Transparency and provable rarity

The concept of rarity in collectibles and games has been around for some time, but the ability for transparent “provable” rarity in web3 has really brought the concept to the forefront. In the past, games could claim items as rare based on their drop rates, but they lacked the means to truly prove an item's rarity due to the absence of transparent databases or code. Usually the closest anyone had to proper status signaling was either via items that were known to be very expensive or required a significant achievement such as defeating a very difficult raid boss in an MMO. However, issues like item duplication exploits often undermined the true sense of rarity, particularly in games with active item trading, such as Diablo. As a result, the authenticity of an item's rarity was often questionable in traditional gaming setups. There have been efforts to enhance transparency and prove rarity in physical collectibles through methods like mint numbers (successfully used by NBA Top Shot) and certificates of authenticity. But now, web3 takes it to a whole new level by ensuring clear and verifiable rarity.

The “Town Square” effect

Typically, displaying a status symbol in a game requires a specific location like a town square, although social media makes it possible to share an image outside of the game. NFTs, on the other hand, have a unique advantage - they are inherently visible outside of games, which allows for clear proof of rarity and authenticity. This still requires code to read a wallet, retrieve all the relevant data from the smart contract and find some kind of image to display to represent the NFT. As a result, marketplaces have adopted a sort of “Town Square” effect due to the financial motivation to offer compatibility with as many NFTs as possible. Since NFTs work differently, any platform wanting to showcase them must be aware of a specific NFT's existence to display it correctly. This means that when comparing platforms like OpenSea and Magic Eden, entering the same wallet address can lead to vastly different visibility of NFTs.

Status display outside of web3

Currently, there are efforts to facilitate the viewing of "wallet contents" outside of NFT marketplaces, using tools such as NFT Viewer or even Etherscan. However, a universal "profile" system similar to Xbox/PlayStation or Steam does not yet exist. Many platforms are working on such systems, and eventually, one may gain prominence. Hopefully, it will come with a user-friendly username system, eliminating the need to paste in wallet addresses or expensive .eth addresses to find others. Until then, if you want to display rare NFTs outside of web3 communities, your options are limited to using the constrained systems on Facebook and Twitter (sorry, X) for social media display. The unfortunate downside in attempting to flash your status outside of web3 circles is that the average person is still likely stuck in the “right click” mentality and won’t recognize ownership in the web3 context. This is a challenge especially for games, where the NFT’s utility goes beyond visual representation, unlike Art/PFP NFTs. Overcoming this challenge will be crucial for wider recognition and adoption of NFT ownership beyond the web3 circles.

Visual representation in the metaverse

The concept of a metaverse functioning as a social hub holds significant potential. While achieving an exact 1:1 representation of an item from one game to another is highly impractical on a technical level, there is potential for visual representation that doesn't need to be perfectly identical. The movie Ready Player One popularized the idea of a metaverse, and although it had its peculiarities, it showcased the appeal of displaying collectibles or in-game items outside of the game as a coveted social status symbol. In this way, even if the representation is not exact, it can still hold social value.

Cross-platform NFT integration

Decentraland effectively showcased this idea via their "Linked Wearables", which connected the ownership and display of wearables in Decentraland to an NFT owned elsewhere. Unfortunately, this idea never gained widespread popularity after its initial demo with Satoshiverse NFTs, but it's possible that this concept might be picked up again if other virtual worlds or metaverse platforms gain significant traction. For instance, Roblox-inspired platforms like Core, attempted to integrate blockchain wallets to read NFTs, allowing users to display their PFPs on white shirts within the game. These efforts indicate that the potential for cross-platform integration of NFTs remains a compelling idea for the future.

From virtual to real world

It might seem insignificant or driven by ego, but the ability to showcase game items outside of games can help expose others to ways ownership of game items can be interesting. Steam demonstrated this effectively with status symbols and displays like CS:GO skins and exclusive trade items such as the infamous "Bill's hat." These items have provable rarity, which added weight to their display outside of the game environment, even though the transparency was not perfect. Of course, for this display to hold meaning for others, there needs to be some recognition or understanding of the item's significance, but there’s plenty of room for odd looking wearables to become a point of discussion to inform the curious. Hopefully there’s a future where someone hanging out in a virtual social world ends up shouting “OMG is that a real Bill’s hat you’re wearing?!”, and verify it is.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content!

By focusing on elements such as customization and social aspects, games can transition into long-term hobbies

There are a few important factors to consider when thinking about hobbies, such as the amount of time and financial resources dedicated, the acquisition of knowledge, the improvement of skills, and various forms of accumulation. Hobbies can last a weekend or a lifetime and can be as general as “gaming” and as specific as “speedrunning metroidvanias on handheld game systems”. As individuals become more deeply engaged in a hobby, they naturally want to spend more money and time on it, up to their personal limits.

When gaming is approached as a hobby, it tends to involve more specific interests beyond simply "playing games." This is especially true in physical gaming, where even the category of "board gaming" often branches out into more specific classifications such as "euro games," depending on the players' preferences and interests. In the context of hobby-style gaming, it is important to consider the revenue potential based on factors mentioned in the previous discussion on collectible gaming, but more specifically customization, tools/accessories, collection building, specialization, and social aspects. By focusing on these areas, a game can become more than just a short-term engagement and transition into a long-term hobby. This transition can greatly benefit the game's longevity, customer lifetime value, and player retention.

Players can customize their player experience in various ways, ranging from console skins and keyboards, to avatars and wallpapers

The aspect of customization in hobby gaming manifests in various ways and is closely tied to collection building. In trading card games, it typically involves customizing a deck, card sleeves, playmats, or life counters. In miniatures games, customization involves the painting of miniatures, constructing an army or team, and creating terrain or set pieces. In the realm of physical console gaming, players can customize via console and controller skins, customizable stick grips, trigger enhancements, and special headsets. In digital console gaming, customization options include choosing a gamertag, avatar, home screen wallpaper/theme, and collecting achievements. On the physical side of PC gaming, customization extends to monitor setups, LED lighting, keyboards, mice, mousepads, headsets, and microphones. These are just a few examples, as customization choices can vary widely and often involve a combination of DIY approaches and brand preferences, with brand selection itself becoming a personalization factor. Additionally, customization overlaps with accessories, which can range from storage systems and bags to items focused on enhancing comfort during gameplay. Tools, on the other hand, primarily pertain to DIY aspects such as paintbrushes, cutting tools, and similar equipment.

As players get deeper into their hobby, their desire to acquire, collect, customize, or upgrade aspects of their gaming experience naturally increases

As hobby gamers become more deeply involved in their chosen hobbies and engage in customization, it naturally leads to an increased focus on collection building and specialization. More specific specializations tend to lead to specific equipment like arcade fight sticks for fighting gamers, special keyboards and mice with macros for MMO gamers, attachable/wireless controllers for serious mobile gamers, steering wheel and pedals for racing gamers, throttles and rudders for flight sim gamers, etc. The longer a player remains engaged in the hobby, the stronger the desire becomes to acquire, collect, customize, or upgrade various aspects to enhance their overall gaming experience. In some cases, this leads them to explore customized or DIY options available on platforms like Etsy or eBay, supplementing what is available in stores or enabling them to create unique items themselves. Oftentimes the lack of new things to purchase can lead to stop the hobby, particularly in collectible driven games.

Web3 gaming has the potential to capture hobby gamers in new ways, via features such as interoperability and composability

The main focus of this discussion is to examine web3 gaming from the perspective of hobby gamers, as it has the potential to engage them in ways that web2 cannot. One key aspect is the concept of ownership, which holds great significance in hobby gaming (including the ability to resell assets when exiting a hobby!). Owning collectibles or other hobby-related assets as NFTs fosters a sense of ownership and provides the opportunity for steady accumulation, which becomes an integral part of the hobby experience. In web3 gaming, interoperability and composability are now starting to provide benefits that resemble accessories, reducing the reliance on multiple APIs that was previously necessary. A prime example can be observed with third-party platforms supporting games like Gods Unchained, Splinterlands, and Sorare. These platforms not only provide data but also introduce new services such as card renting. Imagine a scenario where both first-party and third-party NFTs can also offer various cosmetic, quality-of-life, or convenience upgrades, similar to how accessories enhance the physical side of gaming.

Customization elements powered by web3 can unlock a more immersive and personalized gaming experience

There is another area that is only beginning to explore its potential: customization in web3 gaming. While PFP options that offer some level of personalization already exist, there is room for significant expansion. This can involve alterable attributes, the combination of NFTs (such as clothing and equipment), crafting systems, the incorporation of NFT history, and even the ability to attach custom player-written lore. Often, game developers view cosmetics solely as additional content for in-game shops, rather than enabling a more comprehensive integration of cosmetics and UGC through modifying and creating NFTs.

An excellent example of a web3 game that understands this concept is Shrapnel. The game has already released tools that allow players to create custom insignia art and custom callsign NFTs. The developers of Shrapnel recognize the potential of UGC elements and how they can even lead to opportunities for commissioned work. This allows players who may have the financial means but lack the necessary skills to still obtain the desired customizations they want.

Moonbreaker, a digital miniatures game, provides an interesting example of how a web2 game can explore customization commonly associated with physical gaming. In this game, players have the opportunity to paint their miniatures, much like in real-life, to “show off” in battles. The act of showing off here extends beyond mere status symbols - it becomes a means of expressing one's personality, DIY skills, and creative ideas. In this sense, in miniature gaming, players often prioritize showcasing their paint jobs over the game itself, using it as a platform to demonstrate their creative skills.

Web3 presents significant opportunities to seamlessly transfer the habits and desires of physical hobbies into the digital gaming space

As with most of our explorations, this Nexus piece is intended to be food for thought around web3’s potential to upgrade gaming. Rather than looking at games as simple consumable entertainment products, games as a service has at least brought attention to the potential for longer term play. Web3 offers the opportunity to better translate the habits and desires of hobbies into digital gaming that have been the domain of the physical for so long. The potential rewards of successfully capturing the interest of hobbyists are significant, both in terms of player engagement and revenue generation. Hobby gamers have the potential to transform into the "everyday whale" - an audience that can be cultivated rather than simply sought after. It's about enriching players' lives by providing a blend of escapism, purpose, a sense of progression, and a community of fellow enthusiasts. Let’s stop looking at players as customers and instead as excited participants in an engrossing new world they can dive into and really appreciate what web3 can bring to the table.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content!

Subscribe now

When considering the types of games that are most suitable for web3, there is one specific element of gaming that consistently emerges as a significant catalyst for the adoption of NFTs: collectibles. Collectibles have been an integral part of games, both in physical and digital formats, and their extensive history can provide valuable insights into the potential applications of NFTs and meta-games in web3 gaming.

Although there may be older forms of physical collectible gaming, one of the earliest experiences we had was through schoolyard competition in the form of marbles. In a game of marbles, players engage in a competition where the objective is to knock each other's marbles out of a designated circular area and claim them as their own. This aspect of collectible gaming, which involves winning another player's collectibles, is not commonly explored in web3 gaming and applied to NFTs.

Marbles, as collectibles, didn't typically possess a wide range of attributes for collecting purposes. However, they could have visually appealing styles on the inside, such as the classic "cat's eye" design. Additionally, marbles generally came in two sizes: the smaller normal ones and the much larger boulder-like ones. The game itself was simple and portable, combining elements of skill and randomness derived from physics and the texture of the ground.

The next collectible game to gain popularity in elementary and middle schools was based on a short-lived 90s trend known as POGs. These small cardboard discs originally derived from milk caps in Hawaii, and the name "POGs" originated from a juice blend combining Passionfruit, Orange, and Guava. POGs represented a significant advancement in terms of collectability compared to marbles. While marbles had a relatively limited number of variations, cardboard discs with printed images offered limitless possibilities. Similar to trading cards, POGs often had collectible sets produced by different manufacturers. Some POGs were distributed as promotional items, serving as advertising for various products like fireworks, and were commonly included in cereal boxes due to their low production cost and ease of distribution.

The game itself involved stacking the discs in a column and forcefully striking them with a thicker metal or plastic disc known as a “slammer”. The player would win the POGs that flipped upside down as a result of the impact. POGs predated Trading Card Games but served as a clear transition from physics-driven games to collectible-focused games utilizing images and text.

An interesting attempt to translate the concept of POGs into web3 gaming was made by KOGs, which introduced interesting concepts related to set collection, drawing inspiration from the physical tubes that POGs were typically stored in.

Following the era of POGs, Magic: The Gathering emerged and introduced the world of trading card games as we know it today. Unlike previous collectible games, Magic: The Gathering did not rely on physics or any form of physical skill. Instead, it introduced a combination of deck building and shuffling mechanics. By removing most of the physical elements and shifting the focus solely to the printed information on the cards, the game suddenly gained depth and introduced a wide variety of card values and collections.

In contrast to marbles or POGs, where the differences between individual items were primarily based on aesthetic value, occasionally including slight variations in weight or material that might slightly impact gameplay, trading card games needed to establish numerous rules to ensure balance. The Pokemon Trading Card Game (TCG) maintained a closer resemblance to the collection-oriented style of POGs, as children primarily focused on collecting the cards themselves and didn't place as much emphasis on their gameplay value.

The impact of differing cards on gameplay introduced the potential for rarity to play a role in the game beyond mere collector or aesthetic appeal. This development, however, has given rise to its own set of challenges, but it is important to consider when assessing the utility of attributes on collectibles. Baseball cards, for example, possessed the potential for this by featuring a variety of statistics and other information, although they were primarily used for informational purposes rather than in gameplay, except in simulations like Strat-o-Matic.

Throughout the years, there has been a fascinating array of collectible-based games, primarily targeted at younger children, that exist along a spectrum ranging from physical-focused to information-based experiences. Examples include Beyblade, which is predominantly physical in nature, and Bakugan, which represents a hybrid of physical and informational elements. These games can still be found in toy aisles, showcasing the enduring appeal of collectible gaming.

There is also the enduring world of miniatures wargaming, such as Warhammer 40K, which places a strong emphasis on the physical aspect of collecting. Players engage in customization by painting the figures and constructing unique battlefields, while the gameplay revolves around the informational aspects of the different units. Miniature gaming has experienced significant growth within the realm of board gaming, as it allows players to fully appreciate the collecting aspect alongside the creative customization involved in painting the miniatures.

Dice have also been integrated in various ways as collectibles themselves, alongside the informational aspects found on cards, in games like Dice Masters and Star Wars Destiny. These combinations provide diverse avenues for physical interaction and strategic planning within a collection, facilitating the possibility of expanding content and ongoing collecting opportunities.

All of this comes from a desire to do more with collectibles than merely collect them. There is a rich history of collectible gaming that can serve as a valuable source of knowledge for web3 in order to expand the utility of NFTs beyond profile pictures (PFPs). Furthermore, the toys-to-life collectible genre, notably pioneered by Skylanders, presents valuable insights into the concept of interoperability that can be applied and learned from.

One of the exciting aspects that NFTs bring to the collectible gaming space is the ability to incorporate provably unique procedurally generated elements. This is a feature that, aside from games like Keyforge, is generally absent in traditional collectible gaming. By combining this capability with other attributes such as aesthetics, rarity, set collection, interrelationships between sets, counter-play, game balance, meta shifts, collector customization, and numerous other elements that have been explored in collectible gaming over the decades, NFT collectible gaming holds the potential to establish itself as a significant global phenomenon.

It is time to move beyond the phase of solely focusing on FOMO art flipping and imitating trading card games (TCGs), and instead leverage the blockchain as our futuristic equivalent of how physics and information have influenced design in the past.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content!

