Launching a token with intent
In this Nexus piece, we reflect on some of the motivational drivers behind launching a token for web3 games
In the past, the question of whether to have one or two tokens was most frequently asked, while the question of why having a token at all was most often put forward by those skeptical of web3. In this piece, we want to examine the reasons behind having a token and explore the potential benefits of a token model. To begin, let's focus on the specific unlocks that arise from having a token.
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.