Lessons From Web3 Gaming: Sustainable Economics and Tokenomics on the Blockchain
“What the…” — Researchers.
Web3 gaming has taught us a lot about what it means to achieve sustainability in crypto. This is what on-chain economic research has taught us so far:
- Gaming is vital to the ecosystem, and necessary for Solana’s success
- Proper measurement is everything — classify the users
- Tokenomic sustainability relies on three primary factors: emissions, sinks (utility), and adoption (also utility)
- Peer-to-peer trading is important
- Airdrops are a form of financial stimulus, which contribute to asset price inflation and financial instability
This article will introduce the reader not only to web3 gaming but also to innovative economic research as it pertains to crypto and web3. The contribution here is a way of thinking. To do impactful economic research, we must work with economically meaningful data. This requires defining essential statistics out of blockchain data.
Blockchain Games with on-chain movement represent an untapped goldmine for Solana Validators
I have argued this for a while, but now is the time to prove it. Games are highly interactive; more significant blockchain interaction with the gaming experience means greater gaming transparency and more substantial fee revenue to the Solana validators and those supporting the ecosystem.
As a case study, I compare Star Atlas SAGE Labs — a blockchain gaming crafting economy that is built entirely, in all its complexity, on chain to web3 gaming projects with web2 elements like Honeyland, Aurory, and Genopets.
The more blockchain integration a game has, the more significant a small group of players can contribute to the Solana ecosystem. As seen in the chart below, there is no comparison to SAGE Labs regarding the number of transactions per player. This is so prevalent in fact, that each player has paid an average of $18.3 in fees in 30 days. No other project is remotely close; it is ten times the next closest game, based on crafting and entirely on chain, Elementerra.
The utilization of bots within the context of economic gameplay is the root cause of the increased transactions per player. This insight is going to be investigated further, but I would imagine that bots within the Solana ecosystem account for most of the fee revenue collected by validators.
Unlike any other stand-alone blockchain game or application, SAGE Labs generates fee revenue for Solana validators. In just 30 days, 3505 players have paid $64,127 in fees. That's an incredible fact that should be studied, replicated, fostered, protested, debated, and amplified.
What happens to the 623.2 SOL paid in fees? Half of it gets burned — permanently reducing the circulating supply. The other half is sent to validators as a reward for supporting the network. Thus, the fees are a token sink for Solana itself, and the more transactions, the greater this sink. They also pay the validators.
Blockchain gaming is crucial for the Solana blockchain and the ecosystem (and I suppose botting is too).
Gaming is Important to the Broader Ecosystem
In general, the importance of the gaming sector cannot be understated for any blockchain. The reason is that web3 games, built on-chain, are a significant contributor to the on-chain metrics of the blockchain. This further encourages new development and funding, as these metrics can be seen as a measure of success concerning network performance.
Solana Monthly Active Gamers includes distinct wallet interactions for Honeyland, Star Atlas, The Heist, Photo Finish Live, Elementerra, StepN, Aurory, and Genopets. For eight games to have collectively one hundred thousand users is impressive.
For comparison, consider that the popular swap program Jupiter had similar numbers of users before announcing its airdrop in November. Before that announcement, Web3 gamers made up 20% of the users on the Jupiter platform — and up to 6% of the total monthly transactions, thus positioning them well for the Airdrop that would come.
The percentage of gamers that made up the monthly users of Jupiter before the airdrop was substantial and helped Jupiter in its path towards success.
We have a chart for all DEX platforms below, for most DEXs, gamers make up between 5% and 10% of their total userbase.
Defining The Metaverse Citizen
A vital aspect of any empirical evaluation of a project's tokenomics begins with defining statistically what it means to be a participant in the project. Participation is then further delineated into Citizen/Resident status depending on how involved/invested the player is in the game and its future.
Having a standard set of definitions works wonders when comparing projects side by side. Even though the range of diversity in web3 projects makes perfect standardization impossible, if the economic intent and meaning of the definitions are preserved, we can always come to a standardized measurement.
The Star Atlas Census was explicitly created to meet the measurement challenges and intuitively classify participants within any web3 ecosystem.
Let us start with token and NFT holders; without program interactions, these individuals are non-residents or foreign investors. This money may or may not be sticky, but for the tokenomics, these holders impact the ecosystem little. Then you have those who don’t participate in the gameplay but are involved through every other avenue- including staking in the governance token. This is where we often begin to measure participants because staking facilities tend to emit a token reward, which becomes a critical tokenomic consideration.
The two most important groups whose actions shape the tokenomics of any project are residents and citizens, both of whom are employed in the game. Employed means that by playing the game, they are giving their time and labor, and in exchange for their work, they are the natural receivers of any token emissions or rewards, aka wages. Lastly, we have citizens, who, by the definition of the term, meet the conditions to vote and shape the project's future. However, other definitions can apply without a formal governance program, and the table below hints at how.
