How To Design Tokenomics For Your Web 3.0 NFT Game — With Examples

How To Design Tokenomics For Your Web 3.0 NFT Game

With so many titles under development and the flurry of interest from consumers, blockchain gaming is ripe for an explosion in popularity and growth this year. At the same time, however, many experts are questioning the future of this novel sector.

The biggest concern revolves around the sustainability of play-to-earn games. That is because even the most prominent titles like Axie Infinity are betting on explosive growth in user base to support the rewards that keep the players around. However, what happens when the demand for rewards outpaces the growth rate of its player base?

To help you maximize the odds of success for your NFT game, I’m putting together this guide to creating sustainable tokenomics that will last longer than the limited lifetime of any trends.

The 4 Keys of Designing Sustainable NFT Game Tokenomics

Every game is unique. As such, there’s no rigid, repeatable process that can yield the perfect structure for your game. But that doesn’t mean you have to run around blindfolded and figure everything out by failing over and over.

Instead, let’s analyze the history of popular NFT games and learn from their experiences to avoid common pitfalls plaguing this industry.

To that end, I’ve gathered four crucial lessons you must keep in mind when designing your project’s tokenomics and the overall in-game economy.

1. Balance Inflationary and Deflationary Activities

Inflationary activities include completing quests, defeating enemies, looting dungeons, etc. The players get a new supply of some in-game tokens in return for their contributions. On the other hand, deflationary activities include things like breeding, traveling, upgrading, etc. These lead to the burning of in-game tokens.

Striking a balance between those inflationary and deflationary activities is crucial for the sustainability of your in-game economy.

Real-World Example

A recent example of economic imbalance led to the plummeting of Smooth Love Potions (SLP) tokens from the ever-popular game Axie Infinity.

From its peak of $0.39 per SLP from July last year to this month’s low of $0.0089, the SLP token lost over 95% in value. The reason behind this drop was that Axie Infinity recently attracted many new players, which led to a dramatic increase in SLP production as those players completed in-game activities.

However, thanks to the abundance of Axies available through scholarships, players didn’t breed many new characters, which means a lot more SLP was being produced than what was being burned. The result? An inflated supply of SLP and a dramatic drop in prices for this token.

As players earn money by getting SLPs in return for their in-game value creation activities, this token’s pricing drop leads to plummeting incomes. Not only did that discourage new players from joining, but it also limited the prospects of existing players, thus disrupting the entire economy.

Lessons to Learn

• Incentivize users to spend their in-game tokens by offering them a host of activities. Please don’t make the same mistake as Axie Infinity by depending on a single primary activity to drive all the deflation (in their case, the primary source was breeding). To avoid supply inflation, you must add exciting features that allow users to spend their tokens and effectively burn them.

2. Maintain Complete Control Over In-Game Tokens

While this may go against the decentralization philosophy of blockchain, it’s a crucial tradeoff if you want to keep your game from running into an economic collapse.

As it’s impossible to come up with the perfect economic model on your first or even fiftieth try, you’ll have to make changes throughout the lifetime of your game. That’s why you must maintain complete control over any in-game tokens. This way, you can change the balance of economic activity by updating the pricing of different activities as needed.

Real-World Example

As a result, the SLP token lost over 95% of its value due to an imbalance between inflationary and deflationary activities.

Since Sky Mavis (creators of Axie Infinity) was wise to retain complete control of the SLP token and its dynamics within the game economy, it quickly reacted by announcing some significant economic rebalancing. The most notable changes include eliminating rewards for activities like “adventure mode” and “daily quest’.

These changes immediately reduced the production of SLPs by 56%, which (among other factors) has led to a price increase of over 100% in the last few days.

While some players are irked by this display of centralized power, most are still happy with the results as it means that their beloved game will continue to survive and thrive for a long, long time.

Lessons to Learn

• Keep your in-game tokens uncapped and retain complete control over in-game prices and rewards. This way, you can tinker with the economy to respond to evolving market dynamics.

3. Create a Governance Token

Since you must retain complete control of the primary in-game token(s), passive investors will have a hard time investing in your currency tokens for the long run. You could mint new tokens and dilute the entire market from their perspective. Rug pulls are an unfortunate reality of this industry.

This is where the dual token setup comes in. By creating a separate governance token with a fixed supply cap, you can offer investors a chance to bet on the future of your game. Not only will this make your project more favorable to passive investors, but it will also make your in-game economy more resilient by concentrating the broad crypto market exposure to the governance token.

Real-World Example

Crypto Raiders is an up-and-coming dungeon crawler with P2E elements. Hoping to leverage game theory mechanisms to create a sustainable game, they made Aurum for in-game activities and Raider tokens for governance.

The result of this difference is that players can easily lock their investments in the Raiders token because it’s capped and shielded from the in-game balance of the economy. This way, investors can bet on the game’s future without worrying about in-game economic changes hurting their investment.

The numbers prove the appeal of this setup as the governance token (Raiders) has a 24-hour trading volume of over $4,600,000. Whereas the in-game ticket (Aurum) only has a little over $470,000 in trading volume. These numbers may change in the future, but I expect the ratios to remain similar.

In other words, Crypto Raiders has access to ten times more liquidity because of the success of their governance token, thus making their game that much more sustainable.

Lessons to Learn

• To capture investments from the broader crypto market, you should create a governance token that’s capped and free of interference. This will add much-needed liquidity to all your assets since you can create liquidity pools with your governance token against your in-game token(s).

4. Create and Own In-Game Resource Token Pools

Most games feature multiple in-game resources like gold, oil, and diamonds. But where they make a big mistake is by not turning them into actual, tradable tokens.

By turning in-game resources into crypto tokens that can trade, you can execute an advanced revenue generation strategy by owning all the liquidity for these resource tokens. Let’s look at a real-world example to see what I mean.

Real-World Example

Let’s go back to the tokenomics of Crypto Raiders. The creators of this game executed a brilliant revenue generation strategy by launching resource tokens and owning all the liquidity for them.

Here’s how they did it. Since they have complete control of AURUM (the in-game currency token), they can create liquidity pool pairs for their resource tokens against AURUM. For instance, they have a liquidity pool for an in-game resource called “Grimweed,” with over $860,000 worth of liquidity on a decentralized exchange. Since they own both assets, they own 100% of the liquidity from this pool.

Things get interesting because users can trade these pairs effortlessly at the standard transaction cost of 0.35%. Furthermore, since the creators own this specific pair’s liquidity, they get to keep all the profits from these exchanges. As you can create dozens of resources in your game and their corresponding tokens, the potential for additional revenue is massive here.

Lessons to Learn

• By maintaining complete control over the in-game currency token and pricing dynamics, you can create tokens for all in-game resources and own their liquidity pools. As a result, you’ll get a substantial increase in revenue, which you could either invest in the development of the game or put towards player rewards to make your game more sustainable.

Conclusion

Creating a sustainable economic model and overall tokenomics of your game is a matter of trial and error. With multi-billion-dollar titles like Axie Infinity continuing to refine their tokenomics despite years of experience, it would be unwise to expect the perfect model on your first try.

The key is to keep things as simple as possible. Treat it like a living organism that must evolve to survive and hopefully thrive. By implementing the strategies I’ve outlined in this article, you can avoid pitfalls while retaining the power to make crucial changes as market dynamics change over time.

Despite your best efforts, players and markets will always be unpredictable. So your best bet is to follow the principles outlined above and remain eager to make changes as you learn from the reactions of your audience.