How a Tiny Austrian Village Solved Play-to-Earn Gaming Economics…in 1932
It’s summer 1932. We’re in Wörgl, Austria, a beautiful valley village. We have about 4,200 people in our little village surrounded by mountains near the border of Germany.
It’s a lovely place…but we’re living horrible times.
We’re in the heart of the Great Depression, baby. Nobody has jobs. Nobody has money. And we’re so hungry we’re about to eat a damn mountain goat for dinner.
But our ballsy new mayor has a crazy idea: he’s about to invent blockchain technology! Just kidding. (Although, how sick would that have been?)
No. See, Michael Unterguggenberger has only been mayor of Wörgl for 1 year, but the dude already wants to try an experiment:
He’s wants us to create our own currency, using a framework he discovered in the papers of a long-forgotten German merchant. He thinks it’s our only way to survive the economic Depression.
It’s risky, and he doesn’t know if it’ll work. But he has to try something, or else our small village may not survive.
Mayor Unterguggenberger will implement the new currency on July 31st, 1932. For the next 13 months — at a time when towns across the world are crumbling, prices are skyrocketing, and public works projects are at a standstill — Wörgl will thrive.
- We’ll build a new town drainage system
- We’ll repair our streets
- We’ll modernize our railways with lights
- We’ll finally fix the town mill
- We’ll build a damn ski jump, if you can believe that
- And commodity prices will stabilize
The experiment is a roaring success. Until the Austrian government comes in and shuts it down in September of 1933.
How exactly did this new currency save the town?
And how can we use its mechanics to save play-to-earn gaming?
P2E Gaming Is Fucked Up
Play-to-Earn gaming is broken. So far.
What is Play-to-Earn (P2E) gaming?
In theory, it’s a form of blockchain-based gaming where you get paid a cryptocurrency in exchange for playing a game.
Here’s how it works:
You buy an NFT character. You play a game. You get rewarded with the game’s cryptocurrency. You sell the crypto for fiat. You live happily ever after.
Sound too good to be true? It is.
Here are the problems with P2E games in their current iteration:
1. Game Design
When you think of modern video games, you think of open worlds like Skyrim or Red Dead Redemption. Where the graphics are so realistic, and the story so immersive, that you develop a deep emotional attachment to the characters. I mean, go watch gameplay videos on YouTube. People legit cried when Arthur died at the end of RDR2.
No such luck in P2E games. The characters in P2E games are 8-bit pizza chefs, cartoon frogs, or goofy crabs. The characters rarely elicit any emotional response beyond, “Oh, that’s kinda cute.” Which brings me to the next point…
The designs are slipshod because most devs don’t care about making high quality games. They only care about making money.
Players don’t demand better graphics because they also don’t care about game design. They only care about making money.
Nobody will admit this. But it’s true.
2. S2E not P2E
Play-to-earn doesn’t even exist yet. The “games” are more simply Stake-to-Earn (S2E) games. Here’s how the economics work:
- You buy an NFT
- You stake that NFT in the game
- You earn the game’s native token in exchange for staking
- There’s an in-game incentive to burn or stake the token, but otherwise you sell the token on the open market for fiat
- The coin slowly (or not-so-slowly) goes to zero as everyone is incentivized to sell, and nobody is incentivized to buy the coin
Nobody has fun “playing” these “games.” At best you’re staking and unstaking an NFT over and over for crypto rewards.
They are mostly Ponzi schemes: get in early (buy the mint), wait for the game to pump (usually a week after launch), then get out of dodge. This is how you make money as a P2E gamer.
Starting to get the picture?
Not a single game has figured out sustainable play-to-earn economics. A lot of them think they have. But their “economic” structure amounts to nothing more than a clever burn mechanism: the dev team somehow incentivizes players to spend their in-game coins, which the devs burn. They do this to reduce the supply and create deflation.
However, burn mechanisms ≠ deflationary tokenomics.
Don’t even get me started on games that use an infinite coin supply for their in-game currency.
The point is, every project thinks they’re the first ones to figure out play-to-earn tokenomics. Spoiler alert: they haven’t.
Even successful games like Axe Infinity and Crabada are struggling in a down market. Why? Because no players (or investors) have any incentive whatsoever to buy the in-game cryptocurrency.
If I’m playing a game to earn money, I’m going to sell my crypto rewards for fiat. That’s a lot of selling pressure on any currency.
But where’s the buying pressure? It doesn’t exist.
All the burn mechanisms in the world won’t account for a lack of buying pressure.
I have a question for P2E devs:
“What’s anyone’s incentive for buying your in-game cryptocurrency?”
If the answer is “I don’t know” then the coin will always (always) trend toward zero.
4. P2E Games Just Aren’t Fun
This is what it all comes down to:
The only buying incentive that will ever work is a fun game.
There isn’t a single P2E game that’s so fun people would play it for free. And there sure as hell isn’t anything fun enough that you’d pay to play it, like players do when they buy a console game like Red Dead Redemption or Grand Theft Auto.
That’s why P2E gaming is broken (and kind of doesn’t exist yet).
So why bother? Why not call it a wash and move on with our lives?
Because there’s so much potential with P2E games. The technology exists to create addictively fun video games. If only we could get the tokenomics right.
Which brings us back to Wörgl, Austria.
Lessons from the Freigeld
The Wörgl currency was called the Freigeld. This roughly translates to Free Money. Not free as in “you get it at no cost.” But “free” like freedom — the same way the air is free. Though there was a sense of freedom associated with the Freigeld, it was still a supplemental currency to the Austrian Schilling (more on that later).
