Web3 Game Tokenomics: Extrapolating the Future From the Past

1. Web2 to Web3: Shifting from Closed to Open Economy

While fun is certainly important in game development, designing a sustainable game economy is equally important. A fun game attracts players, and a well-designed game economy prevents players from churning. Ragnarok Online suffered from churn after hyperinflation of its game currency, the Zeny, crushed the value of the currency. MapleStory, EVE Online, and World of Warcraft, on the other hand, have enjoyed stable in-game economies for decades. Drawing from these experiences, game companies have gathered expertise to build a stable game economy.

Yet, the Web3 gaming environment is significantly different from Web2—meaning that the economic framework built for Web2 games may not work for Web3 games. In the Web3 environment, there are new types of stakeholders, and assets and goods that have previously been controlled strictly within the games now flow outwards. In this article, we will first look at the challenges of building Web2 closed economy and Web3 open economy. From there we'll move on to discuss how Web3 tokenomics models have evolved to address such challenges. Lastly, we'll take a shot at predicting the future of Web3 tokenomics and conclude with a few suggestions.

2. From Web2 to Web3: Challenges in Building an Open Economy

Above, we briefly described the difference between a closed economy and an open economy. The traits unique to Web3 are what need to be thought out when building an in-game economy since game companies have not incorporated them into the Web2 economy.

First, game companies are asked to ensure user ownership in the Web3 gaming space. In a closed economy, game companies own the game assets while users "borrow" them. In an open economy, the users are guaranteed full ownership of the assets. This allows users to monetize their assets, create secondary content, and more.

Second, unlike closed economies, it is difficult for game companies to have control over currency outflows in an open economy. In Web2 games, a well-managed supply and demand of an in-game currency prevents inflation and devaluation. In Web3 games, investors emerge as a new parameter, opening up possibilities that the currency deviates from the way it is initially designed in the Web2 context. Therefore, game companies need to incorporate potential currency outflows by investors in the design of Web3 game economies and devise preventive measures.

Lastly, game companies will have to relinquish control over the in-game economy. In Web2 games, game companies maintain strong control over the in-game economy, acting as a central bank and supplying and balancing in-game items and goods. While game companies in an open economy are still responsible for the development of the game and the initial design of the in-game economy, subsequent economic decisions are subject to the democratic process of governance.

In the following chapter, we'll explore how game tokenomics models have evolved to respond to these challenges.

3. Evolution of Game Tokenomics Models

3-1. NFT-Based Tokenomics Focused on Ensuring Item Ownership

<Cryptokitties, the first blockchain game and NFT-based model | Source: Cryptokitties>

First, the NFT-based model was the go-to strategy in the nascent stage of blockchain games, such as Cryptokitties, in 2017. In 2017, Ethereum's DApp ecosystem was not yet vibrant, and the notion of NFT was just emerging. The importance of providing users with item ownership outweighed gameplay or in-game economics. With the arrival of CryptoKitties in 2017, along came the games that began to incorporate NFTs in their games, including Sorare, a sports game where player cards were made into NFTs.

The mechanism of the NFT-based model is not complicated. The structure is simple because there is no FT (Fungible Token) involved, and the primary economic activities revolve around NFTs. The rest of the user activities, e.g., breeding and item trading, rely on mainnet currencies such as ETH. This is because the notion of issuing native FTs in the games did not even exist at the time, giving the projects no other options than using the existing mainnet currencies as the in-game currencies.

The advantage of the NFT-based model is that it lessens the pain of designing and managing the in-game economy. It not only saves the game companies resources to build the game economy but gives them control over the in-game currency, while users are granted ownership of the items. Also from the user's perspective, the inclusion of the mainnet currency in this model simplifies the process of trading and upgrading their NFTs.