Subscribe now

Why fiat-to-crypto conversion requires alternative methods

At its core, any transaction, whether it's buying, selling, or trading, involves swapping one item for another. The blockchain simply utilizes a different type of ledger compared to traditional banks. However, fiat money, until central bank digital currencies (CBDCs) become widely adopted, cannot directly exist on the blockchain. When someone spends fiat money, they can only give it to someone else in exchange for a cryptocurrency or token. Since fiat exists outside the blockchain, it cannot be directly exchanged by a smart contract and requires alternative automated methods. It is worth noting a number of physical ways that existed prior to involvement from banks and payment processors to convert fiat into crypto, namely Bitcoin ATMs and Local Bitcoins.

Physical methods of converting fiat into crypto

Bitcoin ATMs offer a unique experience similar to using an ATM in a foreign country, where your fiat currency needs to be exchanged rather than simply stored and transferred by banks. To utilize a physical bitcoin ATM, you need to provide a wallet address and, if you're receiving cash, sign a transaction using your private key. When you withdraw cash, you sell bitcoin to the ATM operator at a price lower than the market rate, allowing the ATM to make a profit, and then the machine dispenses physical cash from its storage. On the other hand, when you deposit cash, you buy bitcoin from the ATM at a price higher than the market rate, increasing the cash stored within the machine. As for Local Bitcoins, it functioned as a platform similar to Craigslist, where bitcoin buyers and sellers could arrange meetups to exchange cash for bitcoins. This platform provided a certain level of anonymity and could potentially resurge if there were attempts to ban cryptocurrencies, for instance.

Buying crypto via exchanges increasingly regulated

As cryptocurrency has grown in popularity, there are now simpler electronic methods to purchase crypto and tokens online. One of the most common ways is to purchase them from exchanges such as Coinbase, Crypto.com, Binance, and others. These exchanges may differ in their specific transaction processing methods, whether it comes from their own market or a pool held by the exchange. Unlike physical methods, these exchanges typically accept debit/credit cards or bank transfers to receive fiat currency from you. It's important to note that these exchanges are usually subject to various regulations, including Know Your Customer (KYC) and Anti-Money Laundering (AML) policies. They are also required to report any activity that may violate local laws. Selling crypto/tokens for fiat currency, particularly through an ACH bank transfer, can be even more complicated due to strict regulations, especially in the United States. As a result, there are fewer options available for converting crypto to fiat using these exchanges. Similar to bitcoin ATMs mentioned earlier, there is often a markup involved when exchanging fiat currency into the system, which serves as profit for the exchange.

On-ramps offer a convenient way to convert fiat into crypto

Another common option for converting fiat currency to crypto is through on-ramps. Popular examples include MoonPay and Ramp and operate by maintaining pools of various cryptocurrencies and tokens on different networks, including layer 2 solutions. Tokens are sold out of these pools, whenever a transaction is made. By implementing minimum transaction amounts, fees, and KYC/AML policies, on-ramps aim to protect themselves to some extent, considering the financial risks involved, including fraud, chargebacks, and other issues associated with the fiat banking system. However, similar to exchanges, on-ramps are subject to local government regulations, and the level of customer access can vary significantly.

On-ramps are particularly useful when dealing with layer 2 networks

In general, on-ramps offer a more convenient option for making impulsive purchases, which is why OpenSea utilizes MoonPay to facilitate card transactions. On-ramps are particularly useful when dealing with layer 2 networks like Polygon or Immutable. Buying tokens on a layer 1 network such as Ethereum and then bridging them to layer 2 can be costly and time-consuming, due to high layer 1 gas fees. On the other hand, on-ramp providers already have tokens available on the layer 2 network, allowing them to sell directly to you. Moreover, on-ramp providers like MoonPay and Ramp have expanded their services to include off-ramping. When you off-ramp, the provider buys your crypto/token from you at a discounted rate, taking into account the processing fees. To complete the process, you need to send the crypto/token to the off-ramp provider's address, and once received, the money will be transferred to your bank account. This procedure still requires some form of KYC, such as providing a social security number, and relies on third-party systems like Plaid to connect with bank accounts.

In-app purchases as a way of dealing with fiat-to-crypto conversion

Games have an alternative option for handling fiat transactions from players via in-app purchases (IAP), which finds itself in a bit of a gray zone. In theory, since all forms of purchasing crypto involve one party sending money and the other party sending crypto, it is possible to sell crypto through this method. However, it's important to note that Apple's current policy for iOS restricts dealing with cryptocurrency/tokens solely through approved exchanges that comply with local jurisdiction laws where players are located. While there may be a potential workaround for this, it is crucial to emphasize that this is not legal advice, and attempting such a workaround could potentially violate the law in many countries.

Using both off-chain and on-chain currencies can simplify the payment process

One option is to sell a virtual off-chain currency, such as gems, through in-app purchases, which is a common practice. However, you can also allow players to exchange those gems for an on-chain token outside of the game or app. The game or app would essentially remove the off-chain currency from the player's account in its database and send tokens to the player's wallet in return. These tokens can either be minted on demand or sourced from a token pool. In theory, Apple shouldn't be overly concerned by this, as it still receives its 30% cut of the transaction and can distance itself from the subsequent crypto exchange occurring outside of its ecosystem. The benefit of this system is that it simplifies the card payment aspect of the transaction, making it an additional step only if the player wishes to have an on-chain token instead of solely using the virtual currency within the app.

Working around Apple’s current web3 policies

There is a second option that draws inspiration from how Pachinko operates within gambling laws in Japan. Players can purchase an NFT as an in-app purchase, with Apple receiving its 30% share of the transaction. Afterwards, players have the choice to either sell the NFT to other players in exchange for tokens, or the game itself can buy back the NFT from the player using tokens. Alternatively, a simpler and more discreet approach is to have a smart contract where the NFTs can be burned, resulting in the issuance of tokens. Both methods achieve the same outcome, but burning the NFTs for tokens adds an additional layer of obfuscation compared to direct buybacks. In the latter case, the NFT can be seen as representing a "bag of tokens," although it's important not to make this relationship too obvious. Apple's current policy permits the direct purchase of NFTs using in-app purchases, making this system somewhat more legitimate in certain respects. Automation could be implemented on the game's side to automatically buy or burn these specific types of NFTs from players in exchange for tokens, which can then be seamlessly transferred to a wallet linked to the player's game account without any explicit mention of these actions within the game. Once again, it's important to emphasize that this discussion does not constitute legal advice; rather, it explores the technical possibilities presented by Apple’s current web3 policies.

Minimizing friction in the process of spending money is crucial

Simplifying the process of spending money in a game is crucial to encourage more spending, and it's worth exploring various methods to reduce friction in this regard. In-app purchases are a reliable and convenient strategy, as long as the post-purchase experience is well-executed. Dealing with NFTs is generally easier than handling cryptocurrencies, although legal considerations must be taken into account. It's worth noting that Apple does not target games like Clash of Clans that provide web shops allowing players to purchase gems online without Apple taking a 30% cut. This approach not only offers alternative fiat payment systems (often through platforms like Xsolla) for selling game items and gems but also creates an opportunity for games to sell in-game items and currencies for cryptocurrencies and tokens. However, it's important to remember that any revenue received in the form of crypto/tokens will eventually need to be converted back to fiat to be considered as revenue. This is where stablecoins like USDC and USDT prove useful.

Why stablecoins are an interesting option for conversion

Stablecoins offer an intriguing solution for connecting fiat and tokens. The concept of stablecoins aligns with the principles discussed earlier. Essentially, for every token created, there is a corresponding dollar held in reserve. This concept is reminiscent of the time when US dollars were backed by gold before transitioning into the fiat system we have today. The term "stable" in stablecoins refers to the tokens being exchangeable for cash at a 1:1 ratio, providing them with a value as stable as the currency they are pegged to.

Stablecoins offer a valuable advantage in terms of maintaining the stability of token value when held. Typically, when purchasing tokens with fiat, you aim to buy the exact amount needed. This is similar to buying in-game gems through in-app purchases, where you typically buy the necessary amount unless you anticipate needing more soon. However, similar to stablecoins, the value of gems remains constant, allowing you to hold excess gems confidently, knowing that they can be spent at a later time. Buying stablecoins with fiat enables you to convert more than the required amount, providing liquidity for future purchases without requiring another on-ramp process. Holding excess amounts of any cryptocurrency or game token often exposes you to price volatility and the challenge of timing your sales or usage. By converting to and from stablecoins for surplus inflows and outflows, the necessity of frequently converting to fiat is reduced, offering a more streamlined approach.

Sykweaver uses stablecoins to provide players with higher flexibility

Games like Skyweaver simplify their marketplace by using USDC, a stablecoin, instead of requiring players to purchase a game-specific token to acquire new cards. Let's say a player wants to buy $10 worth of cards using their debit card. If the on-ramp has a minimum requirement of $30 and charges a $4 transaction fee (which is common), the player would need to spend $30 to obtain $26 worth of USDC to purchase the desired $10 worth of cards. However, the excess amount of USDC is not a significant concern since it maintains a stable value and can be exchanged for other tokens or converted back to fiat currency (although at an additional fee). This flexibility encourages players to consider purchasing a larger amount, such as $100, to have extra USDC available when needed, with the assurance that it can always be converted back to fiat if necessary. This added flexibility reduces the friction associated with using an on-ramp and benefits the game developer as well. Since all card purchases from the game developer are also in USDC, they can hold the revenue in USDC for as long as needed without worrying about exposure to price volatility. Moreover, the high liquidity of stablecoins makes it easier for the developer to cash out, as there is typically a substantial demand for stablecoins in the market.

Stablecoins come with their own set of risks

It's important to consider a few warnings regarding stablecoins. Firstly, there is the potential risk of government regulation. When a token is created as a digital representation of a fiat currency, it essentially becomes an alternative to the fiat currency, which can be viewed as a competitive threat by governments, especially those developing their own digital currencies.

The second risk pertains to the trustworthiness and management of stablecoins. Certain stablecoins, such as Tether (USDT), have gained notoriety for questionable practices in backing up the token, leading many to doubt the existence of a genuine 1:1 reserve. Additionally, algorithmic stablecoins pose inherent risks, as demonstrated by previous instances like the case of LUNA.

Currently, USDC is considered one of the more reliable options due to enhanced oversight and regulation. However, it still carries some risk exposure, as exemplified by the potential vulnerability of its reserves in the event of the collapse of Silicon Valley Bank.

Financial fundamentals must be considered when conceptualising web3 projects Despite being fundamental concepts, they are often overlooked when developing web3 games. The F2P games industry has become so accustomed to in-app purchases that the complexity of financial transactions is often taken for granted. It's evident that Apple and Google's 30% cut may not be fully justified, but their payment systems still offer significant convenience and value. With the emergence of web3, things become more complicated again, although with the potential for positive outcomes in the future. It's reasonable to expect that once regulations and technology stabilize, both Apple and Google will likely incorporate crypto elements into their payment systems. Until then, pioneering web3 games must navigate the challenges and find ways to minimize friction.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content!

Subscribe now

Moving from desktop to native solutions

Taking these considerations into account, let's examine where web3 currently sits within the platform landscape and explore its potential path forward. As web3 initially manifested through wallet and web3.js implementations, the web browser emerged as the primary platform during its early stages. The advantage of utilizing a browser was the ease of instantly reaching a global audience on desktop computers, while the usage on mobile was limited due to lacking plug-in capabilities. Although the browser served as an excellent platform for early experimentation and distribution, HTML5's capabilities proved somewhat limiting in terms of consistently delivering diverse gaming experiences. As a result, exploring native experiences became necessary.

Global platform fragmentation

Early examples of native experiences, such as Axie Infinity and Gods Unchained, were initially offered as downloadable executable files for Windows. Early adopters and those who bought into the NFT hype were willing to risk downloading, installing, running and manually updating these executables, but it wasn’t ideal for mass distribution. The next logical step was the adoption of "launchers," which allowed for automatic updates, making the experience more convenient. However, a significant challenge arises from the fact that different regions and demographics have their preferred dominant platforms amongst desktop, mobile, and gaming consoles. Furthermore, each of these platforms is typically divided between two different operating systems: Windows vs. Mac, Android vs. iOS, and Xbox vs. PlayStation.

Desktop and mobile as most suitable platforms

Consoles tend to be the slowest in adopting new technologies and show the most resistance to change. Both online play and F2P features have been introduced much later in their systems. This makes them less of an ideal potential platform for web3 gaming, which leaves desktop and mobile as the primary platforms, which are predominantly controlled by Valve, Apple, and Google. However, Apple has proven to be highly resistant to web3, driven by excessively stringent security sandboxing standards and a firm hand with getting a 30% share of payment processing. Valve, on the other hand, has expressed openness to the technology itself but is concerned about the dubious activities associated with it. While Valve may eventually embrace certain aspects of web3, it has even demonstrated a willingness to shut down its own technologies, like CS:GO case key trading, to prevent their exploitation in money laundering and alternative payment systems. Another challenge arises from the potential competition between NFTs and the Steam marketplace. Nevertheless, Valve could potentially consider integrating NFTs into its marketplace platform, allowing for its typical fee structure and while also supporting royalty systems.

Android as the potential home platform for web3 games

For the immediate future, three viable options emerge as potential home platforms for web3: Android, Steam alternatives, and web browsers. Despite occasional shortcomings, Android has taken a relatively hands-off approach regarding web3 games on the Play Store. However, this hands-off nature can leave users more susceptible to scams and fraud, which is an inherent risk associated with open technologies. Mobile game developers often exhibit an overemphasis on treating iOS as the flagship mobile experience - however, research conducted using data.ai reveals that the Android versions of various games frequently perform equally or even better than their iOS counterparts. Multiple factors contribute to this, including the number of players and the spending habits of each platform, which can vary depending on genre and demographics. Unless there are significant changes, it seems reasonable to consider Android as a potential home platform for web3 games.

Ultra incentivizing developers via tokenization and resale opt-ins

When it comes to desktop platforms, finding an alternative to Steam becomes a bit more complex. One approach involves game ecosystems that serve as publishers, blockchains, tokens, and more. Gala Games, for instance, has developed a launcher focused on its expanding collection of games. However, this launcher would primarily appeal to players of Gala Games' titles such as Town Star or Spider Tanks. Ultra, on the other hand, is attempting to establish itself as a Steam alternative by forming partnerships with both web2 and web3 games. By including non-web3 games, albeit from smaller developers and publishers, Ultra adopts an interesting strategy to build up its catalog, particularly since many high-quality web3 games are yet to be released. Ultra offers a mix of F2P and premium games, but with an interesting twist - it allows tokenization and resale of games if game developers opt into the system. Allowing re-sale of games does at least give a reason to consider getting a web2 game on the platform over the alternatives, but realistically its primary use case for now will be its web3 game catalog. Ultra already boasts several moderately established web3 games, including Cross the Ages, Undead Blocks, Cards of Ethernity, and Synergy Land. It's unfortunate that there isn't a straightforward way to filter the web3 games, as the platform has the potential to serve as a means to discover new web3 games to play.

