What is a Game Economy?

Games’ economy experts tell about the basics of game economy design

Video games are an acute combination of tech and art, science and spirit. A good video game connects to human emotions and behaviors and imitates life in a closed environment.

When video games turned to the masses, they created a new area of expertise called “Game Economy.” The usage of economic practices in video games is relatively new and exciting as it relies on the fundamentals of human behavior. Moreover, the emerging blockchain technology changed everything as in-game currency accepts real value.

I interviewed two specialists in that field to learn more about the fascinating world of human behavior and game economy.

The Basics of game economy design

Kiefer Zang has been involved in the crypto space since 2014 and has four years of experience designing cutting-edge token models and Web3 incentive systems. He has provided economic consulting services as a consultant at Economics Design for AAA gaming companies in the Web3 space, such as Scopely, Neon (Shrapnel), and Worldspark (Edenbrawl), to help them achieve sustainable economies.

Ethan Levy is a 20-year veteran game designer and producer who has contributed to over 80 shipped games across every genre and platform. He has worked at companies including EA, BioWare, and N3TWORK and has specialized in free-to-play games for the past decade. He currently works as a Gamer-In-Residence for Connect Ventures and as a podcast host and blogger for the industry-leading Deconstructor of Fun podcast.

As always, we will start from the beginning and define the basics of the game economy. Game Economy is the design of resources in the game. The game economy is robust in multiplayer and live ops games but exists in single-player games.

“An economy exists in every game,” says Levy. “The red orbs of (single-player game) God of War are an economy, and the crafting mechanics of the Witcher are a part of the economy.” Initially, the game economy was led by game designers, but as it becomes more complex in multiplayer games, it has become its own specialty. When it comes to single-player games, the designers are pacing the distribution of resources to create delight and challenge for the player. But, Levy adds, “game economy is not only tied to monetization, since it exists in almost every game we know.”

The evolution of game economy

In the past decade, many games introduced two types of in-game currencies: soft currency and hard currency. Soft currency is money that can be earned easily by playing the game: gold coins and credits from playing the game and completing tasks are good examples of this. Hard currency is the currency players primarily purchase with fiat currency (but can also be won in small amounts). Gems and Diamonds used to open card packs are an excellent example. Many other types of currency, like energy and mana, lie somewhere on this soft-to-hard currency spectrum.

Many games feature different currencies, each specialized for a specific role. Hard currency works like chips in a casino: it’s easier to spend virtual currency than real money. Moreover, hard currency is a psychological anchor that retains value. People are biased against spending money they can retain in-game, and inflation can devalue the money they purchase. For this reason, Hard Currency is used as means of conversion. Spending money on a rare unachievable currency is more accessible than spending it on a currency that can be achieved in-game. This trick is not unique to video games. The gold standard was used similarly when the Americans connected the USD to gold ounces in Fort Nox. People knew their Dollars were backed by gold, and it retained value over time. For example, while players make gold while playing, diamonds are achievable primarily by paying Dollars. Finally, players can transfer money only in one way, and thus developers keep the distance between the perceived value to the actual value.

Zang points out that multiplayer games require a sound economy for balancing the game. “in single-player, the developer or publisher has complete control over assets and market rates, while in multiplayer games, things are much more dynamic.” Zang explains that in multiplayer games, player actions have an economic impact on other players through changing asset supplies and relative exchange rates, complicating the process of maintaining an engaging experience.”

Behind the scenes of game economy

What drives a game economy? In most instances, every player input of gameplay has some economic output. In most games, each time a player defeats a monster or performs a task, he receives a coin or an asset with a value. Killing monsters is the game equivalent of printing money. The player generates money out of thin air. Since monsters and quests spawn in a timely fashion, it creates a never-ending circle of asset creation. The creation of currency is called a currency tap. As we learned in the current economy, the perpetual printing of currency creates inflation since the amount of money grows infinitely. While in the real world, we protest against it, in video games, we will just switch to the next game. To negate that, designers use currency sinks, unique features that drain currency out of the system. For example, every teleport that costs money, equipment repair, taxes, and fines are all designed carefully to remove currency from the game economy. In the ’90s, a game called Gaia Online offered to donate to charity, everytime the players will burn 15 trillion gold coins. In Diablo 2, Stones of Jordan became an alternate currency, and shards were used as currency in Asheron’s call after the economy inflated to the points where currency had no value.