Yet, the limitations of this model are also clear. First, it doesn't fully guarantee users’ ownership to the in-game currency. The only thing users can own is the item, or NFT, and the ownership of the in-game currency still lies with the game companies. Secondly, this model is highly exposed to external variables, notably the price of the mainnet token. The absence of native FTs and an economy built around them puts it in a vulnerable position to external factors like price fluctuations in mainnet currencies like ETH. Also, the business model resembles collectibles sales, e.g., PFPs, making it difficult for game companies to create a steady stream of revenue.

<Sorare and Gods Unchained: NFT collectible games>

The emergence of NFT-based game tokenomics precedes the arrival of individual game companies’ own tokenomics. The model pioneered the collectibles market and has since given rise to numerous PFPs and collectibles projects as well as collectible-based card games, most prominently Sorare and Gods Unchained.

The NFT-based game economy design remains a viable option for Web2 games that are reluctant to introduce in-game tokens. For example, Npixel, the developer of the Gran Saga, which launched its metaverse platform METAPIXEL on Aptos and has various games in the pipeline, said it currently has no plans to issue tokens yet. Although the company has not provided any specific reasons, opting for this model reflects its cautious approach to Web3 games, likely due to the lack of solutions to the problems of the open economy at this point.

3-2. Single Tokenomics: Guaranteeing Users’ Ownership of In-Game Currencies

Despite the limitations to building an in-game economy, CryptoKitties' NFT-based game economy captured significant attention in the Ethereum ecosystem. Indeed, the success of CryptoKitties proved the potential of blockchain gaming. A series of games followed suit, namely Axie Infinity (previously single token economy with $AXS), Decentraland ($MANA) and Sandbox ($SAND).

As apparent from the name of the model, the tokenomics revolves around a single token that acts as both the utility and governance tokens. Users earn tokens in the games or buy tokens on exchanges to participate in economic activities, e.g., purchasing and leveling up in-game items (NFTs). At the same time, token holders participate in decision-making in and outside the games.

The leading advantage of this tokenomics model lies with its simple structure. It simplifies game development and maintenance for game developers and provides a better gaming experience for users by allowing them to have a good grasp of the economy and currency of the game. Despite such benefits, however, this model did not manage to dodge the inherent tradeoffs of an open economy, including asset outflows. In Web3 games, investors are free to move their tokens out of the game. As a result, the price of the token increases when the game is successful or the market is bullish whereas the value of the token plummets when the game falls out of favor or the investment climate sours. These external factors cause the users to lose their money and leave the ecosystem.

Despite such limitations of this model, many popular games are sticking to it. Casual games, in particular, tend to opt for this model due to their relatively short lifecycle and importance of accessibility of these types of games. For example, hyper-casual games like Arc8 have seen the involvement of investors continuously causing volatility in the token price. But Arc8 still maintains over 10,000 daily active users (DAUs), largely driven by its continued focus on simple gameplay instead of a complex revenue structure. Alien Worlds is another good example where it has a burn mechanism in the game, known as the Sink, and showcases how the game's lifecycle can be extended even with investor involvement.

3-3. Dual Tokenomics: Minimizing Asset Outflows

The dual tokenomics model was created with the intention of addressing a major limitation of the single tokenomics: asset outflows. In a single tokenomics model, asset outflows were rampant, turning the tokens into a type of investment vehicle for investors or play-to-earn (P2E) players. In response, Axie Infinity introduced the $SLP-$AXS dual tokenomics.

Prior to the introduction of $SLP, Axie Infinity used to have a single token economy. Along with the growing popularity, selling pressure began to mount on $AXS, the token utilized for both governance and staking rewards. As part of mitigation, Axie Infinity adopted its first dual tokenomics model in August 2020 with the introduction of its in-game token, $SLP. After observing the success of Axie Infinity in 2021, many other games followed suit, and dual tokenomics became prevalent across Web3 games.