Epic Games Store embracing web3 to challenge Steam

Surprisingly, the Epic Games Store, a determined contender to Steam's desktop monopoly, has emerged as an unexpected hero in this context. In its quest to gain an advantage over Steam, Epic has employed various tactics, including the strategy of offering free games. Rather than resisting the web3 movement, Epic has shown a rather accommodating stance towards it. The introduction of Blankos Block Party as the first playable web3 game on the platform marked the beginning, followed by a stream of announcements for other web3 games. Notably, Grit from Gala Games, a relatively recent release, made its appearance on the Epic Games Store, hinting at Gala's acknowledgment that their own launcher may not be sufficient for gaining traction. Superior is another interesting case as the game is also on Steam in Early Access without the web3 aspects, while it’s assumed the Epic Games Store version will. Further, even older games like Gods Unchained have moved beyond their own launchers and made their debut on the Epic Games Store this week.

Preferred desktop platform for web3 games

Although there isn't a straightforward method for browsing web3 games on the Epic Games Store, searching for "Blockchain" on the Epic Games Store seems to yield results and allows users to find games with associated pages on the platform, whether released or not. With the recent addition of the "self-publishing" feature on the store, an increasing number of games are making their way to the platform. Some notable titles include Apeiron, Metalcore, Defimons, World Eternal Online, Delysium, Star Atlas, STG Football, and The Machines Arena, one of the first 3rd party games on the Ronin chain. While being on the Epic Games Store doesn't guarantee increased discoverability, it still represents a significant improvement compared to browser-based games or the need to download executable files or launchers. Moreover, there is Hyperplay, a web3 launcher for the Epic Games Store, which facilitates seamless wallet connection. All of these developments are shaping up to position the Epic Games Store as a strong contender to become the preferred desktop platform for web3 games in the future.

Platforms can be beneficial for adoption

While the presence of a distribution platform for web3 games may not be the most critical element in driving adoption, these platforms offer numerous advantages that should not be underestimated. These advantages include:

• Streamlined payment rails: Distribution platforms provide streamlined payment systems, allowing users to make secure transactions using various payment methods, including cryptocurrencies.

• Enhanced discovery and curation: Platforms facilitate the discovery of web3 games, helping users explore and find new titles based on their interests. They also curate content, showcasing high-quality games and increasing exposure for developers.

• Reduction in fraud: Distribution platforms implement measures to mitigate fraud and enhance security, protecting both developers and players from potential scams and unauthorized activities.

• Efficient library management: Platforms offer tools for managing game libraries, making it easier for players to organize and access their web3 games in a centralized and convenient manner.

• Ability to identify players across games via platform-based game accounts: One often overlooked aspect is the consolidation of game accounts within a platform. This feature allows web3 gamers and their associated wallets to be uniquely identified across multiple games. While wallets can be easily created for free, creating accounts on platforms like the Epic Games Store or Google Play can involve more work due to the attachment of game libraries and downloadable content (DLC) purchases. As these accounts become linked to wallets, games will gain a better understanding of players' web3 activity across a wider range of experiences.

While there are potential future platforms to consider, such as cloud gaming, VR/AR, it is reasonable to assert that Android and the Epic Games Store are currently the most promising candidates to propel web3 gaming to the levels achieved by F2P gaming. Android's ubiquitous presence and open source nature make it a great candidate for web3 gaming, while the Epic Games Store's developer-friendly revenue share model and large user base provide an excellent opportunity for game developers to reach a large audience. Unfortunately, consoles present certain challenges as a viable avenue to explore for web3 gaming. However, we believe that with the right partnerships and innovations, the console market could also be a viable option for web3 gaming. We encourage fans of web3 gaming to actively support and play web3 games on these platforms to showcase the value that web3 brings to the gaming industry and to help usher in a new era of gaming that is more inclusive, more decentralized and more accessible to gamers all around the world.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content!

Subscribe now

Tokens as a reward system

The rise of Axie Infinity was fueled, in part, by its mechanism of enabling players to earn “money” from playing a game. However, enabling players to receive monetary rewards for their time and skills doesn’t necessarily require the use of a token, as demonstrated by esports models and secondary game marketplaces like Diablo’s. Still, tokens improve the entire process while addressing some of the ethical concerns associated with attempting to make real-world profits from games (which includes models such as esports). The basic idea underpinning tokens as reward system seems logical - you can earn rewards via gameplay and subsequently sell these to other players.

Balancing supply and demand

The inherent problem in this model became evident when considering the challenges in balancing supply and demand for the earned and sold assets. As a whole, the token model is still a concept that has potential, but it requires a primary focus on creating demand for the token and subsequently managing the supply in relation to that demand. It's crucial to acknowledge that most players are not spenders and thus prioritize the earning aspect. Consequently, this places greater pressure on a small number of high-spending players, or "whales," to purchase the available rewards. It is possible to balance earning and circulating supply against spending and price as a way to try and keep the two somewhat in balance. Advertising games as Play-to-Earn (P2E) goes against this sustainability model unless a game manages to attract some very heavy whales that keep buying up whatever the earners look to cash in. The most important thing here is to carefully consider why this model is better for a game rather than simply following a conventional F2P model. The other question is whether NFTs would work better for a game than tokens.

Making P2E work

The presence of token earnings even in older models of P2E games doesn't necessarily spell doom for the game, as is evident with examples like Alien Worlds and Splinterlands, which have managed to persist despite experiencing low token prices. However, it's important to recognize here that a significant portion of players in these games are actually bots, which will remain active until the tokens' value drops below the cost of running those bots. Part of the problem is that earning was fairly easy in these older, more transactional models, which made bots a sticky problem. On the other hand, newer games like Sunflower Land have successfully emphasized the importance of the token within gameplay and the internal economy, despite having external AMMs for resources like Niftyswap. This has made the game more sustainable despite the ease of earning, although the game also has regular “halvenings” to help fight inflation. Smart games like Gods Unchained kept token earning strictly to competitive weekend pools while attempting to figure out token economy revamps to support more frequent earning, which helped to counter rampant earning problems.

Cross-game utility does not equal value

The concept of having a currency that spans across multiple games provides an appealing opportunity. It is commonly believed that the value of a currency increases by providing players with numerous games or options to utilize it. While it is true that having options is valuable to players, it doesn't automatically make the currency inherently valuable. By the same token, arcade coins are not worth more than their value simply because they can be used across a room full of games. In fact, the worth of these arcade tokens may even be lower than the initial $0.25 investment if you cannot sell any surplus tokens to others for at least that value, as they are limited to use within the arcade premises. Similarly, buying gems in one game and being able to use them in another game from the same publisher also doesn’t necessarily add a lot of value either. The mere cross-game compatibility of the currency or virtual assets doesn't automatically result in a significant increase in value.

Shared tokens can drive engagement

Of course these are examples of a virtual currency that has been purchased, not earned. However, if tokens are earned in one game and can be utilized in another game, they do offer additional value to the individual if both game spending options are appealing. Nonetheless, caution must be exercised as the introduction of a currency from one game can impact the economy of another. If the shared token is deeply integrated into both games and its acquisition is relatively easy, it creates an opportunity for arbitrage. Fortunately, this impact can be minimized with careful planning, and instead, it can simply encourage players to engage with both games. This process becomes smoother when the shared token serves as a tertiary component of the economies, such as a cross-promotional event token or a broader ecosystem token tied to participation in the ecosystem rather than game-specific earnings.

Tokens as a gateway to a game’s economy

An alternative motive for tokens, although less common, is to serve as an alternative to fiat currencies. There are several reasons why this might be desirable, but one of the strongest motivations is the facilitation of on-chain games. The traditional banking system and fiat money come with their own set of issues, and detaching from that system can offer some benefits. At the same time, it's important to be cautious about potential implications related to money laundering or securities. When tokens are designed to be purchased by players, adding additional steps to participate in the in-game economy generally hinders broader participation but can at least be made easier with connections to on-ramps. This becomes less of an issue if more players have increased access to liquidity in blockchain tokens and cryptocurrencies, enabling seamless swapping between them. Until that is the case, it may be more practical to consider utilizing stablecoins or highly liquid blockchain-based primary tokens such as ETH or Matic. As an illustration, Skyweaver has effectively streamlined engagement with the game's economy by allowing the use of USDC to purchase and sell cards, supported by Sequence, a user-friendly custom wallet and partnerships with on-ramps like Ramp.

Artificially limiting token supply does not work

Unfortunately, the real reason why most games today still decide to have tokens is simply because investors require it as a condition of investing in the game. The concept is relatively straightforward: sell tokens to investors with the intention of selling them to players over time. Investors anticipate that if a game becomes very successful, the token prices will skyrocket, resulting in substantial returns for the investors when they sell these tokens. However, this motivation for tokens presents several challenges. The first issue is that the game must generate enough demand for the token to entice players to purchase it from investors at significantly higher prices. Games often attempt to achieve this by restricting the token supply to drive up prices. However, unless players anticipate making a profit from buying and using the token, there is a limit to how much they are willing to pay for it. Another problem is that investors may find themselves in competition with game developers, players, and speculators when it comes to selling tokens. This competition makes it more challenging for investors to drive prices up as they would like. Lastly, artificially inflating prices via limited token supply, without genuine in-game utility or demand, is unsustainable and tends to harm the economy, eventually leading to a collapse that negatively impacts the player base. Some games have attempted to incentivize higher prices by promising potential investment returns in the future. However, such promises often result in Ponzi schemes when they are untrue, and rampant inflation when they are true.

Token unlock and staking schemes are not effective to control inflation

Games have made efforts to address some of these challenges by implementing strategies to control the circulating supply of tokens through tokenomics distribution plans and staking programs. Staking programs aim to temporarily remove tokens from circulation, but to incentivize stakers, there must be some form of reward. Unfortunately, this often leads to token inflation as the reward is typically more tokens, or even if it isn't, the tokens eventually re-enter circulation once the staking period ends. Tokenomics distribution plans that release tokens over fixed periods of time also present issues. These plans involve dumping large quantities of investor tokens into circulation at specific time points, regardless of whether there is sufficient demand to absorb the new supply. If the market becomes saturated with tokens that exceed player interest, the price naturally decreases. As investors witness a decline in price over time due to the increased circulating supply, they rush to cash out, competing with other investors and further crashing the price. This sets off a slow death spiral for the token value and ultimately harms the game, often leading to its demise.

Learning from open economies

These are just a few of the potential factors to consider when contemplating the use of a token in a web3 game, and the list is by no means exhaustive. It is essential, however, to not only deliberate on whether to have a token but also to understand the underlying motivations for that decision. Ultimately, the challenges underpinning this decision are a mix of design and economic issues that are very likely solvable, if approached thoughtfully. While open economies introduce a level of unpredictability, it is possible to leverage their advantages and mitigate the drawbacks, thereby fostering the growth of the gaming industry for the benefit of game developers, players, and potentially even investors. Open economies are not a brand new concept, and history provides us with valuable lessons to learn from past experiments. By capitalizing on these lessons, we can strive to find repeatable solutions. If such solutions prove elusive, it may be worth considering the possibility that the optimal choice is not between one or two tokens but rather having no token at all.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

Iterating on standards for impact

The adoption of a contract standard is often driven by the success of prominent projects, be it a game, marketplace or another significant development. While the ERC-721 standard initially gained traction through Cryptokitties, its true breakthrough only came when major successes like Axie Infinity and BAYC NFTs proved their value. However, the true challenge with this standard may be in determining how it can create a substantial impact. Nevertheless, the repeated efforts to establish such a standard clearly reflect the growing interest in pushing the boundaries of what smart contracts can achieve.

Use case: Inventory content

In the realm of gaming, the most obvious application comes in the form of inventories for NPCs, which can be purchased and sold while keeping their inventory contents. This functionality holds great potential, particularly for recent RPGs like Stella Fantasy, where both characters and their gear are transformed into tradable NFTs, allowing for a more diverse offering on the market. If embraced by marketplaces, there could even be opportunities to enable the acquisition of individual assets owned by NPCs.

Enabling on-chain NPC activities

This can create situations where the NPC itself is not available for sale but instead functions as an on-chain sales vendor, akin to the mechanism used in the MMO Ultima Online. This opens up a myriad of possibilities for on-chain NPC activities, ranging from autonomous behavior using their assets to players trading these NPCs while retaining their assets and allowing them to continue to engage in activities. Notably, Mini Royale: Nations recently introduced a simplified version of this concept, enabling Gear NFTs to be owned by NFT character skins, thereby enabling the transfer of the entire kit as a single asset.

Building intricate structures

Looking past RPG systems, there are other interesting possibilities involving items owning other items. Imagine a 4x style game where cities themselves are represented as NFTs and own various elements such as factories, NPC residents, and treasury assets. This would enable the transfer of city ownership in a decentralized manner, surpassing the limitations of a more centralized "city deed" style NFT. While such capabilities have been somewhat feasible with existing technology (such as SFTs and other smart contract iterations), upgrading standards allows the construction of more complex infrastructure that ultimately paves the way for new opportunities.

Expanding the capabilities of decentralized technology

The internet serves as a prime example of this concept. Initially, web browsers relied on inefficient ****plugins and scripting to accomplish various tasks. However, as standards such as HTML5, CSS3, and WebGL evolved, we saw the emergence of a significantly more resilient web infrastructure. In the context of decentralized technology, the aim is to expand the technology’s capabilities beyond that of the global Ethereum network. In view of the recent surge in artificial intelligence, it seems to be the right moment to extend decentralization and enable NFTs to operate more autonomously.

Seeking a native web3 gaming platform

As it stands, much of this may seem like a solution seeking a problem until a game or application emerges that makes its value glaringly obvious. Achieving widespread adoption of on-chain games that are seamlessly efficient may take some time, however, as we gradually build different decentralized aspects within gaming, we inch closer to making it a viable reality. Many questioned the viability of mobile as a gaming platform, particularly after significant failures like the N-Gage. Yet, the quality of mobile games is now beginning to rival that of earlier consoles. Considering that web3 currently lacks a prominent native platform, hopefully, increasing decentralization of the backend will allow it to be a kind of its own.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

Generally speaking, SFTs are used in a way that is mostly identical to fungible tokens (FTs), but with a few interesting properties. First, unlike with standard FTs, there can be multiple types of SFTs within the same contract, thereby allowing SFTs to act as different types of resources. Second, as SFTs can exist in parallel to NFTs within a single contract, they can be transformed into NFTs.

Suppose you wanted to introduce multiple types of currency in a game, such as Gold, Silver, and Bronze - instead of creating separate contracts for each currency, you can use SFTs more efficiently and cheaply. Or, consider a game where initially a sword is identical to others in its basic form, but via special quests or other processes can be transformed into a special sword that is unique to you as a player. Both of these game scenarios can be achieved using a combination of fungible and non-fungible tokens, however, they would require multiple contracts and transactions and result in much higher costs.

The mechanism behind this functionality relies on a unique type of contract called ERC-1155, which enables the co-existence of different fungible and non-fungible tokens within the same contract. This makes the functionality suitable for any project, but particularly useful for games. We are not suggesting here that all games should be migrating their game resources on-chain, however, consolidating everything within a single contract allows for more efficiency, such as the batching of transactions.

When it comes to marketplaces, there are some interesting benefits to treating items as semi-fungible. With standard ERC-721 NFTs, where tokens are nearly identical except for minor details like mint numbers, the shopping experience may feel odd, as you look at identical assets and focus solely on the floor price.

With ERC-1155 tokens, the purchasing experience becomes significantly simpler and more user-friendly, particularly when purchasing multiple items.

NiftySwap takes the concept even further by leveraging Automated Market Makers (AMMs) to consolidate all the items and automatically determine their prices based on supply and demand.

