Economics of a gaming cryptocurrency (Part 1)
When designing Enjin Coin, we ran into some interesting challenges in balancing an economic framework that needs to be able to scale to thousands of game companies, millions of users, and trillions of game items.
Cryptocurrencies are the purest expression of unfettered free markets.
“It is the most effective system we have discovered to enable people who hate one another to deal with one another and help one another.” — Milton Friedman
There are no human laws or regulations that can govern a cryptocurrency after its deployed. We can, however, add a philosophy into the initial design, much like Satoshi Nakamoto did with Bitcoin.
Enjin Coin can evolve organically in the free market, guided by its original mission statement: trustless ownership and liquidity of your game assets.
A typical game world contains many kinds of virtual items. Weapons, armor sets, and other objects can be earned by the player. Items become desirable in the free market because of their rarity, popularity, or the advantage they provide in gameplay.
Virtual items are centralized by nature
Items need to appear inside a game world to actually do anything. They’re still only virtual representations.
Your weapons, armor or power-ups in your crypto wallet won’t be very useful if the game you’re playing is hacked.
What happens if the game studio shuts down after running the game for a number of years? The market value and appeal of all the items from that game would collapse and all the players would be left holding useless tokens.
One way to fortify against this weakness is using the same item types across multiple games or servers. If a few similarly-themed Minecraft servers agree to adopt the same virtual items or currency in their games, players can now participate in all the partnered servers and use their assets without starting from scratch in each one. They would be protected from the centralization risks of a single server to some degree.
Unfortunately, this isn’t a final solution, because while some game servers might partner together to provide a linked experience, the majority of games will use their own item database. A better way to protect an item from suddenly becoming useless is to back it with a universal token.
Enjin Coin as a reserve token for game items
As described in our original whitepaper, each game item will have the ability to be “melted down” into Enjin Coins. Instead of putting items up for trade and waiting for a buyer, users can choose to liquidate through the contract. This smart contract is used to create every game item and it will store Enjin Coins for each game item in circulation.
Game developers can choose either a Fixed Reserve or a Bancor Smart Token reserve system for a game item. They both behave differently:
The simplest form of reserve is a fixed exchange rate between Enjin Coins and game items.
This could be thought of as the material cost of the item, and offers a fixed amount of insurance against loss. Regardless of what happens to the game, every copy of these items will retain some universal value.
Game developers could choose Fixed Reserve to represent treasured items such as valuable gemstones or even a gold currency in a game. Each unit of the game item is locked to the same amount of Enjin Coin.
Limitations of the fixed reserve price
Fixed Reserve items are almost always guaranteed to trade on the market for higher than their reserve value. The insurance works unless the market value begins to greatly exceed the reserve cost of the item.
The flip side is not as concerning. If a game item’s reserve value exceeds its market utility, it can continue to be traded just above the reserve value, or simply liquidated for Enjin Coins.
Bancor Smart Token
Bancor is an automated “robotic” exchange that runs on Ethereum.
Newly minted game items will be created as Smart Tokens and the initial ENJ exchange ratio (CRR) can be defined. Once the tokens are minted, the total number of tokens may fluctuate and the price will dynamically adjust based on market demand.
The Bancor smart token design means that a catastrophic failure of the game itself could leave a few users holding useless tokens, but the majority of users would be able to liquidate before the reserve token supply is diminished.
This reflects a more realistic market dynamic, and it also lets players exchange their game items to others through the universal token (ENJ) without needing to find another player that’s ready to trade for their particular item.
Minimum Reserve Price
Because ENJ is a utility token meant to support the entire Enjin Coin network, it’s necessary to enforce a bare-minimum ENJ cost for minting custom items.
Otherwise, a developer could take 1 Enjin Coin and mint endless quantities of items or game currencies, selling a small portion and manipulating supply.
There are certainly many cases in games where you’d want to have infinite quantities of item types. But for classes of items being put on the blockchain, scarcity is a very important principle.
The way we are tackling this is to use an “economy of scale” formula. The initial supply of custom tokens needs to be minted all at once. The number of tokens created during this initial minting process defines the final minimum price per token. As the total tokens created increases, price per token decreases, by using the reciprocal of the square root:
The following graph and minimum minting cost chart illustrates:
Creating 1 item costs 1 ENJ.
Creating 10 items cost approximately 0.3 ENJ per unit.
Creating 100 items would cost approximately 0.1 ENJ per unit, and so on.
The person minting these items also has the freedom to use a higher exchange rate if they wish. For example, making a valuable treasure, gemstone or prize.
Long-term Minimum Price Adjustment
As the number of ENJ in circulation becomes locked up in game items, there will be less ENJ available for future game developers to use in their new games.
To combat this, the above minimum price formula will scale down slowly based on the number of total ENJ locked up across the entire currency.
This means that developing brand new types of game items will always be affordable relative to how many games are using the system as a whole.
Planning out the economic roadmap of a decentralized economy takes some careful consideration. With anarcho-capitalist markets and smart contracts being the law in crypto-land, we have designed these mechanisms to improve on the distortions and inefficiencies that exist in the real world
This allows Enjin Coin to grow and evolve over time, and without any central banking, it will remain trustless and decentralized forever.
In Part 2 of this article, We’ll discuss the various parties that interact in a crypto-economy, how to earn tokens by participating, and the details of trading items across multiple games.
The Enjin Coin crowdsale starts on October 3rd, 2017!
Visit the Enjin Coin website
Enjin is the largest gaming community creation platform online with more than 18 million users. The company, based in Singapore, was launched in 2009 and now sees more than 60 million global views a month.