The dual tokenomics model leverages two tokens: a utility token and a governance token. Utility tokens are in-game tokens that can be acquired within the game and are mainly used for item trades. Governance tokens, on the other hand, are tokens that grant governance voting rights. Projects tend to endow governance tokens with various other utility functions, e.g., breeding, NFT lottery, and payments, to reduce the nature of being securities and selling pressure. There are projects like Crabada that operate three tokens, but it appears to be a variation of dual tokenomics as the game uses two in-game tokens and one governance token.

Utility tokens are primarily supplied from within the game and thus have no pre-set amount of supply and are inflationary whereas governance tokens typically have a fixed supply.

The dual token economy is designed to minimize the impact of token price fluctuations on the economic activities in the game. The advantage of the dual tokenomics is that it separates the supply and demand between in-game users and investors to prevent in-game asset outflows. Galaxy Digital Research once dubbed this strategy as "currency distancing." Currency distancing allows in-game users to enjoy the game without being heavily impacted by price fluctuations caused by investors, while investors benefit from investing in the game.

It too has limitations though. If both utility and governance tokens are listed, the risk of a single token economy that an external factor may disrupt the in-game economy comes back into play. Perhaps most illustrative of this is the unraveling of Axie Infinity and STEPN. In the case of Axie Infinity, both $AXS and $SLP were listed on a centralized exchange (CEX) but the game was faced with a surge in outflows after the number of new users started to trail. Eventually, this has brought Axie Infinity's in-game economy to its knees. Similarly, STEPN listed both $GMT and $GST, but when growth stalled, the in-game economy swiftly crumbled.

The significance of the dual tokenomics model lies in being the first to propose a structure that separates governance and in-game tokens, while also significantly reducing in-game asset outflows through currency distancing. While it is true that listing both in-game and governance tokens led to the collapse of the in-game economy in cases like Axie Infinity and STEPN, it is important to note that it provided game companies with an alternative to single tokenomics. As a result, even the earlier released games have embraced the idea of a dual token economy.

Case Study League of Kingdoms: Endowing Governance Tokens with New Utilities

League of Kingdoms is noteworthy in that it is trying to solve the problem of the lack of utility of existing governance tokens. It provides ways for governance tokens to participate in the in-game economy.

<League of Kingdoms Profile | Source: Coindesk Korea>

League of Kingdoms is a Web3 MMO 4X strategy game released by Nod Games in 2021. Users engage in gameplay by constructing their own kingdoms, establishing alliances with other kingdoms, producing troops, and invading other kingdoms to expand their territories. This is similar to popular Web2 games like Rise of Kingdoms and Clash of Clans.

At launch in 2021, League of Kingdoms adopted the single tokenomics, implementing a single token called $LOKA. After seeing the success of Axie Infinity and STEPN, however, the company realized that the limited emission of $LOKA was not enough to reward users. Subsequently, it announced the introduction of $DST, although the schedule was delayed amid the doldrums of Axie Infinity and STEPN. The project then worked on improving the utility of $DST and $LOKA, finally introducing $DST in April 2023.

$DST not only levels up Drago (NFT) but provides various utility functions such as VIP shops and Drago upgrades. It expanded the utility of Drago by allowing users to burn Drago to earn Dragon Souls, which in turn can be used to upgrade Drago. $LOKA, which is used to train Drago, has enhanced its in-game utility by adding a 30% discount on in-game purchases paid in $LOKA.

<The Pledge of LOKA (Ranking) | Source: League of Kingdoms

One of the standout features of League of Kingdoms is $LOKA pledging. The pledge system is designed to allow $LOKA holders to lock up their tokens to give their continent (server) additional resources, monster regen, troops buff, and other benefits. Continents that lock up more $LOKA than other continents receive more rewards. This bears a similarity to Bribes on Curve.

League of Kingdoms set a new precedent by introducing a dual tokenomics model, where the utility of the governance token, $LOKA, was enhanced. It expanded the usage of $LOKA while simultaneously increasing the influence of the token on the in-game economy. The primary implication of this approach is the introduction of new utilities in governance tokens.