Sunflower Land and Skyweaver are two great examples of games that use NiftySwap, and SFTs, in different ways. Sunflower Land, a farming simulation, revolves around cultivating and managing various crops and other resources such as wood and stone. Within the game, players frequently swap and exchange different resources and the game's primary fungible token, $SFL. Considering different production styles, as well as time and resource constraints, players may find themselves short or in excess of certain resources. To address this, players can use AMMs (Automated Market Makers) to trade resources without the need for explicit sale listings. Interestingly, the pools for swapping to $SFL are much more popular than those for swapping to $USDC, indicating that the system effectively prevents extractive behavior. And since these tokens behave like fungible assets, it is easy to establish barter systems, allowing for resource swapping through concepts like multi-token pools, thereby moving away from financialization models altogether.

In contrast, Skyweaver has a different style of resources with its trading cards. Physical trading cards (beyond the wear and tear) align with the concept of SFTs in the sense that there may be many different cards but copies of the same card are identical. There are 580 different cards in Skyweaver, which would make creating individual fungible token contracts for all of them prohibitively expensive. Splinterlands and Gods Unchained, like other TCGs, use NFTs for their cards. However, as these can also be upgraded, SFTs offer a suitable use case for them. SFTs also offer the flexibility to transition from fungible tokens to non-fungible tokens within the same contract. Considering that players of both Splinterlands and Gods Unchained often have base level (non-upgraded) cards, there is a strong case for transforming these base level cards into SFTs that can later become NFTs, once upgraded. Another option is to simply modify the SFT type since all upgraded cards are identical to each other. For instance, all level 2 versions of a Splinterlands card share the same characteristics. This eliminates the need to use NFTs when the token is not one-of-a-kind.

Of course there are some who would argue that NFTs are better as they are currently more universal, which is true. However, considering that OpenSea supports SFTs and Magic Eden partnered with Genopets to support their SFTs, there is some evidence that the adoption of SFTs is slowly but surely spreading.

The advantage of using ERC-1155s is that you no longer have to make the choice between supporting something as a fungible or non-fungible token. ERC-1155 tokens can effectively function as both, which is particularly useful if your game incorporates multiple types of tokens. Initially, PFP projects spearheaded by Cryptokitties, BAYC, etc. were designed around single NFT lines because they weren’t games. However, games have different requirements and should encompass multiple resources, surpassing the limited "one token or two tokens?" primitive design of web3 in 2021. While SFTs certainly aren’t the end of the evolution of tokens, they are a great upgrade. Lastly, for more on innovative token standards, we recommend reading Limit Break’s recently released upgrade to NFTs, ERC721-C.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

Transformative airdrops

Yuga Labs, known for its popular Profile Picture (PFP) projects like Bored Ape Yacht Club (BAYC) and Mutant Ape Yacht Club (MAYC), is yet to launch its game, The Otherside. In an attempt to generate excitement for its NFTs, which would ultimately contribute to The Otherside metaverse and associated games, Yuga Labs created the Dookey Dash competition earlier this year.

Sewer Pass NFTs were airdropped to BAYC/MAYC holders, which granted them access to the Dookey Dash P2M competition, a short-term event based on receiving high scores in a simple, endless runner game themed around toilet humor and the Bored Ape lore. The game was designed to be easy-to-play but challenging-to-score-high and drive enthusiasm around minting a new NFT. In typical Yuga Labs fashion, the actual object to be minted was mostly kept under wraps, but given the reputation of their previous NFTs, it was assumed to be highly valuable. Naturally, this drove interest, transaction volumes and royalties around the NFTs.

The Sewer Pass wasn't Yuga Labs' first transformative airdrop: The Mutant Apes, for instance, were minted by combining BAYC NFTs with an airdropped NFT called a “Serum”, a concept later adopted successfully (at least initially) by DigiDaigaku, which spurred transaction volume and hype.

A new take on skill-based mints

In contrast to previous P2M systems, Yuga Labs introduced some innovative mechanisms in the Sewer Pass design that influenced secondary market trading. As the competition was NFT-gated, Yuga Labs anticipated trading activity around their NFTs. Rather than whitelisting a player’s wallet address for the mint, the Sewer Pass itself was designed to transform into the next NFT form after the competition, instead of minting something new.

This also tied into how high scores were tracked, which was designed to both encourage and discourage certain forms of trading. High scores were linked to both a unique Sewer Pass ID as well as the wallet address that achieved the high score. While players could in theory pass the Sewer Pass NFT around, the high score would not move with it. For a player to claim their high score at the end, they would need to retrieve that specific Sewer Pass NFT. This design made it harder for a holder to simply hire another player to achieve a high score for them - they would need to trust that the player would also perform the conversion at the end and return the resulting NFT.

Different trading opportunities

There was a twist however, in that shortly after the competition ended (and cheaters were weeded out), the high scores of the current holder were imprinted into the Sewer Pass metadata to allow for trading, regardless of who achieved the score. The high score imprinted on the Sewer Pass directly affected the “mint” aspect of the P2M competition in two ways:

• The highest score would transform into a special golden key, which was won by a Fortnite Pro and sold for approximately USD 1.6m in ETH.

• The other ones would transform into a Power Source NFT of different tiers, depending on their rankings. These NFTs were trading even before their utility was known, but it did not take long before players discovered that they could be transformed into HV-MTL Mech NFTs with unique attributes. These Mech NFTs are related to a "forge workshop", more details of which will be unveiled this month as part of an "It came through the rift" event. Following that, there's another, mysterious "Journey to Evo 2" event in June that will reveal the next stage of transformation for the HV-MTL Mech NFTs.

This process provided a variety of trading opportunities with different levels of speculation involved:

• BAYC/MAYCs could be traded to claim Sewer Passes

• Sewer Passes could be traded during the competition, or after high scores were locked

• Power Sources could be traded before converting into HV-MTL Mechs, and after

Given that Yuga Labs enforced compulsory royalties for its recent NFTs, this translates into a profitable side effect of its P2M competition.

Various events had a significant impact on trading volume and average price and both metrics transferred seamlessly over from one collection to the other on March 15

• Feb 8: End of Dookey Dash Gameplay

  • No spike

• Feb 15: Dookey Dash reward distribution (an attribute was added to Sewer Passes that allowed them to be traded in for power sources / HV-MTL)

  • Visible spike

• Feb 27: Sale of Dookey Dash NFT key from Mongraal to Adam Weitsman for 1000 ETH

  • Big spike

• Mar 1: End of Toad Mode Gameplay (a limited-time Dookey Dash event that offered players a chance ‘to lick some toads’ in order to unlock a companion trait to their Power Sources during The Summoning)

  • Visible spike

• Mar 15: Power Source Summoning

  • Visible spike

A lot of hype

Beyond the royalties, the hype generated by a relatively simple P2M competition was significant. Making the Sewer Pass an expensive and somewhat exclusive gateway to minting restricted the P2M event to web3 whales but also made it an aspirational event for smaller players to watch. Dookey Dash was frequently streamed on platforms like Twitch and YouTube, creating a sense of active participation and encouraging influencers to acquire the Sewer Pass, even if only temporarily.

While the competition was successful at separating game players from simple speculators to some degree, it was more about marketing and hype than aligning with the right player demographic. The P2M approach adopted by Yuga Labs was also notably different from typical P2M competitions as the Dookey Dash gameplay bore little (to zero) relevance to Yuga Labs' future games and was essentially a throwaway game.

Creativity is key

For game developers considering running a P2M competition, it is worthwhile to evaluate what aspects of Yuga Lab’s Sewer Pass design could be copied for their respective use case. Evidently, a Dookey Dash type of P2M competition can be used to build hype and while the mystery of each transformation can bring a lot of speculation and short-term value, this could be desirable for marketing or user acquisition. Unique methods of manipulating trading by tracking scores related or unrelated to a wallet or NFT ID will undoubtedly influence how things move around. Another consideration is whether the competition should be exclusive to NFT holders, open to a whitelist, or open to everyone. Finally, whatever elements are introduced, besides the fact that they have to align with the game and target audience, they should be creative if you really want to capture your audience’s attention.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

This piece will focus on role-playing games, and action RPGs, and massively multiplayer online RPGs specifically are genres that can benefit from web3 technology, as they often feature extensive in-game economies, character progression systems, and various items and resources. For each genre, we will look at the potential applications of the three primary types of tokens: Fungible Tokens (FTs), Semi-Fungible Tokens (SFTs), and Non-Fungible Tokens (NFTs).

Tokens as in-game currency

Incorporating FTs as in-game currency can enable player-driven economies and facilitate trading between players. The issue here lies primarily with inflation as has been illustrated through gold farming in MMOs. Distribution has to be tightly controlled and the sinks need to be strongly desired to keep them interesting. We would consider isolating tokens to a specific sub-system of the game instead of making them a universal part of it.

SFTs for managing resources and crafting

By implementing SFTs, developers can create unique resource combinations and crafting recipes. It’s helpful to think of these as different resource types that should be sunk often which makes crafting materials an ideal application. By allowing players to trade these it lets some players specialize in either the acquisition of materials or the crafting with them. However, inflation is still something that needs to be controlled here, and it’s possible to use burning through crafting to mitigate inflation.

NFTs for rare items and collectibles

NFTs can be used to represent rare items, collectibles, and other unique assets. These exclusive in-game assets can become highly sought-after, creating a liquid market for trading and collecting. NFTs can also serve as a means of recognizing player achievements, offering a tangible and tradeable representation of their in-game accomplishments as is often the case with equipment gained from high-end Raid bosses in many MMOs. Sinks for NFTs should be seriously considered for anything easily obtainable. Gear can have durability and repair costs that escalate to eventually make a player consider “salvaging” the item for SFT craft materials once it’s become too expensive. Designers could also consider the potential for players to lose the items on death in more hardcore settings as a way to sink items, similar to what Shrapnel is doing in the Extraction Shooter genre.

Battle Royale/Extraction

Battle Royale and Extraction games, with their competitive nature and time-limited matches, offer a unique opportunity for web3 implementation. These fast-paced games can leverage blockchain-based tokens to enhance player progression, reward systems, and customization options.

FTs for battle pass progression and rewards

FTs can be used to support battle pass progression and rewards, offering players a more transparent and decentralized way to earn in-game currency and items. By integrating FTs, developers can create dynamic reward systems that encourage players to participate in events and challenges, fostering a sense of achievement and progression. Tying this to a Premium Battle Pass can limit the distribution to more engaged and spending players. Some Premium Battle Passes already provide a premium currency to allow players to recoup part of the costs, the difference here is the non-tradability of regular game currency. In contrast, FTs are highly tradable, which is why there should be some depth to the token sinks to encourage heavy spending - Gacha systems for cosmetics could be a good fit here.

SFTs for consumable items and limited-use power-ups

SFTs can be implemented to manage consumable items and limited-use power-ups in Battle Royale and Extraction games. These tokens can be used to create a wide range of in-game items with varying levels of rarity and utility, providing players with strategic choices and customization options during matches. SFTs are generally seen as more consumable than NFTs so it makes sense to treat them that way here. Limiting the quantity of SFTs a player can bring into the match is important for game balance purposes though. The total quantity of SFTs could even potentially be capped by power level if, for instance, a player could bring 3 low power, 2 medium power or just 1 high power items.

NFTs for rare skins and exclusive content

NFTs can represent rare skins, exclusive content, and other unique in-game assets in Battle Royale and Extraction games. Shrapnel is betting on this aspect combined with UGC to increase the excitement - interestingly enough, players do not lose the cosmetic elements when dropping gear as it remains separated. Both Battle Royale and Extraction games can consider airdropping rare NFTs into matches to really drive up the tension around a match as players fight over it. Warzone 2 DMZ is an interesting example around its weapon case players can try and extract with. Deadrop is an example of a web3-powered extraction game we will be looking out for.

Multiplayer Roguelikes

Roguelike and Roguelite games, known for their procedurally generated levels and permadeath mechanics, are another interesting opportunity for web3 integration. By incorporating blockchain-based tokens, these games can offer players a sense of persistent progression, reward systems, and novel ways to customize their gaming experience, even in the face of constant challenges and resets. Currently, not many multiplayer roguelikes games exist, as they often get lumped into ARPGs, as seen with Diablo where its hardcore mode is made optional. Superior is an example of a multiplayer roguelike web3 game that is currently in development.

FTs for persistent progression systems

FTs can be used to implement persistent progression systems in Roguelike and Roguelite games, allowing players to earn and accumulate in-game currency or resources across multiple playthroughs. This can create a sense of continuity and achievement, motivating players to continually improve their skills and strategies. The important part however is making sure the token does not contribute to other forms of progress inflation. Ideally, the token should be used to purchase boosts for individual runs and there should be higher priced consumables with some extremely high priced items like revives to allow for faster sinking of the tokens to slow down or limit the accumulation of tokens.

SFTs for managing consumables and power-ups

SFTs can be utilized to manage consumables and power-ups in Roguelike and Roguelite games, providing players with a range of strategic choices and a deeper level of customization. By incorporating SFTs, developers can create unique combinations of items and abilities that offer different tactical advantages during gameplay, encouraging players to experiment and adapt their strategies. One possibility is to have consumable equipment or items that accentuate certain playstyles and players can always trade equipment for playstyles they simply do not care for.

NFTs for exclusive items and character unlocks

NFTs can represent exclusive items, rare collectibles, and character unlocks in Roguelike and Roguelite games, offering players a sense of accomplishment and a tangible representation of their progress. One way to implement these would be to have a rare chance of drop on defeating a boss to encourage multiple attempts at a level, similar to how Diablo encourages repeat runs, but with much higher variability of levels in this genre (Diablo was originally much more of a roguelike!). Again, combatting inflation is critical here, which can be done with things like very small drop rate chances, large loot tables, and procedurally generated NFT drops with lots of different attributes. These could even be very rare but permanent (kept on death) versions of the SFT items with special cosmetics or effects to represent their status.

MOBAs

Multiplayer Online Battle Arena (MOBA) games, characterized by their intense, team-based gameplay and intricate hero roster, are another exciting platform for web3 integration. By incorporating blockchain-based tokens, MOBAs can offer players new ways to engage with in-game economies, customize their heroes, and develop unique strategies, all while fostering a sense of community and competition. The difficult part with MOBAs lies with maintaining a sense of competitive integrity with an open economy.

FTs for in-game currency and hero progression

FTs can be used as in-game currency, enabling players to unlock new heroes, purchase cosmetic items, or progress their heroes in MOBA games. By utilizing FTs, developers can create a player-driven economy that rewards active participation and allows players to trade assets with one another. Careful consideration has to be made around being or competing with a premium currency system however - the Battle Pass example from the Battle Royale/Extraction genre section is one potential use case here.

SFTs for hero abilities and item management

SFTs can be implemented to manage hero abilities, item upgrades, and other strategic elements in MOBA games. By incorporating SFTs, developers can create a deep and engaging system that allows players to customize their heroes and adapt their strategies based on the unique combination of abilities and items they choose. These could be one-time use consumable items that are relatively easily earned and sufficiently inflationary to make prices low enough that it does not translate into a competitive issue. They could be given out frequently as match rewards even upon a loss to help players feel more motivated towards a future match while allowing for trade if it is not an item the player will use.

NFTs for rare skins and exclusive content

NFTs can be utilized to represent rare skins, exclusive content, and other unique in-game assets in MOBA games. With players only being able to really equip one skin on a character at a time, having the ability to trade skins provides opportunity for more usage of excess skins. This can be combined with a Gacha system that uses skins as an input for a chance at higher rarity skins.