When working on Live Service games, Levy explains that the role of Product Managers is often to try and strike a balance between fun gameplay, monetization, and player currency reserves. This is a tricky problem that has no perfect solution.

“Let’s say we ran an Ultimate Dragon Kill Fest event this weekend and awarded 1,000 gold coins for every dragon killed. But a bug was introduced Saturday night when people were getting ten times as much gold as they were supposed to. And now players all have way too high gold balances. So what we need to do is introduce something that they can buy to reduce their gold balances. So let’s make a flash sale on a special sword that costs a hundred thousand gold and is super powerful. So you’re not trying to manage a free market economy. Instead, you’re trying to balance many individual players’ experience.”

In such cases, Levy offers an example of balancing: “Now that players have more gold than anticipated, we need to find a way to remove it from the system. Otherwise, players will have no motivation to purchase more gold (or gameplay that generates more gold). So let’s say we sell a sword that does plus five million damage. Such a sword unbalances the entire system. To limit the usefulness of this highly desirable sword, we will make it potent only against yellow dragons, who don’t show up that often. We control the number of dragons that will appear. That’s how we balance the economy while avoiding power creep.”

The economy of Web3 and blockchain

Web3 games are changing the entire method game economies have worked so far. “Once you legitimize a secondary market, you lose control over siloed players,” says Zang. “Now you must be very careful and create limitations in how different participants can create new resources.”

The biggest headache for Web3 game economies is the low level of control developers have over the economy. The demand for assets and resources is no longer within the game. Zang says Web3 games must have tighter control over the supply and demand by putting constraints. “For example, Axie Infinity put constraints on the number of tokens each player could earn per day, but not on the total number of players or overall supply increase per day, leaving no real constraint on total token inflation.” Once the number of players grew, the currency inflated, and the game economy collapsed.”

Web3 is a tough nut to crack, and both Levy and Zang agree there is yet to be a standardized solution to manage cryptocurrency inputs and outputs inside a game. Cryptocurrency and fungible tokens create more new and unique problems than existing genres of video games.

Zang thinks there will be many combinations of cryptocurrency with hard and soft currency. “Developers can create web3 games with web3 and free-to-play monetization loops that allow users to choose their desired experience and offer a non-intrusive onboarding method to NFTs.”

Zang believes there will be a variety of uses for tokens as well. “A token could be set up as a relatively stable currency meant to act as a medium of exchange in that game economy, or a different token could be set up to accrue value and have equity-like attributes. These are completely different implementations, with the first targets slightly inflationary monetary policy and the second targets deflation.”

Levy sees NFTs and tokens as another tool in developers’ toolbox. “After so many years in video games, I finally see a massive innovation in business models. I don’t think crypto will change everything about making games. They are just a new exciting tool.” Levy believes developers can still control the tokens from the developer’s side. “You still control the game and how tokens are earned and spent.”

Levy thinks that cryptocurrencies and NFTs can be used in many ways that soft & hard currencies currently are in games, but with many advantages to the players that make them superior to purely digital currencies. Although the field is still very early in terms of using cryptocurrencies and NFTs inside of live games, he believes designers, product managers, and game economists will ultimately discover ways to run cryptocurrency-based economies that better align the incentives of players and game developers.

Zang thinks that virtual currencies in virtual worlds can create exciting combinations. “Token-based currencies, specifically those targeted towards being a relatively stable medium of exchange, are a fundamental component of creating virtual economies that rival the size and complexity of countries, with real value at stake. It sets the stage for complex economies with jobs and businesses in the metaverse- not doing meaningless play-to-earn gameplay, but fitting into a supply chain of assets and services funded by real demand from players making a time vs. money tradeoff.”