3.4. Platform-Ingame Tokenomics: The Dawn of Multi-IP Onboarding & Creator Ecosystems

The platform-ingame token economy first came about in 2017 to meet the needs of Web3 native projects to build a creator ecosystem. Initially, the model started with the intention of building a game publishing platform. Platforms, such as Enjin, Gala, and ImmutableX, began to adopt platform tokens to build an ecosystem of game content creators. Over time, some of these platforms even built their own mainnet.

It wasn't until 2022 that this model rose to prominence, as a bulk of Web2 players initiated Web3 projects. The meteoric rise of WeMade's Mir 4 in 2021 sparked a wave of Korean Web2 game companies to move into Web3 gaming. Gaming heavyweights, namely Netmarble, Com2uS, and Neowiz, introduced platform-ingame tokenomics to leverage their stellar IP lineups.

The platform-ingame tokenomics provides a way to link one platform token with the in-game tokens of multiple games. While dual tokenomics is characterized by a 1:1 correspondence between governance and utility tokens, this model is characterized by a 1:N correspondence. In this model, the platform token acts as both the reserve currency and an upper-tier token that governs all the in-game tokens.

Depending on the utility of the platform token, the platform-ingame tokenomics is divided into two types. The first type is when the platform token functions as a publisher token, where the main utilities typically include cashing out through an in-game token exchange and purchasing NFTs or game items. Some of the well-known examples of publisher tokens are Web3 native tokens such as GALA, TreasureDAO, ISKRA, and platform tokens of gaming companies like MarbleX and Neowiz.

The second type is when a gaming platform turns into a mainnet. In this case, the platform token serves as a publisher token and provides an additional utility of securing the network. Examples of such mainnet tokens and platform tokens that have transitioned into mainnet tokens include ImmutableX, WEMIX, and XPLA. This model augments the value chain of Web2 gaming companies as mainnet platforms get to manage infrastructure in addition to games, publishers, and platforms, which publisher platforms used to manage.

Users earn in-game tokens by playing games and can convert them into platform tokens and sell them on exchanges to cash them out. Conversely, users who wish to purchase in-game items can buy platform tokens from the exchange and convert them into in-game tokens within the platform. This way, the platform-ingame tokenomics model helps build and run an in-game economy through the organic interaction between platform tokens and in-game tokens.

The advantages of this model are threefold. First, the platform-ingame tokenomics benchmarks the currency distancing strategy of the dual tokenomics model. For example, MarbleX requires users to exchange their in-game tokens for a bridge token called MBXL, which should then be converted back to MBX for cashing out their in-game tokens. This makes it harder for funds to flow out, ensuring that most in-game tokens stay within the game.

Second, Web2 game companies can leverage multiple IPs to converge the value of each game on the platform token. In-game tokens, on the other hand, are exchanged at a set exchange rate with the platform token, ensuring the stability of the in-game economy. Wemix's Mir 4 is a good example of this. Despite the high price volatility of the platform token WEMIX, the in-game tokens DRACO and HYDRA are exchanged for WEMIX at a fixed exchange rate, minimizing the impact of WEMIX price fluctuations on the in-game economy. As a result, Mir 4 has maintained a stable in-game economy with 240,000 concurrent users for nearly a year after its launch.

Third, it enables the creation of a creator ecosystem, which is the core of Web3 games. Web3 games pursue community-driven projects from the bottom up, rather than top-down development by a centralized developer. This model facilitates the establishment of an ecosystem fund through the platform token, enabling the bottom-up development of game projects. Web3 native projects like IMX and GALA are putting this into practice, each launching $250 million and $1 billion ecosystem funds to train game developers and attract game projects.

There are limitations to this model. The first limitation is the transaction delays caused by running multiple games on one platform. As a result, Web 2 game companies have opted to run each game on their individual private chains. This approach has been labeled as Web 2.5 and has faced criticism for potentially undermining the fundamental Web 3 value of user ownership.