In the Star Atlas ecosystem, citizens make up 1% of the universe, yet they command 11% of the total ecosystem wealth [this includes everything — Resources, Currency, NFTs]. The actions taken by citizens and residents will often differ, but tracking both is essential as they are the natural receivers of token emissions [they are the ones employed in gameplay].
From a practical point of view, the path forward is to measure the emissions to players directly from the rewards curve. The behavior of these players with the in game token will directly shed light on the tokenomics of any game, no matter the structure.
Tokenomic sustainability and lessons
Once we have defined who the active player base is, we can now ask what a sustainable tokenomic system looks like. The reason is that we can now isolate the behavior of natural token receivers and see what they do with their token rewards.
Tokenomics impacts token prices for one simple reason: the net balance of emissions/sinks translates into selling/buying pressure, impacting the price. Only the buying and selling of tokens can impact their price. Burning a token has little to no effect in the short run. The ideal policy will tie the purchase of a short-term boost in gaming performance with a permanent token burn. As people play the game over time, it will have a net positive impact on tokenomics, irrespective of the player base size.
- The balance of emissions versus sinks will determine whether a token is on the net being swapped into or swapped out of by the player base.
- In two token systems: one is viewed as a transactional currency and the other as a governance token. The transactional currency will continually be reinvested in ecosystem assets, which include the governance token.
- Citizens will be more inclined to Swap into the governance Token as they see themselves as shaping the project's future. They also are wealthier on average and tend to characterize smart, sticky, and institutional money.
Decentraland is a good example. All MANA have been disbursed, and there are no further plans for emissions. Furthermore, MANA has utility that will raise its demand perpetually into the future.
Similarly, net swaps into ILV have been positive, but those engaged and participating with the ecosystem. Here is another example of token emissions that have effectively ceased, and
Some lessons should be considered here, and there is a delicate balance. If you want to attract new users and secure financing, there might be better options than token neutrality at the beginning of a project's life.
Once the token is released, all sinks and no-faucets will provide consistent upward pressure on the token. If you can maintain your player base, gameplay will have to slap without in-game rewards.
Why is accounting for OTC trading important?
The reason and the method
In a typical trade through a marketplace, you are met with three fees: a marketplace fee, a royalty by the NFT creator, and the Solana transaction fee. These fees add up and typically equate to 6.5% or more of the value of the NFT.
In an OTC transaction, the end buyer ends up saving money, the seller ends up making more money, and the NFT creator receives zero royalty on the trade. For an expensive NFT, the monetary value saved from performing an OTC trade could easily be in the thousands of dollars.
Peer-to-peer trading is a fundamental feature of any gaming community. This is because before web3 gaming was established and official marketplaces existed, people had to form relationships with each other to sell their in-game items. This type of activity was prevalent, but before the blockchain was difficult to track; now we can create rules around token transfers to measure these trades.
In what follows, my four rules are that
A. items sent from A to B, and money sent from B to A occur within the hour.
B. For tokens, I include USDC, SOL, and the gaming ecosystem token.
C. The money transfer and item transfer are not part of the same transaction.
D. All marketplace sales txs, game program Id txs, Magic Eden, Tensor, you name it, are excluded.
See my dashboard that I created for this article for all your data verification needs.
The data
The table below is the important one, here we can see the total amount of peer-to-peer and marketplace trade that has occurred in project NFTs since October.
Within the Star Atlas Ecosystem, $24.5 million has been traded since October, with 37%, or $9.1 coming from OTC trades. That’s huge. By avoiding the official marketplace, the total amount saved on fees has been $548,765.
Aurory OTC trades totaled $532.8 thousand dollars, 14% of overall trade. The amount saved on fees came to $31,971.
Only 2% of the Heist trade volume is OTC, but this still represented $83.1 thousand dollars in trade, and $4,988 saved in consumer surplus.
Genopets has a high OTC trading percentage at 30%, but low overall trade volume. $39.2 thousand was traded peer-to-peer.
Obviously, what the data tells us is that there is a lot of trading that is occurring outside the per view of official projects. This is going to both help and hurt projects. It hurts that they can’t collect the royalty fees, it helps that people within the ecosystem are engaging with each other and willing to do deals face-to-face. That’s a sign of a strong and engaged community.
Airdrops are a form of financial stimulus
Airdrops represent helicopter money. It could act as a financial accelerator and even introduce financial instability to the crypto cycle.
Let’s consider the JUP Airdrop. Web3 Gamers swapped out into $33.8 million USDC/USDT, $15 million into SOL, and a range of other coins.
The airdrop had a real wealth effect. For example, the average spent in the Star Atlas marketplace after the drop was $300 per wallet, versus $175 per wallet that didn’t receive the airdrop.
What is clear is that airdrops can permeate throughout the entire Solana ecosystem.