Simulation/Survival

Simulation and Survival games, known for their immersive environments and focus on resource management. By incorporating blockchain-based tokens, these games can offer players an enhanced sense of ownership, more intricate economies, and innovative ways to engage with the game world, creating a more immersive experience.

FTs for in-game currency and resource trading

FTs can be used as in-game currency in Simulation and Survival games, allowing players to trade resources, purchase items, or expand their virtual territories. By implementing FTs, developers can create a player-driven economy that rewards active participation and encourages players to collaborate or compete with one another, further enhancing the gaming experience. With death and destruction being frequent in many of these games, there is the possibility of incorporating these as sinks. In EVE Online for example, large ships can be destroyed, thereby sinking high amounts of the economy. This could mean a loss of the tokens directly or a loss of what the tokens are used for. Ideally, the tokens should provide huge gameplay advantages and instead focus on expression and socialization.

SFTs for managing resources and crafting materials

SFTs can be utilized to manage resources, crafting materials, and other strategic elements in Simulation and Survival games. By incorporating SFTs, developers can create complex systems that allow players to discover, gather, and utilize resources in unique ways, fostering a deeper level of engagement and interaction with the game world. This is similar to the crafting materials situation with RPGs and allows for interesting geographic resource trade that happens outside the game and thereby does not risk death when trading.

NFTs for rare items and exclusive content

NFTs can be used to represent rare items, exclusive content, and other unique in-game assets in Simulation and Survival games. Beyond the socialization aspect, many players of these types of games are often left with a feeling of “pointless building” without the existence of endgame style content. Allowing for things like super rare crafting materials being used to craft high-level, but not severely gameplay-affecting items/buildings/etc. can create situations where players come together to trade and build. Depending on the difficulty and costs these may be able to somewhat counter inflation.

Web3 games offer a unique opportunity for developers to innovate across various genres and even create new ones. Multiplayer games, in particular, can benefit from the potential of Fungible Tokens (FTs), Semi-Fungible Tokens (SFTs), and Non-Fungible Tokens (NFTs) to create more engaging and immersive experiences.

From RPGs and MOBAs to Roguelikes and Survival games, web3 technology can enhance player-driven economies, facilitate the trading and collecting of rare in-game assets, and provide more intricate systems for managing resources and crafting materials. As a result, players can enjoy a deeper level of engagement and personalization, fostering a stronger sense of community and achievement within these games. These genres are just the tip of the iceberg and are meant to stimulate further thinking around other, novel use cases.

As the gaming industry continues to embrace blockchain technology, we can expect even more innovative ways to incorporate tokens and decentralized systems into game design. By experimenting with these possibilities, developers can shape the future of gaming and provide players with unique experiences that push the boundaries of what games can be.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

A balancing act

Although making money is not the primary goal for (all) game developers, it is important to remember that generating revenue is crucial for sustaining ongoing operations, including live ops and the development of new content. By extension, this need to generate income creates a responsibility for developers to ensure their games are enjoyable and appealing to players. F2P arguably has some manipulative aspect to it, though the spending in the game is completely optional. In this sense, game developers need to design game aspects that players are willing to spend on. Unfortunately, that can also mean types of players who do not actively spend might see their favorite portions of games they love dwindle in support over time. So, while developers aim to keep all players happy, balancing the needs of paying and non-paying players can be challenging.

World of whales

One particular type of player which is the most desirable for game developers to understand are whales. Catering to whales, or high-spending players, is a practice that may seem malicious but is often misunderstood. Similar to high rollers in the casino world, whales enjoy the special treatment they receive and are willing to spend significant amounts of money to maintain it. This creates a mutually beneficial relationship between the whales and developers, allowing for revenue generation while keeping these players engaged. However, it is important to strike a balance between catering to the high spenders while also ensuring that the game is enjoyable for all types of players, including low or no spenders. Gabe Leydon has talked publicly about his understanding of whales from his time at Machine Zone as understanding that these players want to be respected leaders and a sense of power and influence, rather than simply wanting to destroy other players.

Monetizing on fun

While it is important for game developers to generate revenue, they need to be careful not to manipulate players too aggressively. Books like "Addicted by Design" have revealed the potential negative consequences of such practices. Striking a balance between engagement and ethical boundaries is crucial. However, it can be challenging to maintain this balance when analytics focus too heavily on spending habits. This is where a balance between spending habits and actual in-game activity is important. In reality it can be hard to get players to even spend money on things they love without some degree of goading. To encourage players to spend money on things they love, developers must identify the type of content that different players prefer and build on that. It is also easier to ask for more money while players are having fun, as the premium market has shown.

Shift towards retention

To keep players engaged for extended periods, game developers strive to strike a balance between fun and addictive elements in their games. By understanding their players better, developers can fine-tune gameplay mechanics to ensure long-term enjoyment and success. Retention has become a crucial metric for developers due to the rising costs of acquiring new users. As a result, the focus has shifted from acquiring new players to keeping existing ones around for as long as possible. This involves understanding how players engage with the game initially, through polished tutorials, exciting hooks, and compelling gameplay. In web3 games, allowing players to sell off their digital assets and exit the game can align with this focus, as it reduces the “sunk cost reason” for players to stick with a game.

Public sentiment vs. data insights

In the gaming community, a vocal minority of players can sometimes overshadow the opinions of the silent majority. Game developers must be careful not to cater solely to this vocal minority and instead prioritize understanding the preferences of the wider player base. This can be difficult, as online platforms like Reddit often amplify the voices of the vocal minority. Interestingly, even these outspoken players often contradict themselves in their in-game behavior versus their online speech. It is crucial for developers to balance public sentiment with data-driven insights. The rise of web3 games has helped in this regard by making community involvement a priority from the outset. By linking player data to social media accounts, developers can gain deeper insights into player behavior and preferences.

Transparency does not cure all

For a game to thrive, it needs a happy and satisfied player base. Game developers must listen to and understand the needs of their players to ensure the longevity and success of their games. However, players' preferences and opinions can often be biased and difficult to communicate effectively. To gain deeper insight into player behavior, developers rely on analytics tools to make data-driven decisions about improving gameplay. Even with transparent data and explanations, players may still have strong opinions about game balance, as seen in the example of Rainbow 6: Siege, where Ubisoft releases "designer's notes" with data to explain their updates, yet even then receives pushback from players.

Understanding evolving preferences

To create a successful game, developers must understand and support the different interests within their player community. By focusing on the most engaged players, developers can create a more tailored and satisfying experience. However, this can be challenging in web3 with varying player archetypes and a broad selection of game genres. For instance, Bartle types, a popular player categorization method, are not fixed, and players often evolve and shift between types. Recognizing this, game developers can better understand the dynamic nature of their player base and adjust their games to cater to evolving preferences. It is crucial for developers to actively seek a balance between talking to players and analyzing data to provide context for player feedback - understanding why players say what they say is just as important as analyzing the data they provide.

Creating a win-win

Most game developers genuinely care about understanding their players to create enjoyable, engaging experiences. Balancing financial needs with ethical considerations, developers need to cater to different player types and evolve alongside their audience. By utilizing analytics tools and considering the full spectrum of player preferences, developers can ensure the longevity and success of their games, ultimately benefiting both the developers and the players themselves.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various intricacies of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

The true meaning of a digital wallet

There is a common misunderstanding that tokens and NFTs are stored "in a wallet," but this belief is wrong. The truth is that your wallet represents a digital signature or "password" (private key) that authorizes you to sign messages/transactions, providing proof that they are signed by you. The tokens and NFTs themselves are simply entries in a smart contract, similar to a list that reads, "Wallet address 1234567890 has this many tokens" or "Wallet address 1234567890 has this NFT ID." Ownership is established by sending action requests to the smart contract, accompanied by your signature as proof that you are the one asking for a specific action to be performed.

Adding backdoors and administrative functions

The code of a smart contract, once deployed on the blockchain, is immutable, meaning it cannot be directly modified. The rationale behind this is to ensure that the code is open and trustworthy, but the average user of tokens or NFTs typically does not read the code. In theory, this means that a smart contract developer could add backdoors and administrative functions without the user's knowledge. Typically, a smart contract will allow certain actions to be performed based on the wallet address of the user making the request. While there are standards such as ERC-20 and ERC-721 that specify basic requirements for token and NFT contracts, these are minimal requirements and do not restrict what can be done. These standards simply provide guidelines for functions such as "transfer", which expects certain parameters to ensure that the transfer or sale of an NFT works as intended.

Limitations of blockchain “ownership”

It is important to note that we are not suggesting here that token or NFT smart contracts are typically deceitful. Generally, they are standard contracts with additional functions such as "whitelist" mint functionality (which is a list of approved addresses that can use the mint action) or airdropping (which allows a special admin wallet address to assign certain NFTs to specific wallets) or other special extensions. However, there are times when special code is added, such as for transfers to enforce royalties as evidence that you do not actually "own" the item. For example, some NFT projects have allow or block lists of marketplaces that are authorized to transfer the NFT to facilitate royalty enforcement. We are not saying this is strictly a good or bad thing, but it is important to understand the limitations of what blockchain “ownership” actually means.

Persistent existence and transferability

After discussing the technical aspects of blockchain ownership, it is important to understand what "true ownership" means. Typically, this refers to two aspects: the ability for items to exist beyond the game or platform and the ability to transfer or resell owned items. While persistent existence is a critical feature, it does have limitations. The ability to prove that you own a specific NFT is what truly persists, but only the metadata that is stored on the blockchain for the NFT remains intact as images hosted elsewhere, game mechanics or functionality context, and any data stored on game servers can be lost. To address this, some decentralized hosting solutions like Interplanetary File Service (IPFS) and Arweave exist, but they are not permeant. Recent examples highlight how NFT developers may be the true owners depending on their ability to modify items. Storing proof of ownership on the blockchain is still superior to typical digital media ownership, which is a license stored on centralized servers, such as Kindle books (which can and have been revoked by Amazon) or iTunes music (which Apple controls).

Re-selling digital items

The previous section lays out the limitations of transferring or re-selling what you own, particularly with regards to enforcing terms of sale such as royalties. In fact, this is a step backwards from physical items, which can typically be freely re-sold without any interference. The ability to re-sell purchased items may be a big step forward for digital items, but considering physical copies of digital games already had this feature it is not much progress towards “true ownership”. Allowing transfer or re-sale also poses potential drawbacks, such as disrupting game balance through pay-to-win mechanics or exacerbating economic issues such as inflation. Nevertheless, given the often exploitative nature of in-app purchases, the ability to re-sell digital items remains a valuable feature, although there is room for improvement.

Rights granted via ownership

To gain a better perspective on the possibilities of ownership, it is helpful to view it as a mechanism that grants "rights". The transfer of an NFT, for instance, is an example of a right that is bestowed by a smart contract, but can also be constrained or withdrawn. The ability to modify a physical product is generally assumed, but with NFTs, this is not the case, except in rare circumstances. For instance, if you purchase a PFP, you cannot draw a moustache on it and have it reflect for others. Similarly, if you buy a weapon NFT, you cannot modify its stats, appearance, sound, or other aspects. Even purchasing weapon skins as NFTs only allows you to display them together with the weapon. While it makes sense not to allow owners to change how NFTs function in the game, such restrictions should be part of the game's code or database, not the NFT itself. It begs the question: what metadata can we realistically allow owners to modify? And what does "true ownership" mean if you cannot modify your assets in any way?

Licensing in web3

Protecting intellectual property can be a complex issue as it involves safeguarding intangible information, meaning the rights have to come from the legal system. Bored Ape Yacht Club provides an interesting example of how a license for intellectual property usage rights can be granted to the NFT holder. Many people, including celebrities like Seth Green, have explored the implications of owning a license for a unique 1 of 1 piece of art. Licenses can offer various rights such as reproduction, distribution, copyright usage, and derivative work. The derivative work right is particularly interesting as it allows the creation of new assets that use modified versions of the original, rather than modifying the original itself. This can give a stronger sense of "true ownership", but it is more complicated to manage. Part of the problem is that brand identity is still a significant concern that NFT projects and games may be overprotective of.

Transferring ownership

Some rights are implicitly granted or in some cases explicitly integrated into the NFT marketplace or game, such as the right to rent, lease, or loan NFTs. This is an interesting extension of the right to transfer ownership as it monetizes temporary transfers of control or ownership. This right has gained popularity with the Axie Infinity guild and scholar model and has been adopted by many games. In contrast, web2 games have typically lacked the means to enable this for game assets. In games where land ownership is significant, these rights are often considered an essential part of the asset's value. Profit sharing models are another interesting aspect of this space, where instead of paying upfront rent, the owner receives a share of the profits. Although this model is not commonly found in the physical world due to overhead, smart contracts make this process seamless.

Governance tokens vs. NFTs

One area that has seen some experimentation in terms of granting of rights but requires more exploration is governance. Having ownership of a corporation can grant the power to influence decisions and profit, but involvement in profit may draw attention from security laws and pose legal issues. However, ownership that provides governance rights, such as voting or participation in decision-making, is an area worth exploring further. Governance tokens have been used to have varying levels of influence and represent vested interest through risk, while some games treat ownership of genesis NFTs as a type of founder membership that offers a voice in exchange for early investment. Both models require further iteration and consideration of incentives and alignment. Land ownership is an obvious case for strong influence, but the specifics of how that influence is exercised are still being developed.

Moving beyond bait-and-switch

As we continue to think about the potential rights that come with "true ownership," we must also consider how these rights will be enforced, whether through smart contracts or other forms of community management. The matter of rights can prove to be complicated, often requiring a struggle to safeguard them, with no guarantee that they will be honored despite any promises made. If game developers are promoting "true ownership" as a feature, we need to hold them accountable for what it entails and ensure that we are making progress rather than simply tweaking the current system. The financialization of digital assets is just the beginning of what this could entail, so let's move beyond the existing system and ensure that NFTs are empowering rather than just another bait-and-switch, as some traditional gamers might suggest.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

How money flows in esports

The funds for esports organizations mostly come from sponsors, though there may be some revenue from merchandise sales and sometimes even from the game developer to ensure stability. This money is then spent on league spots franchises and payment and housing of players. These organizations may also receive a portion of the prize pool money, or sometimes all of it, to help cover the player overheads. Sponsors pay for exposure, similar to Nascar, and ultimately esports relies on marketing spend from all three groups: developers, orgs, and sponsors. Additionally, tournaments themselves often have sponsors that pay game developers for league/event exposure. To further complicate things, many game developers outsource the actual running of leagues/events to organizations such as ESL, FaceIt, and Blast, who pay for production staff that usually includes talent like commentators and hosts.

Bad actors

The fact that the esports industry is relatively new and involves different players with different interests leads to several challenges. Game developers face problems such as inexperienced middle managers, bureaucratic red tape, and difficulties with managing marketing budgets for contractor payments and prize pool payouts. In esports organizations on the other hand there is a general lack of transparency concerning finances, and players frequently don’t receive their salaries on time or at all. Unless game developers exercise proper oversight, contractors may also engage in similarly dishonest behaviour. Moreover, sponsors often lack essential information, such as metrics and financial data, which impedes their ability to make sound business decisions.

Transparency of money flows

We believe that web3 can help with some of these issues, especially around financial management and transparency. The most apparent way that blockchain technology can be valuable is by ensuring the transparent flow of funds. This could be achieved through smart contract escrows for player and prize payments, as is already the case for Axie Infinity, where leaderboard-based payment systems are used to pay out AXS rewards at the end of each season. Additionally, Splinterlands demonstrates how automated payouts for player or org/guild-run tournaments can be achieved by automating the tournament and paying out from an escrow account. Smart contract technology could also be utilized to fund prize pools using player contributions/purchases, as seen in games like DOTA and Rainbow 6: Siege. These contributions could be distributed to treasuries in a manner similar to royalties, providing complete transparency and enabling everyone to monitor the progress of the prize pool in real time, thus facilitating ethical prize pool funding.