Another limitation is the close correlation between the value of platform tokens and the popularity of games. If the value of a platform token is primarily determined by popular games, the in-game tokens of less popular games may be overvalued compared to the number of users or may also be exchanged at excessive exchange rates damaging to the in-game economy. In essence, the reliance of the value of platform tokens on popular games can shrink the economy of less popular games.

Currently, this model is standard among Web2 games, particularly among South Korean game companies. Given the extensive IP portfolio of established game companies, newcomers would also find themselves inclined to choose the platform-ingame tokenomics model, allowing them to leverage all their IPs.

Case Study Wemix: Leading the Transition to Platform Among Web2 Game Companies

Wemix, a game platform developed by a large Korean game company, WeMade, initially operated on the Klaytn sidechain, but later upgraded to Wemix 3.0 and introduced its own mainnet.

Here’s how Wemix is structured. Firstly, Wemix operates its own main network where its base currency $WEMIX exists. Within the mainnet, platforms like WEMIX.FI (DeFi) and NILE (DAO•Guild) create demand for $WEMIX. There is a sidechain called Play Chain on top of it, where each game is connected in the form of a private chain.

Players earn off-chain assets by playing WeMade’s various IP games such as Mir4 and Mir M. Off-chain assets are exchanged for in-game tokens, which are then exchanged for pTokens on the Play Chain. These pTokens ($pWEMIX, $pWEMIX$) can be pooled, swapped and then transferred to the WeMix mainnet for cash.

Looking at the in-game tokenomics of two of Wemix's most popular games, Mir 4 and Mir M, Mir 4 implements a daily cap of 1 million $DRACO to restrict the excessive outflow of its off-chain core asset, darksteel. This measure helps prevent reckless outflows of in-game goods. DRACO is exchanged for $pWEMIX using a unique exchange formula called DERBY, and $HYDRA, the investment token of $DRACO, is exchanged for 20+𝛼 $DRACO and the off-chain asset Septaria. $HYDRA is used for governance and DeFi on Mir4.

Mir M showcases more advanced tokenomics than Mir 4. In Mir M, there is an in-game token called $DRONE, which is similar to $DRACO. Players can exchange 1 million $DRONE for a daily darksteel chest. They can also stake $DRONE and $HYDRA to participate in DIVINE staking to earn a token called $DOGMA. $DOGMA is the governance token of Mir M and gives players voting rights. With voting rights, players can spawn boss mobs on their servers, organize valley capture battles, and engage in Sabuk Castle Siege.

Despite the fact that Mir M's tokenomics is more sophisticated than Mir 4's, Mir 4 has about five times the number of concurrent users as Mir M. What set them apart is considered to be the quality and the level of refinement of the games. The rushed release of Mir M after the wild success of Mir 4 is believed to have resulted in a lesser degree of fun and overall quality of Mir M compared to Mir 4.

Case Study MarbleX: From Platform-Ingame Tokenomics to Platform-Platform-InGame Tokenomics

Another large Korean game company, Netmarble's MBX is a platform token issued on the Klaytn mainnet. The upper-tier token, $MBX, can be swapped with a bridge token called $MBXL, which can then be swapped with in-game tokens (MBX <> MBXL <> in-game tokens). In a way, the structure looks similar to Wemix, but they differ in that MarbleX does not utilize MBX as the mainnet token.

Netmarble's games are developed by each of Netmarble's developer units. For example, Netmarble Neo and Netmarble N2 have developed Second Country, A3: Still Alive, and Meta World. Each of them has their own in-game token economies and MBX serves as the higher-tier token for all of them.

Recently, MarbleX announced ITU Union Tokenomics, signaling a major tokenomics overhaul in July. ITU Union tokenomics is a design that links each in-game off-chain currency to the value of $ITU. Under the MarbleX platform, there is a subsidiary platform that uses $ITU as the base currency, and under the ITU platform, there are sub-sub-units such as A3: Steel Alive and Meta World. The specifics of MarbleX's platform-platform-ingame tokenomics will be unveiled soon at the upcoming “Xangle Blockchain Conference: Adoption 2023” in July.

