Economy and NFT games
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In our first article we want to address probably one of the most sensitive and controversial issues surrounding NFT games, internal economy and value generation.
Before starting, we should clarify that although this article is based on the analysis used for the design of our own internal economy, it does not seek to justify our design, but rather to discuss the foundations used.
We understand that not everyone has knowledge on topics such as economy, finance and value generation among others, but it is important to be clear about some basic notions, so we will start with that.
What is the economy?
In very general terms, and in simple words, the economy is a social science that studies the behavior of its participants with respect to the administration of resources that are usually scarce.
What does it mean that it is a social science?
It means that it is not focused on numbers, but rather on the participants. The economy is in charge of analyzing the interactions in society and how its behavior evolves in certain situations such as the increase or reduction of the emission, taxes, availability and administration of resources, etc.
What is finance?
It is common to find confusion between economy and finance.
Finance is a field of economics that focuses on numbers, specifically on elements such as money, or its equivalent, depending on the specific ecosystem, interest rates, capital, etc.
What is value generation?
Regarding value generation, this is also often confused with “price increase”, i.e., that value is generated when something increases its price. This is partially wrong, since strictly speaking, value generation is the capacity to generate whealt or utility, and both are not necessarily “money”.
We will exemplify this in a very simple way.
Suppose we have all the ingredients and the knowledge to make bread.
The process of transforming those ingredients, together with the knowledge involved, has the potential to generate value. For whom? It depends. If the bread will be for personal consumption, the value generated is perceived by the individual and is directly linked to the usefulness of the product. On the other hand, if the bread will be commercialized, i.e. for consumption by a third party, the value generated can be perceived by both participants, for the value generator it will be transformed into wealth, while for the end user it will be transformed into utility.
It should be noted that the definitions used are a simplification to facilitate the understanding of the foundations by any reader.
NFT games
We are sure that blockchain technology will revolutionize many industries, including the world of video games.
But an NFT game should not be confused with what we call Play2Earn or Play&Earn.
The NFT game concept emphasizes ownership of the assets used within a project, while Play2Earn, or Play&Earn, is a feature that may, or may not, be implemented within NFT Games. If implemented, an internal economy must be designed, and this is the point sought to be discussed within this paper. It is presented below, from our perspective, how to design an economy and what are the foundations that should be considered.
Foundations
The economy to be designed must consider the elements of a traditional (real-world) economy, but these cannot be directly replicated in the blockchain world, as there are substantial differences that must be identified to make the corresponding corrections.
A fundamental premise in economics is the following:
“We live in a world of scarce resources and unlimited needs.”
It is also often referred to as finite resources and infinite needs.
When we talk about resources, we refer to natural resources, technological resources, financial, economic and/or human resources.
On the other hand, when reference is made to unlimited or infinite needs, these must be understood as a concept, not as a number.
Let’s look at an example: the water.
It is clear that water is a resource and renewable, but why is it considered a scarce resource?
A priori we could even think that water is an unlimited good, since technically there is enough water in the world to satisfy all human needs and technologically we have advanced to the point of being able to transform sea water into drinking water. Even so, why are there still people without access to drinking water?
The answer is that it is not the commodity itself that is scarce, but the way and cost of getting it to where it is needed. In other words, the external resources needed to mobilize the resource in matter, make it scarce.
Why do we refer to this?
Because this premise does not hold true in the blockchain world.
In the blockchain world, specifically in NFT games, obviously assets represent resources, be they NFTs or Cryptocurrencies. But is there a shortage? Technologically the answer is a resounding NO!
Why do we say no? Because regardless of the arbitrary number defined by a developer, creating a unit of an NFT or a unit of a Cryptocurrency has the same “cost” of creating an infinite amount of them (omitting transaction costs). That is, resources can become technically unlimited.
What about needs?
The same, the relationship is inverse.
We could say then, very roughly, that:
We live in a “Blockchain World” of scarce needs and unlimited resources.
If we recognize this premise as true, it becomes clear that trying to apply a real-world economy in the blockchain world would not be correct.
This does not imply that the elements of the economy cannot be applied, but they must be adjusted according to the detected differences and to each particular project.
As mentioned above, we will not delve into the economic design of Fragmented Spells, as the focus of this article is the discussion of the foundations that should be considered for the design of a healthy economy in the world of NFT games.
The internal economy design
The fact that the fundamental premise of the economy is not identical in the blockchain world does not imply that it cannot be adjusted, since, in general, the components of an economy, such as value generation, supply and demand, finance and the behavior of ecosystem participants, among others, are applicable, but the necessary conditions must be met.
First, let’s talk about the main errors detected in the economies of different projects.
In the first place, it seems that the economic designs proposed in various projects are based purely on supply and demand. Unfortunately, supply and demand do not serve to design an economy, but rather to establish prices.
On the other hand, we have emissions, which in general turn out to be arbitrary numbers based, in the best of cases, on estimates of growth or users. I say at best because in many cases it is probably just an arbitrary number.
Finally we have value generation — is there really value generation between users within blockchain game economies? I would say partially, but insufficiently so. Reference is made to value generation between users as this interaction is what will provide a healthy economy. The projects themselves are already generating value through the game, the Marketplace, the development of an internal economy etc. But the participants of this economy must also generate value within the ecosystem, and when that happens the economy becomes sustainable.
Emphasis is usually placed on emissions and the famous “burning mechanisms”. But that is only the tip of the iceberg, the economy is much more complex.
I will try to explain all this with an example.
Let’s suppose that I have breakfast every day, which consists of a coffee and two pieces of bread.
I get the bread at my neighborhood bakery, which I go to every morning to exchange cash for the product itself.
In the same way, the bakery must obtain the supplies it will need to make the bread. To do so, it accumulates weekly the resources generated to use part of them to supply itself with, among other things, the flour, which it buys in cash from a mill.
The mill negotiates with various farmers to purchase wheat from their harvests, and for this purpose makes agreements or contracts even before seeding. These agreements or contracts may involve a formal commitment with which farmers can access financing for seeding and harvesting.
Finally, the farmer may require labor to carry out his work, for which I am hired.
In an economy, sooner or later we become customers of ourselves, but for this to be possible, in every interaction there must be value generation.
At the same time, these dissociations between timing and forms of payment, whether cash or credit, allow wealth to be generated along the way.
Is this happening in blockchain gaming economies? This is a question I will leave you to answer for yourselves.
In summary, we believe that in order to design a sustainable and healthy economy, the above elements must be considered. The economy is a very old science, so we should not reinvent the wheel, we should make the necessary adjustments to it to be functional to the vehicle in use.
To conclude, whether you are designing an internal economy or you are analyzing the feasibility of an economy, we believe that a good starting point would be to ask yourself the following questions.
Is emission an arbitrary number or does it have foundations? Is there a relationship between emission and growth? Is it direct or inverse?
What is the value generated by the project for its users? What is the value generated by the users for the project? What is the value generated by users for users?
Are there dissociations between the interactions, what are they, and how do they affect the economy?
How many alternatives do I have? Can users be differentiated or do they all do the same thing?
The common saying that for some to win others must lose, in our opinion is a very simplistic view, and like everything in life, things are never that simple.
I would love to know your opinions and have an enriching debate on the matter.
Best Regards, Layne
