth $198.4B in 2021.