Funding tournament prize pools

Web3 can also help by offering alternative forms of prizes in the form of digital assets, including tokens and NFTs, as opposed to solely cash payments. In fact, the value these unlock is more around funding prize pools by providing prizes that are low cost to a developer but high value to players. Tokens, if highly desired by the player base at large, can be designed in a way that it makes sense for tournament winners to sell their winnings to general players. NFTs, on the other hand, offer even more possibilities as they can provide exclusive cosmetic variations or even virtual autographs for winners. For example, the Pokemon TCG sells special editions of tournament-winning decks, but imagine if the winners could sell their copies of those special decks or cards to other players. By lowering the cost of providing prizes for game developers the number of tournaments and esports events can potentially increase and make them more accessible to a wider global audience.

Smarter affiliate systems

Another area web3 technology can offer support is the way organizations work together with influencers. Influencers play a vital role in building the brand image of organizations and attracting a loyal audience. With the use of smart contract-based royalty systems, there is an opportunity to create more efficient and automated affiliate programs for influencers. In a traditional affiliate system, the influencer uses a unique link or coupon code to track their sales. However, this method lacks transparency and can lead to complications in paying influencers, which can lead to a lack of motivation and trust in the organization or brand they represent. Smart contract systems can provide proper attribution to the source of the sale, improve transparency, and automate payment processes. For example, Faze may have some NFT skins in a web3 game and want to incentivize influencers of the game to promote sales of these digital items. In a typical web2 game, each influencer would need to have a unique coupon code, and every given period, the game developer would pay out a percentage of sales to Faze, along with a report of coupon code usage. Faze would then need to divide the revenue among its influencers. With a smart contract-driven system, an influencer could register their coupon codes and wallet address in the smart contract, and whenever someone purchases the Faze NFTs, the smart contract would automatically distribute payments to Faze and the influencer.

Driving new esports business models

These are just a few examples of how blockchain technology can facilitate improved business models in esports through financial automation and transparency, but there are many more possibilities. Unfortunately, crypto has a bad reputation in the industry due to examples like the FTX TSM deal. However, as web3 games establish new esports, there is an opportunity to change this perception. We anticipate seeing more innovative profit-sharing models between game developers and players that organically improve discoverability and provide sustainable earning opportunities for players. While competitive gaming may not be for everyone, as long as there is significant interest from players in watching high-skill players compete, there is an opportunity for those skilled players to earn a living from their passion.

Thank you for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

User identity in web3

Typically, most games on platforms are somewhat tied to hardware driven accounts, such as Steam/Epic on PC, Xbox/Playstation gamer IDs on console, and Apple/Google accounts on mobile. In contrast to the these platforms, web3 games lack a distinct native platform and typically rely on wallets as the primary means of user identification. However, since nearly all assets are transferable between wallets, this is not strongly tied to any specific platform. This situation is unlikely to continue indefinitely as the demand for simpler onboarding and accessibility is likely to drive the linking of wallets to platforms or social accounts. We anticipate a combination of self-custodial linking and custodial creation to proliferate, as game developers will likely lean towards easy onboarding middleware or simpler-to-use wallets, such as Sequence.

Why tracking true player numbers is ambiguous

If a wallet is not linked to a game or platform account, there is a high possibility that a single player may be using multiple wallets, especially with digital wallet providers such as Metamask making wallet creation incredibly easy. This is particularly concerning for free-to-play games as players can create unlimited, free accounts, which also invites bots. While email-based signups are susceptible to this issue too, especially with domain names featuring catch-all forwarding, in web3, the absence of a dedicated platform account system and the potential financial gains from operating multiple accounts exacerbate the problem. This makes it difficult to track the number of actual players in a game, but also enables easy inflation of tradeable NFTs or tokens that are given away to accounts. The absence of a distinct hardware identifier or IP address, along with the presence of bots makes it challenging to determine the number of unique human players a game has.

Balancing web3 anonymity

One way this issue can be alleviated is by using a combination of KYC and soulbound tokens/NFTs that link a unique real world identity to a specific wallet in a way that prevents identity duplication. We recommend this podcast episode as a great introduction to the issues on KYC/AML in web3. While this approach may contradict the anonymity-based ethos of web3, it can assist with government regulation. Governments already have the forensic capability to trace individuals to wallet addresses through bank or real-world transaction involvement, so this change is not significant. This “non-privacy” approach also goes against the trend set by Apple, which made efforts to prevent unique user device identification on iOS, and similar moves that are expected to come from Google.

KYC can mitigate bot activity

Financial incentives are expected to encourage players to overcome their privacy concerns, as demonstrated by Animoca Brands' push for KYC through the Otherdeeds sale and Benji Bananas reward claims. Games can easily require KYC for taking tokens or NFTs out of the game, citing regulatory concerns. However, we need to establish KYC soulbound standards and on-ramp providers are in a good position to help by linking players to the bank accounts used for on-ramping. This approach does not eliminate bots, as identity fraud and the sale of KYC'd identities are possible, but it can significantly reduce the number of bots, as a unique human identity is still required per bot.

On-chain transactions vs. gameplay data

Another issue with using wallets as a proxy for unique players is the way wallet activity is tracked. Popular sites for analytics like DappRadar and Dune are only able to track contract interactions and the associated wallet addresses, rather than actual gameplay data, unless it is entirely on-chain. This leads to two major problems: First, only select transactions are captured as gameplay, which becomes more prevalent as more "web 2.5" games are released that offer optional web3 integration. Second, transactions that are purely financial in nature and not related to gameplay are lumped together with play-related transactions, making it difficult to distinguish between investors and legitimate players. Mobile games with web3 features will likely link wallets to Apple/Google accounts, providing game developers with more accurate player and wallet information. However, transparency for others will be more challenging. Sites like DappRadar do not differentiate between different types of players and track all contract interactions towards Unique Active Wallets.

Understanding user behavior is key to success

Understanding user behavior and acquisition is crucial for the future of web3 gaming, especially in terms of marketing and advertising. In the mobile game industry, tracking and acquiring players is essential, and game developers cannot afford to waste resources on acquiring bad users. With better analytics, game developers can incentivize good economic player behavior and reduce their reliance on advertising campaigns targeted at the wrong audience. While web3 games are currently targeted at a web3 native audience, as the industry grows, it will be important to expand beyond this user base, and understanding user behavior and acquisition will be key to success.

Wallet activity is not sufficient

By only tracking wallet transactions, we not only miss out on understanding player behavior, but we also run the risk of confusing true players with bots, investors, or duplicate players. Fortunately, some of the systems previously mentioned, such as KYC, linking to less temporary account types, and soulbound F2P content, can help with this issue. However, data.ai and Sensor Tower have not yet shown any interest in finding ways to work with web3 specifically and instead are focused solely on mobile gameplay analytics. While this approach may work to some extent, it misses out on the bigger picture of incorporating both gameplay and on-chain interactions to fully understand player and economic behavior. Ultimately, both web2 and web3 data must work together to truly understand players, not just wallets.

Thanks for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

Limiting digital asset supply

The control of digital supply is crucial as information can easily be copied, making it challenging to be protected. However, controlling authorization to own it is possible. Centralized servers have been used to control the supply of digital assets, but this method has its drawbacks, such as the need to trust the centralized entity. Blockchain technology offers transparency and proof of the designed limitations of digital assets, which can be enforced through a blockchain algorithm or smart contract code, limiting tokens and NFTs. While there is no requirement to limit the supply of digital assets, leaving it open potentially invites inflationary issues. This was seen in the case of Axie Infinity, which did not impose any maximum limits on SLP earned through gameplay or the number of Axies that could be bred. The idea behind this was to allow the token and Axie supply to scale with the player base and give players control over the economy. However, this led to overproduction and greed which resulted in a death spiral that Axie Infinity: Origins is still trying to recover from.

Token supply systems in web3 games

Although it is now widely accepted to set limitations around the economic aspects of web3 games, there is still a need to carefully consider the implementation of these restrictions. Following the collapse of Axie Infinity, the approach has often involved transitioning to a two-token economy where one token is used as a utility token that can be earned and is allowed to be inflationary, while the second token is a governance token with a fixed total supply. This strategy makes sense as it allows the game's economy to expand with the players, ensuring there is always something for players to earn and spend. Additionally, the fixed supply of the governance tokens is comparable to shares in an organization and ensures that the value of these tokens is not diluted over time. Other variations on this approach include single token capped economies, as well as governance tokens with such high utility that they effectively serve as a secondary utility token. Various token distribution schemes have also been developed, outlining precisely how and when tokens will enter circulation for different parties. As a result, it is possible to anticipate how changes in token supply and potential selling pressure will affect the token's value.

Drawbacks of a fixed token supply

Despite its widespread adoption, there are certain flaws with a fixed token supply system that tend to be overlooked. First, a limited supply only becomes relevant once it has been reached. Prior to that, the cap is simply determined by the circulating supply, which is a constantly fluctuating value, and thus the impact on the token's value is more determined by typical supply and demand pressures. Since most tokenomics plans are designed to last for several years, it is rare to find examples of tokens that have already reached their cap, which makes it difficult to predict their impact. Typically, the expectation is that demand will grow faster than the circulating supply, resulting in a gradual increase in the token's value over time, primarily benefiting investors. However, since it is unlikely that demand will always keep up with supply growth, token prices tend to fluctuate considerably in the early stages, influenced by both high and low prices. Second, these fixed caps are essentially educated guesses regarding the maximum amount of tokens required. While it is relatively easy to announce token buy-backs and burning if the supply ends up being too high, there is rarely a plan in place for dealing with a shortage of tokens. Attempting to forecast and regulate a token's supply for a game that is still in development or is yet to be released is akin to putting the cart before the horse.

Fixed supply NFTs

Although our attention has been on tokens so far, fixed supply NFTs can also present issues. While it makes sense to control the exact supply of collectibles, as is customary in the physical world, it is often impractical for other types of assets. The biggest issues often lie with NFTs that are necessary to access a game or are a critical aspect of gameplay. Limiting the availability of these gatekeeping NFTs has resulted in significant inflation and speculative or FOMO behavior, but it is rarely sustainable. This is partly because it contradicts the desire for growth in the economy. Restricting growth can hurt long-term revenue in favor of short-term fundraising. Pre-sales and land sales are notorious for this. There are ways to do pre-sales that provide early access or a special recognition status, which may not generate large sums of money but will be more sustainable. Land sales will also ultimately prove problematic, particularly if they become a bottleneck for user-generated content that is crucial to the economy's design. Although the available land may appear to be sufficient initially, if the game becomes successful enough to run out of land at reasonable prices, content creation could stagnate. Platforms like Second Life tried to increase their land supply when prices became exorbitant, which resulted in a drastic crash in land prices and an exodus of businesses and players that damaged the entire economy.

Real and artificial scarcity

The main topic of this discussion is the concept of "artificial scarcity," which refers to the irrevocable decision to limit the supply or create scarcity. The term "artificial" is used as scarcity is either determined arbitrarily by a person or group (”artificial”), or by real-world constraints such as physics, economics, and time (”real”). Gold is an example of real scarcity since its finite nature is not decided by anyone, but rather by real-world constraints. Bitcoin is a combination of both artificial and real scarcity, with its maximum supply being artificial, while the current circulating supply is real, as it is dependent on factors like mining power. Unfortunately, most tokens and NFTs are purely artificial in design with tokenomics plans specifying the exact amount of supply available at any given time, or the exact number of NFTs that will be minted simultaneously. Axie Infinity was originally designed with more real scarcity as SLP was minted based on play constraints and NFTs were minted based on breeding system constraints, which related directly to the SLP constraints.

Innovation emerging from artificial constraints

Although many consider Axie Infinity to be a failure, it is worth looking at the interesting ways in which real-world constraints affected the game, in contrast to purely artificial ones. The real-world constraint on the supply of SLP was determined by both the total Axie supply and the total number of players. The total Axie supply was also limited by the total SLP supply, which was needed to cover breeding costs. One of the interesting aspects of real constraints is that they can potentially inspire innovative solutions, rather than being insurmountable barriers. Because the high prices and investment potential were in Axies, early adopters and investors sought ways to overcome the breeding constraints. The main breeding constraint was that it required SLP, which could only be obtained through daily play. This led to the first innovation of having other people play with one's NFTs to generate the necessary SLP to continue breeding and create a positive feedback loop. Another constraint to consider was the amount of SLP earned each day, which depended on skill level. This led to the second innovation around the formation of guilds to help facilitate more skilled play and business models around SLP profit sharing to reward skill and dedication. Today, the problems with the system are obvious, but these simple real-world constraints led to innovations that would not have been possible with purely artificial constraints.

Constraining supply via demand

Rather than replicating the problems of Axie Infinity, we should focus on how constraints can shape a system. In real life, gold mining might be a tough industry, but the constraints of geology and technological scouting lead to new innovations both in tech and business. With play-to-earn models, play is often the constraint on supply or earnings, but simply using bots or cheap labor is not a sustainable solution. Instead, we need to get creative and consider how supply can be constrained by demand. Shifting the constraint to highly competitive play was a simple adaptation Axie Infinity has implemented with its AXS token, but unfortunately this also tends to burn and churn players over time. One interesting example is the soft-peg system used by Splinterlands, which adjusts the daily reward supply of its uncapped DEC token based on the price of the token as a proxy for demand. While this system is not perfect, it does show promise in keeping the token price close to or above the desired soft-peg price. However, using price as a proxy for demand is not entirely accurate as it does not take into account how demand is expressed, and it only throttles daily output without controlling the real circulating supply.

Creating authentic game economies

We are only beginning to explore the potential of real scarcity in web3 games, as the possibilities in a dynamic digital world that can draw from multiple sources of information are vast. It is crucial to view supply as a result of the various forces and regulations we put in place when constructing a web3 game economy. Traditional web2 game economies, for instance, depend on game and economic design to shape the uncapped supply of soft currencies, rather than simply establishing arbitrary caps to confer value. While Source and Sink design may be more challenging than capped circulating supply design, it is an essential approach to embracing the freedom of the digital world and advancing economic design. Capped circulating supply design and tokenomics supply curves are a simplistic and unsophisticated approach that only applies in specific scenarios, such as collectibles. Instead, we should aim to make our game economies more authentic by creating them with regulations and frameworks, rather than artificial limitations.

Thanks for reading this piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

The issue of liquidity has taken center stage again due to the recent developments around SVB and the consequent all-time-high demand for emergency liquidity of US banks, which raised the broader question of banking solvency in the US. While recent developments in the US have mostly questioned funding liquidity of banks and their ability to convert their assets into cash or cash-equivalents to meet short-term obligations such as customers withdrawing deposits, there is a similar concept of liquidity on asset markets such as cryptocurrency markets, which we will explain next. In this article, we aim to take a broader approach to this intricate topic and explore its implications for web3.