4. The Future of Web3 Game Tokenomics

Above we discussed the challenges of building a Web3 game economy and the evolution of Web3 game tokenomics to solve them. In this last chapter, we’ll explore the potential applications of the tokenomics models and the hurdles and solutions for building tokenomics moving forward.

4-1. Different Genres, Different Tokenomics

It doesn’t seem worthy to discuss the superiority of tokenomics models. All of them can be viable options for game companies. Over time, the choice will increasingly depend on the genre and nature of the game, as well as the number of IPs. The NFT-based model is a valid option for Web2 game companies and game projects that are not comfortable with the idea of issuing FTs but open to issuing NFTs. A recent example of this is Npixel's Web3 game ecosystem project, METAPIXEL, which does not include tokens as part of its plan. Collectible card games that do not consider issuing tokens may also adopt this model.

The single tokenomics also seems to be a valid model for casual games with relatively short lifecycles. Despite the potential disruptions posed by external factors to the in-game economy, simplifying the token economy—as demonstrated by various casual games in the Polygon game ecosystem—will likely be more effective in lowering barriers to entry for users.

Yet, in the coming year, we project that the majority of triple-A games leveraging flagship IPs will prefer the dual tokenomics model whereas most game companies with an extensive IP lineup will favor the platform-ingame tokenomics model. Specifically, games that require intricate in-game economics design, such as MMORPGs, are most likely to benefit from clear segregation of in-game tokens and governance tokens.

4-2. Addressing Persistent Challenges: A Gradual Transition to Open Economy & Empowered Governance

Despite the ongoing evolution of gaming tokenomics, certain challenges remain persistent. One such challenge is the handling of asset outflows. In Web3 native cases, games like Axie Infinity and STEPN have attempted to manage the outflow of in-game tokens through the dual tokenomics model, but the in-game economy collapsed when the game's growth stalled. Web2 game companies are now adopting Web2.5 model to have control over the listing of in-game tokens, but this has a limitation that it does not fully guarantee users' ownership of assets.

In addition, the role of governance tokens needs more clarification. Governance tokens primarily serve as investments or as utilities, such as NFT lottery or nurturing, and only a few are used for the innate purpose of governing and controlling the in-game economy. Particularly, platform tokens of Web2 game companies, such as Wemix and Netmarble, are predominantly used as a means of cashing out in-game tokens.

So, what could unravel these conundrums? We'd like to conclude by suggesting two viable options.

1) A Gradual Transition to Open Economy

First, the in-game economy may be better off starting as a closed economy and gradually transitioning to an open economy. Similar to what Dispread’s Do Dive has suggested in his recent article, it's better to start the in-game economy as a Web2 closed economy first, rather than an open economy right from the outset. A potentially opportune timing for the introduction of in-game tokens, governance tokens, and NFTs may be when the economy reaches a substantial scale. Once a token is incorporated into the economy, currency distancing can be employed to minimize the outflow of in-game tokens.

This way, the games can ensure that the initial distribution of tokens is channeled to genuine game users and stays immune to early speculative demand. This would minimize the likelihood of disruption that speculative demand may pose to the in-game economy, even if the game later switches to an open economy.

2) Elevating the Role of Governance Tokens & Platform Tokens in Shaping In-Game Economies

We also find that the League of Kingdoms' $LOKA Pledging may suggest a solution for the utility of governance tokens. As noted earlier, $LOKA is a governance token, but through pledging, it allows users to directly participate in the in-game economy, particularly with resources like regen, which is central to the game’s economy.

This approach may be accompanied by problems associated with increased investor influence. With the inclusion of a sink mechanism for governance/platform tokens in the design, however, it is expected to help provide clearer guidance for the utility of governance/platform tokens. Furthermore, when coupled with a gradual transition to an open economy, it can potentially moderate the influence of investors.

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