Let’s start off by breaking down the concept of liquidity on asset markets. One of the earliest definitions of liquid markets has been given by Fischer Black in 1971 (”Toward a Fully Automated Stock Exchange”) by referring to a market on which a “bid-ask price is always quoted, its spread is small enough and small trades can be immediately executed with minimal effect on price”. This definition expresses the concepts of breadth (tight spread), time (immediate execution / continuous pricing) and resiliency (minimal price impact). This has been extended in later works for example by Jun Muranaga and Tokiko Shimizu in a paper by the Bank of Japan (”Market microstructure and market liquidity”) by the concept of depth, whereas on a liquid market an asset should be tradable at any volume. As you can see, liquidity is a fairly technical concept and market microstructure scholars have spent the majority of this and last century analyzing liquidity and related concepts on many different markets. Given that we do not want to overcomplicate the topic here we will use a much simpler definition, that summarizes the main liquidity dimensions mentioned above: “In financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value or current market value.” (Corporate Finance Institute)

The recent surge in interest around liquidity is linked to the transition from a period of expansionary to a phase of tight monetary policy. In short, restrictive policy imposes constraints on margin borrowing, which in turn reduces the funding liquidity of all market participants and therefore has a negative impact on market liquidity. This is due to the fact that financing of asset holdings becomes more expensive for market participants and their perceived risk of holding these assets is higher. Currently, there is no preliminary empirical work that analyzes the effects of monetary policy on liquidity on cryptocurrency markets. Given the reduced trading volumes of cryptocurrencies in recent times, we can assume a similar effect takes place on these markets, having a significant impact on the ease of trading of cryptocurrencies, tokens and NFTs. When it comes to web3 games, the concept of liquidity in crypto markets has several implications unique to the industry:

• First, unlike other markets, much of crypto is built on fixed, capped, or highly controlled supplies.

• Second, fiat cash does not really “exist” in the crypto world, with stablecoins providing the closest equivalent.

• Third, various elements can be partially or completely isolated on blockchains, marketplaces, bridges, and smart contracts, which can significantly affect liquidity.

• Last, automated market makers (AMMs) exist to facilitate liquidity without requiring a buying party, relying instead on liquidity providers.

While fixed token or NFT supply can effectively combat inflation, it can also add constraints on liquidity, as there is no way to issue more assets to increase liquidity. One solution could be to reserve a portion of tokens as treasury to provide liquidity in emergency situations. However, this also increases the circulating supply and requires careful management. NFTs, in particular, are challenging to manage due to the absence of a reserve and lack of liquidity considerations. Games where players control the supply through breeding or other forms of minting can also encounter liquidity issues, depending on the importance of NFTs for the gameplay and the rate of player growth. Semi-Fungible Tokens (SFTs) like those used in Sunflower Land offer some advantages, but the Nifty Swap AMMs used for trading the SFTs has faced liquidity issues for certain resources and the liquidity pools for the Sunflower Land Token ($SFL) have a better fill rate compared to the ones for “cash” in the form of USDC.

The absence of a fully equivalent cash option in crypto creates some interesting liquidity scenarios even when looking to simply trade an asset. Despite the availability of several trading pairs for tokens on CEXs/DEXs, no adequate NFT to NFT trading systems exist, even for SFTs. This creates a situation where exchanging one NFT for another requires selling NFTs for some kind of token and then purchasing the desired NFTs. Although it is theoretically easier to exchange a more liquid asset than to find a suitable barter deal, it can still be difficult to find a prompt buyer for an NFT and simultaneously have the desired NFT available for purchase. This significant liquidity bottleneck has led to various attempts to improve the ease of buying and selling by concentrating solely on floor pricing and "sweeping," which ultimately views NFTs as more of a commodity similar to SFTs.

This problem is further exacerbated by the constraints imposed by the token used on the marketplace. To make a purchase swiftly, a potential buyer must either have the token at hand, swap it for another token, or purchase it for fiat via an on-ramp. On-ramps, on the other hand, may have minimum purchase thresholds or other barriers, and may involve undergoing KYC or other procedures to make a credit or debit card payment. While it would be more convenient to have a large number of tokens at hand, holding any token exposes one to more price volatility than fiat, since even stablecoins have de-pegged in extreme situations. Further, the NFT seller or marketplace must consider which token to accept in exchange for the NFT, as the token's liquidity, general availability, and market penetration all influence the ease of buying and selling NFTs. Skyweaver, for example, attempts to address liquidity issues in many ways, e.g., by making its trading cards SFTs, increasing market supply, using USDC instead of its own token, creating an easy-to-use wallet with on-ramp integration through Sequence, and even developing an SFT marketplace to centralize and encourage liquidity through NiftySwap.

It is worth noting the importance of liquidity in games that use NFTs. Many games operate in a way that directly undermines the liquidity of NFTs by incentivizing the staking of NFTs, which in turn diminishes the supply of NFTs available for trade on the market. However, if the game's business model relies on generating royalties from trading, then liquidity is more significant as it allows for continuous trading, resulting in more royalties. In such cases, it may be beneficial to consider making assets SFTs and facilitating easier trading through Nifty Swap AMMs with good liquidity pools and a highly liquid token. On the other hand, if the benefit of NFTs in the game is optional and selling them does not help the game, then liquidity does not have a significant impact, except for better price stability. Although marketplaces such as Blur that prioritize high liquidity through floor pricing may appear useful, they can actually be detrimental to games by placing a strong emphasis on flipping for profit and disregarding royalties.

The issue of liquidity in the realm of cryptocurrencies and web3 gaming presents unique challenges that warrant further investigation and innovative solutions. While tokens face a delicate balance between liquidity and inflation, NFTs, due to their non-fungible nature, require additional consideration, particularly in the context of web3 games. The development of new concepts, standards, and technologies, such as cross-chain bridges, decentralized exchanges, and layer-2 scaling solutions, will play a crucial role in addressing liquidity challenges and ensuring the efficiency and stability of the financial ecosystem in the ever-evolving world of cryptocurrencies and web3.

As the landscape continues to evolve, it is critical for projects, developers, and investors to understand the importance of liquidity and its potential implications on the broader market. By analyzing the unique characteristics and challenges associated with liquidity in the crypto and web3 gaming spaces, stakeholders can make informed decisions and contribute to a more resilient, efficient, and accessible financial system. Ultimately, fostering a deeper understanding of liquidity and its impact on the emerging world of web3 will help drive innovation, improve market efficiency, and support the growth of a vibrant and sustainable digital economy.

Thanks for reading this week’s piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

The concept of linking physical and digital ownership is not new, but NFTs offer similar advantages to physical product ownership and transfer as cryptocurrency does for currency, which is the ability to prove uniqueness and prevent "double spend". NFTs have an edge over physical goods in terms of verifiable uniqueness since physical goods can easily be counterfeited even with certificates or mint numbers without a trusted third party to confirm authenticity. In the case of NFTs, the blockchain serves as an ever-present, trustworthy authority. While it is possible to be duped by a counterfeit collection on a marketplace that is not paying enough attention, marketplaces do provide verified badges that link collections to a smart contract address. Connecting physical items to digital ownership with blockchain (or other cryptographic) verification will become increasingly important as society and consumption continue to shift towards the digital, especially if the concept of a metaverse gains popularity.

There are several ways the connection between the physical and digital space can manifest. One approach involves obtaining a digital NFT upon the purchase of a physical item, which may occur either during the purchasing process or through scanning to activate, similar to a gift card. Another popular way is redeeming an NFT for a physical product, which often involves burning the NFT or converting it into a non-redeemable version. However, an NFT smart contract can easily maintain a list of all redeemed NFTs, which eliminates the need for dramatic destruction. In most cases, obtaining an NFT version of a physical object does not necessitate any burning, destroying or physically marking, but rather relies on a unique identifier. Without such an identifier, it would be easy to scan or activate numerous copies, rendering the process ineffective. Many early attempts at converting physical toys or items into the digital realm have learned this lesson the hard way, with databases of keys, QR codes, or bar codes frequently appearing online.

The Amazon rumor suggests a simple strategy of granting both physical and digital items upon purchase, but this approach has a significant flaw. While physical goods can typically be returned for a refund, NFTs often do not follow this refund policy, unless specified in the Smart Contract. This creates a tricky situation where a buyer could sell the NFT to someone else and return the physical item, leaving the second buyer vulnerable. Amazon could potentially require the return of both the physical item and the NFT before authorizing a refund, but this process would be cumbersome. To streamline this process, Amazon could create an Amazon wallet for the NFT, where a simple click of a button would authorize a refund. However, Amazon's history of removing Kindle books from Kindle devices and leaving customers hanging raises questions about the trustworthiness of such a system. Imagine a similar scenario where Amazon reclaims an NFT in your wallet due to licensing issues or counterfeit physical goods.

When it comes to games, trading card games have had an interesting history that spans both physical and digital realms. Trading cards are essentially just printed information and so it makes sense to translate them in both directions. One early example of this was the Eye of Judgement game for the Playstation EyeToy camera, where players could use physical cards to play matches against opponents online. The camera would track the cards and translate the gameplay into the digital realm, creating an early form of augmented reality. To this day, playing online matches using a webcam remain popular. However, there is no foolproof way to prevent players from simply using printed copies of the cards, as there is no way to track their true uniqueness. The counterfeit issue is not just limited to trading cards - Nintendo’s Amiibos and the popular “toys-to-life” game Skylanders have also suffered from piracy of their encrypted NFC chip data.

Magic: The Gathering, the original trading card game, had a long running digital client before the launch of its now popular Arena Magic: The Gathering Online (MTGO). MTGO had a redemption program that allowed players to exchange their digital copies for physical printed copies of their cards, which were deleted in the process (a primitive centralized version of burning). Although similar to the idea of marking an NFT as "redeemed", the company could have faced tracking issues without unique IDs characteristic of NFTs. Instead of deleting the digital versions, the company could have found ways to mark them as redeemed. However, this can get complicated to track properly.

The Pokemon Trading Card Game (PTCGO) has a long running program that allows players to convert their physical card packs into digital versions for use in the PTCGO game. Each physical pack comes with a code card that can be redeemed in the digital version, although the code is not unique to each card, so players receive an unopened digital pack instead of copies of the specific cards they own. The game was designed to be kid-friendly, as it does not allow in-app purchases for real money, requiring players to buy physical cards if they want more. Unlike other pre-NFT TCGs, PTCGO allows players to trade cards digitally. However, inspired by the successful models of Hearthstone and M:TG Arena, the game is being phased out in favor of a new version called Pokemon Trading Card Game Live, which eliminates trading and reduces the number of cards received per code to "balance the economy" around duplicate limitations. Despite this, the new version maintains its kid-friendly nature by not offering any in-app purchases, and even the premium battle pass can be obtained with earned currency. Although the number of cards received per pack has been halved, the PTCGO remains one of the most affordable digital TCGs, with online digital stores offering codes for less than $0.20 per pack depending on the series.

A much more digital-native approach was taken by a newer TCG from the creator of the genre, Richard Garfield, in the game Keyforge. Rather than following the conventional trading card system of collecting cards and building personalized decks, the game abandoned this approach and opted for an algorithm that generated distinct, pre-made decks that could not be modified. Each deck was printed with a unique QR code and other procedurally generated elements, such as a unique deck name and card back. Players could scan the QR codes into a centrally managed app to claim and attach the deck to their account. The app also provided other useful features, such as performance tracking in sanctioned tournaments and a redeemable reward currency that could be exchanged for physical prizes at tournament conventions. There were some issues with the system, including the inability to transfer digital ownership of a deck to another player when selling the physical deck on the secondary market, and the risk of someone else claiming a player's deck if they accidentally revealed the QR code online. Unfortunately, Keyforge never released an official digital client, although an unsanctioned third-party client exists that allows players to use decks from the scanned-in database, albeit without verifying ownership. With the game being revived by a new company, a digital version may be on the horizon, which would be particularly well-suited to the game's unique approach.

Lastly, let's discuss NFT-based card games, which are launching in large numbers. According to chainplay.gg, there was a 50% increase in the number of card games in the last nine months. Cross the Ages, currently in beta, plans to offer players physical copies of its NFT cards, similar to MTGO, but with an added NFC feature to prevent counterfeiting. Spellfire is a web3 reboot of a TCG from the early 90s that follows the Keyforge approach, but with a unique QR code per physical card. The unique QR code per card allows for the possibility of replicating the Eye of Judgment experience or other captivating AR elements without counterfeiting, as the codes must be registered to the owner's account. Currently active web3 TCGs such as Splinterlands, Gods Unchained, and Skyweaver do not have any plans for phygital elements, so it remains to be seen if this differentiator will matter. Cross the Ages and Spellfire are both set to launch this year, so we won't have to wait for too long to see what novel features emerge from these systems.

Undoubtedly, there will be many more unforeseen challenges to address in this space, some of which may require new NFT standards or technologies beyond QR codes and NFC for the physical realm. This will be particularly true as we strive to synchronize digital with physical ownership. The industry will likely have to stay vigilant against the ingenuity of fraudulent participants, but we hope that blockchain technology will prove to be a more robust and trustworthy system than many of the previous systems that relied on centralized authorities.

Thanks for reading this week’s piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

Primary vs Secondary Sales

To begin, we discuss what royalties are and how they work in web3. The creator of an NFT (smart contract author) sells the NFTs to initial customers in what is called a “Primary Sale”, even if it is a free mint or giveaway. Any sales made to third parties after the initial sale to these customers are referred to as 'Secondary Sales'. Typically, businesses in most real world markets profit only from the Primary Sale, as Secondary Sales often occur outside of their purview. In the physical world, Secondary Sales are usually for used goods and sell for less than the Primary Sale price. However, art and collectibles are two exceptions to this rule, as scarcity due to their limited production can increase their value.

Secondary Sales can be problematic

The inability to profit from Secondary Sales has been a problem for digital products with physical distribution such as DVDs and video games, as the wear and tear is limited to the packaging, while the actual product remains pristine due to its digital nature. GameStop has been cited as a major contributor to this issue as gamers often complete the content and then sell it to GameStop to recoup some of the cost. This is problematic for the game publishers as it may lead to Secondary Sales cannibalizing Primary Sales shortly after the release, as those who are willing to wait purchase the game at a slightly cheaper price as a secondary copy. Even if the discount is only a few dollars, the game publisher loses out on the entire Primary Sale revenue and receives nothing from the Secondary Sale.

This trend is especially prevalent in sports game franchises like Madden and FIFA, which are released annually. To combat this, publishers/developers have two main strategies: Account Locking and Digital Sales. Account Locking involves including a one-time use code or unique ID with the Primary Sale that links the game to a player's account, although this usually only affects multiplayer or online features. Digital Sales involve selling the game digitally instead of physically and are also Account Locked, which generally prevents any form of Secondary Sale unless the player sells their entire account.

A product code prompt on Steam

Royalties and marketplace fees

One problem with allowing Secondary Sales is that digital copies are identical, so it is crucial to ensure that a sale is a transfer and not a copy. Steam, for instance, could enable games to be resold on its marketplace, validate the transfer, and receive a profit from the transaction via a marketplace fee. However, there is a distinction between a royalty and a marketplace fee: royalties go to the game publisher/developer, whereas marketplace fees go to the facilitator, like Valve.

So why isn’t Valve doing this? It still hurts Primary Sales of the game since entertainment is consumable, and preventing Secondary Sales is more profitable than receiving royalties, which is why game publishers/developers do not allow it. Valve for instance solves this issue with Team Fortress 2 and Counter-Strike: Global Offensive by offering marketplace support for digital cosmetic items, such as gun skins. As Valve serves as both publisher and marketplace, it can view the marketplace fee as a royalty too. However, since there is no built-in royalty system, other game publishers/devs have little incentive to participate.

Listing an item for sale on Steam

How blockchain technology switches things up

The blockchain provides an advantage of proving that digital assets have been transferred and controlling how the transfer occurs. In theory, every game can have its own marketplace with full control over both marketplace fees and royalties. In reality, however, there are a few caveats to consider.

1. Non-limited trading options: The notion of an NFT implies the ability to buy or sell it anywhere, not just on a specific game marketplace.

2. Transfer royalty problem: Enforcing royalties in third-party markets is challenging with the current ERC-721 NFT standard since it requires controlling how any NFT transfer happens. A common example of the transfer royalty problem is how to handle a simple transfer of an NFT from one wallet to another without charging a royalty. Limiting the ability to transfer involves working with marketplaces to follow a standard, which may work against their interests.

3. Liquidity considerations: If your goal is to earn royalties from NFTs, it is essential to ensure that they are compatible with high-volume marketplaces to maintain high liquidity and facilitate transactions, which can limit your marketplace choices.

Capitalising on greed?

Once the technical details have been sorted out, the question arises of whether royalties are even appropriate. Generally, royalties are a way for creators to receive a portion of the profit earned by others using their work. Currently, the most popular type of NFTs are primarily art or collectibles. Traditionally, artists make money from the initial sale of their artwork, but they also have the potential to earn money from commercial use of their art. With NFTs, however, royalties are not based on commercial use but rather on secondary sales.

Unlike the video game context previously mentioned, art is not something that is consumed and resold, and buying art does not take away from primary sales. Thus, charging royalties on art NFT resale effectively implies one of two things: either the NFT was sold at a very low initial price to gain market traction or primary buyers are purchasing the NFT in hopes of getting someone else to pay more for it. Unfortunately, the latter often applies in the real-world art market, so royalties on art NFTs may be seen as an attempt to capitalize on greed and deception rather than genuine appreciation for the artwork.

A balancing act

It is worth considering whether royalties are the primary source of income for a project or merely a supplementary benefit. If royalties are the main source of revenue, it implies that the Primary Sale may not generate reasonable profits for some reason. This may be appropriate for free mints as discussed in our previous piece (ADD LINK), where no Primary Sale occurs. However, it is important to consider that earning royalties necessitates creating a situation where the NFT recipient does not hold onto it. This is the exact opposite of conventional retail, where the goal is to make the product appealing to the buyer. The challenge here is to create an NFT that is desirable enough for others to want to buy, resulting in Secondary Sales and royalties. One way to think about the problem is to release NFTs that increase in potential value over time, which causes “paper hands” to sell to a more confident buyer and generate royalties. However, this strategy has several drawbacks, including the building of speculative bubbles around future mysterious NFT utility. First, it encourages the teasing of future utility, not the actual delivery of it. Second, it is unlikely there will be a high amount of transactions without frequent value fluctuations, and you want the prices to go high enough to make the royalties worthwhile.

Alternative incentives

A different perspective to consider instead is to find other ways to incentivize trading. In many games with collectible elements, having varying levels of rarity and a dynamic meta-game can encourage players to frequently change which NFTs they use and need. Axie Infinity pursued this strategy to some extent, but Sky Mavis demonstrated that breeding fees can be more profitable than marketplace fees by placing the primary sales of new copies in the hands of players, thereby subjecting them to more frequent taxes. A similar situation exists with DigiDaigaku, where Limit Break may be able to sell NFTs or tax production for a potentially higher profit than what it could make from royalties, but the final business model remains a mystery.

Another, more interesting perspective is to find ways to increase the value of an NFT through its exchange, thereby encouraging more frequent and higher value transactions. Instead of the traditional notion of used physical goods losing value, the NFT could gain value from being used or combined in unique ways. Rather than creating new assets through breeding, burning a more common asset could potentially enhance the primary one. DigiDaigaku has implemented an interesting approach by offering airdropped or free minted assets that can be burned or enhanced by burning another, incentivising transactions for value-boosting features such as Villain reveals. Another method to enhance value is through provenance, which can involve previous owners or past usage of the NFT. This could range from esports champions or winners of small competitions to defeating difficult bosses, or even just the history of the NFT itself, unlike a StatTrak gun skin in CS:GO that is reset each time it is sold.

StatTrak gun skins

There are numerous potential avenues to explore when considering Primary and Secondary Sale values and designing incentive structures. Hopefully, the industry can move beyond this initial stage of basic profit taxation and art speculation toward innovative business models that utilize blockchain technology in previously unfeasible ways. We hope that ideas such as free-to-own will evolve into a meaningful concept rather than simply a means of generating hype and speculation around scarcity.

Thanks for reading this week’s piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

Limit Break's mysterious play

The emergence of web3 gaming is often compared to the rise of free-to-play (F2P), where the industry initially resisted its economics, but, eventually, it came around. Many web3 enthusiasts, us included, see a similar pattern emerging, and believe it is only a matter of time before web3 elements become an integral part of gaming.
Gabe Leydon, known for his work at Machine Zone with Game of War: Fire Age, was part of the shift from premium to F2P games on mobile. He is now bringing the same “free is better” mentality over to web3 and advocates for giving game NFTs to players to bootstrap economies and create excitement. Part financial and part marketing tactics, but at the moment, all hype. Gabe's new company, Limit Break, initially launched with a somewhat stealth mint that exploded in popularity despite having no actual game attached. This was followed by a staggering $200M fundraise and numerous types of mints and airdrops. Even with the project generating a lot of excitement and a highly anticipated $6.5 million Super Bowl 2023 commercial very little information about the game itself is currently available.

From free to pricey

The hype around NFTs has spread to other games, leading them to offer free mints as well. Champions Ascension, for example, initially sold expensive Prime Eternals NFT mints with the promise of early benefits, but later held a free mint for their Elementals NFTs. This mint varied in terms of whitelisting schemes, whereby there were multiple tiers of access and only few NFTs left for public minting, which did not require any whitelisting. The limited supply of less than 20 NFTs left for the public to mint caused gas prices to surge to almost $350 - a hefty price tag for a “free mint”. This illustrates the competitive nature of limited free mints, which often negate the meaning of "free" due to supply and demand. Free mints might be interesting from a financial standpoint as they often include a royalty system, enabling projects to earn profits from resales in the secondary market, where the NFTs can command high prices due to speculation. DigiDaigaku for example promised NFT holders future airdrops, thus treating them as “Factory NFTs” (arguably a fairly inappropriate name for how they work). Choosing to keep or resell something that was obtained for free often triggers a sense of greed, especially when it can be sold at exorbitant prices to people who feel like they have missed out.

Incentivizing community involvement

The speculative nature of NFT minting emphasizes the significance of whitelists. While traditional games have limited "insider" groups, such as those who pre-order games or participate in closed beta groups, web3 has taken community involvement to another level by using whitelists as a significant incentive for participating in community events and Discord groups. This creates a strong desire to be part of the exclusive group of inside minters who benefit from the excitement, which is a key driver that free mints can tap into. However, some of these whitelists involve questionable marketing tactics, such as requiring follows, retweets, and referrals. When these types of whitelists are associated with free mints, they may create a new version of play-to-earn that is based on community participation or social media activity rather than gameplay. In theory, whitelists for free mints reward early community participants better than providing them the chance buy into a mint, often at significant costs. Nonetheless, many of these participants are still looking for opportunities to flip for profit, resulting in unwelcome behavior from both speculators and bots.

Whitelist wars and speculation

Source: OpenSea

An almost limitless number of whitelist spots that are easily accessible can result in a large number of bots purchasing NFTs with the aim of making a profit, as the example of Gossamer shows. This is reflected in a relatively high trading volume after release. This type of speculation can be detrimental to the game in the short term as actual players will have to pay a higher price for the NFTs. However, in the medium to long run, the impact is not significant as post-hype prices tend to reach an equilibrium determined by the market's willingness to pay, reflecting the current and future utility of the project.

Nevertheless, a very simple or non-existent whitelisting mechanism can still be problematic, especially for projects with established communities, as it may disappoint community members who are unable to secure a whitelist spot. This is why Limit Break chose to keep their first mint announcement low-key, to provide everyone an equal opportunity to acquire an NFT.

Despite this, the DigiDaigaku Genesis minting concept was not perfect as their very limited supply, combined with potentially high bot activity, resulted in surging prices after its launch and thus created a barrier of entry for players. Consequently, DigiDaigaku decided to use the Genesis NFT as "Factory NFTs" to avoid frustrating early investors while allowing new players to enter the game by introducing new NFTs. In summary, Limit Break’s approach might have been great guerilla marketing but may lead to further problems down the road. Paid mints can also suffer from similar problems as the examples of Axie Infinity and Pegaxy show.

A third example of a free-to-own project, Champions Ascension, seems to have created an optimal model. There was comparatively little speculation after the mint as a reasonably complicated whitelisting mechanism was introduced, which reduced the participation of bots and speculators by some degree. The supply of around 7’500 pieces was also sufficiently large to not create too much excess demand. The NFTs did decrease in price in the short and medium term after the mint, which does not matter much in principle, as the mint was free in the first place.
Moreover, long-term community members who have participated in the mint will be relatively uninterested in the price and bots and speculators could also be deterred from participating in such mints in the future.

Boon for business

The use of whitelists in NFT minting has become a significant incentive for community participation, but examples from the past have shown how difficult it is to manage community expectations and economics. Although providing free mints can benefit early participants, some members of the community may still seek to optimize their earnings.

Overall, giving away free NFTs can be an effective marketing strategy and can alleviate concerns regarding behavior geared towards maximizing ROI. One potential solution could be to allow claiming of a limited number of free copies of an NFT, but delaying the actual mint until they are available for primary sale to the public.
This approach encourages fair competition and prevents speculative pricing, while still giving participants a free NFT. Rather than artificially limiting the supply of NFTs, the value should be derived from the game activity the NFTs are associated with.

That being said, free mints are not always the perfect solution for NFT launches, and game developers need to consider other design points carefully. Nonetheless, free mints mean that developers have no financial obligations to their community members, allowing them to focus entirely on creating a fun game that offers maximum value.

Thanks for reading this week’s piece of our weekly series “Nami’s Nexus”, where we look to decode web3 gaming and dive into the various areas and nuances of the industry and beyond. Don't forget to subscribe to our blog and follow us on Twitter to receive more web3 gaming content.

Subscribe now

A common example of a token economy is as follows:

• Tokens are limited in supply, which creates perceived value

• Token holders can stake or buy NFTs with tokens

• Token stakers or NFT holders get airdropped new tokens at a defined interval

• Holders of airdropped tokens can sell their tokens to others if they want to cash out early

• The tokens provide governance rights, typically concerning the token treasury

It works at first

Initially, this seems like a simple but effective system. Users want to purchase tokens to invest in the system for long-term earnings and a chance to govern or participate in a project. Due to the limited supply and the gradual release of the token, coupled with the fact that tokens are being locked or burned by owners staking or buying NFTs, the number of available tokens is decreasing. As a result, the token is becoming more scarce and thus more valuable. This system may work well with initial token releases selling out rapidly and users reinvesting their earnings, however, latecomers may have to pay high prices for remaining tokens. Eventually, after the hype around the reward distributions driven by endorsements from YouTube personalities and other influencers has died down, the system's momentum starts to decline. As prices drop, some of the early adopters become increasingly hesitant, leading to a surge in selling activity and a sharp decline in token value. The price then remains stagnant for a while, with a slow downward trend as loyal supporters hold on and encourage others to "buy the dip.”

Why does this happen?

It is easy to get caught up in the idea of things having “value” due to certain attributes such as scarcity, investment potential, governance rights, or excitement. However, in the end, the value of a token or anything else is determined by its exchangeability. In the case of games, it might be a source of fun and enjoyment, and in the finance context, it could be a source of profit, but it only retains that value when it is exchanged. The value of financial-type tokens is determined by the price at which they are sold for fiat or an equivalent that can be converted into real-world value. This is critical because it implies that the owner of a token does not dictate its value; rather, the person who wants the token does. Unless the tokens can independently satisfy one of Maslow's hierarchy of needs, owners have to rely on someone else to give them something they do need for it. This is why demand matters more than supply.

Need to have it

When considering the previous example, one might wonder why an individual would be interested in purchasing tokens from other owners. Your first thought might be “so they can stake it to receive more tokens and governance in exchange”. You may want to stake some of the additional tokens that are rewarded to you but eventually, you will want to take some profit and might find it harder to sell than expected. What is the reason for this? For one, the token supply has been steadily increasing over time, and many of the individuals who were highly interested in obtaining them have already done so. Furthermore, prospective buyers may be skeptical that there will be future buyers who are more enthusiastic about the tokens than they were. Essentially, the motive for purchasing tokens is to eventually sell them to someone who is interested in acquiring tokens that they, in turn, wish to sell to someone else. This cycle has earned the label of a pyramid or Ponzi scheme, where one is merely kicking the can down the road, looking for the next victim.

What about governance?

Typically, the next line of defense of this system is that the tokens do hold some value, namely, voting rights. But what do these voting rights include? They provide the right to participate in decisions such as the distribution of tokens or the deployment of treasury assets. As a result, the value of the token lies in determining the fate of tokens that only have value in determining the fate of other tokens - it should be evident by now why this is referred to as a circular design. It appears to make sense when only looking at a portion of the circle or at a limited timeline but it does not add up when viewed as whole. Governance is only valuable to the extent that you have control over something that holds value outside of these tokens and that transcends mere monetary value. In the context of a game it could refer to voting on decisions around gameplay features and multiplayer-wide changes. However, when contemplating this concept for games, one must also consider whether it is appropriate to outright sell decisions to players for money. The usage of terms such as governance, staking, and tokens obscures the fundamental notion that one is selling votes for money. It is unwise to hand over game design and balance decisions to whoever has the most money. Of course, we like to justify this by claiming that it aligns incentives with the most invested players, but let us call a spade a spade.

What about utility, then?

The last defense of circular token economics is to simply fall back on the vague notion of adding “utility”. However, if you look into the term in economics you will find that it is an extremely broad and ambiguous term, as it means different things to different people. Rather than subscribe to these vague ideas, consider a simpler approach: Imagine all tokens are purchased from the source and cannot be resold, only used. This is a similar concept to premium currencies such as "gems" that are used in games. If a token's main feature is the ability to be sold to someone else, then it does not have any real utility. Ultimately, the purpose of a token should be to exchange it for something with implicit value, without the need for multiple intermediate steps. Staking does not add any utility, and it may be better to exchange the token directly for the item of value rather than stake it. Reducing the circulating supply of a token does not increase its value; it only makes it more expensive to buy something of no real worth. Even non-fungible tokens like PFP/Art NFTs can have no apparent need for "utility." To understand how the art market creates pretend value, try playing the Uwe Boll card game Modern Art.

Coming full circle

Why discuss this topic now when we have already moved past Ponzi schemes and similar practices in Play-to-Earn games? The reality is that we are not beyond these schemes, and many systems are being designed with complex structures that give the illusion of legitimacy, although they are still fundamentally flawed. It is time to face the truth that creating value for a token out of thin air is not possible, and we must consider whether the token provides something of real value to the buyer. There is a reason smart VCs are not taking many token deals anymore.

When designing tokenomics, we have to focus on creating genuine demand. We have to exercise caution when dealing with systems where the value of something is dependent on selling it to others, as they are often unsustainable Ponzi-style schemes. It is also crucial to distinguish between pyramid schemes and multi-level marketing, as certain projects that claim to empower player economies are often just disguised MLMs. To truly advance web3, we need to develop projects that understand and cater to the users' needs and are built around genuine value delivery, providing innovative systems that go beyond circular designs.