The Freigeld had 4 main mechanics that made it successful. Let’s look at those mechanics and see how we can use them to fix P2E economics.
1. Effective Stamp Tax
I always thought a stamp tax only referred to the Stamp Act of 1765, which (in part) led to the American Revolution. I legit thought these MFers were just taxing stamps.
Turns out, it’s something completely different in economic terms.
In the case of the Freigeld, the stamp tax was a 1% tax every Freigeld holder had to pay each month. This was denoted with a stamp on the currency.
This created an incentive to spend the money, for fear of losing your spending power due to the stamp tax. This spending pressure incentivized individuals and businesses to buy commodities, as well as pay their taxes.
But why not just trade the Freigeld for Schillings, since the Schilling didn’t incur a 1% stamp tax?
They had a clever mechanism to account for that…
2. Prohibitive Exchange Surcharge
There was a 2% surcharge to exchange Freigelds for Schillings. This incentivized people to continue using Freigelds, rather than immediately exchanging for Schillings (the same way P2E players immediately exchange their in-game crypto for fiat).
With these two mechanics, there was dual pressure to support the Freigeld:
*The 1% monthly stamp tax created pressure to spend.
*The 2% exchange surcharge created pressure to continue using Fregeld.
But that left the question of why get Freigeld in the first place.
How can we infuse the economy with a currency with more restrictions than the current currency?
3. Clever Market Entry
Mayor Unterguggenberger infused Freigeld into the market by paying municipal workers 50% of their salaries in Freigeld. They eventually increased that proportion to 75%.
This allowed the currency to naturally ease into the market without strong-arming private companies to pay their employees in Freigeld.
4. Valuable Backing
Now, we need to be clear about something:
The Freigeld only worked because it was a secondary currency that was convertible to a primary currency. In this case, the Schilling.
In order for a secondary currency to retain value, it must be convertible to a primary currency that can be exchanged for a basket of commodities (more on this later).
In other words, the Freigeld could not have worked on its own.
Which brings us to the next point…
5. Shrewdly-Invested Backing
Wörgl didn’t just pump the Freigeld into the economy and hope for the best.
They backed it with Austrian Schillings.
Estimates differ, but the town held about 12,000 Schillings as backing for the Freigeld, and put about 8,000 Freigeld into circulation.
They didn’t just let those Schillings rot, and they also didn’t make dangerous investments with their backings. No. They made a frugal investment choice and deposited the 12,000 Schillings into a national bank, earning a 6% interest rate.
That interest rate wasn’t going to make or break the Freigeld. But that choice was a perfect example of the shrewd financial strategies that allowed the Freigeld to work.
So, how can we use this little-known currency from 1930s Austria to save P2E gaming?
Fuck a Gold Standard — Start a Fun Standard
I doubt 1930s Europe was a fun place. Just a guess.
Their economies didn’t rely on fun to survive.
Play-to-earn economies do.
Therefore, nothing I suggest will work without a fun game. No tokenomic structure, no VC funding, no shitposting mastery will compensate for a boring game.
The US Dollar used to be pegged to a gold standard. That meant you could convert your US dollars for its equivalent in gold bullion at any time and the federal government would have to honor your exchange.
Richard Nixon ended gold standard in 1971.
Since then, the dollar has been a fiat currency, buoyed by little more than our perception of its value. What’s happened as a result?
Play-to-earn game coins don’t have a gold standard. You can’t exchange them directly for gold. In fact, they’re usually backed by US dollars, which also can no longer be exchanged for gold. As such, P2E coins are double fiats, which is why they all tank to zero.
Therefore, game devs shouldn’t aim to put their coins on a gold standard. They should be on a fun standard.
The only thing that backs the value of a P2E currency is a game that’s fun to play.
Bitcoin and an Effective 2-Coin Structure
Using the Freigeld as our inspiration, let’s imagine a possible tokenomics structure. We’ll use two coins:
- The local in-game coin, which is the Freigeld equivalent.
- The “gold standard” coin, which is the Schilling equivalent.
I’ll walk us through a possibly-effective tokenomics structure for a hypothetical game called Cloud Striker. Its in-game coin will be $SKY, and the Gold Standard coin will be Bitcoin.
As it stands now, in summer 2022, Bitcoin is the only crypto that passes the same “basket of commodities” test as the Schilling. I can’t use Bitcoin at the grocery store, so it’s not perfectly convertible, but there are many private farms and ranchers that accept bitcoin as direct payment.
Although bitcoin is more volatile than stablecoins, stablecoins don’t pass the “basket of commodities” test:
I can more readily trade Bitcoin for a basket of commodities than I could trade a stablecoin for a basket of commodities.
(Companies like Data Mynt may change this soon, though.)
Building the National Backing
To start our in-game economy, the first thing we’ll need is some of the Gold Standard currency in reserves to back our $SKY coin.
We’ll do that the same way most projects do: with an NFT sale.
But most projects fuck this part up. Here’s where a lot of P2E projects get NFT sales wrong:
1. They use the NFT sale (and ICO) as their primary source of funding. This leads to huge timeline problems. Most P2E devs sell their NFTs, get money from their users, then realize “Holy shit, we bit off more than we can chew and it’s going to take us WAY longer than we expected.” See: Star Atlas.
2. They sell too many NFTs. NFT projects of all kinds choose to sell 10,000 NFTs just because that’s what the most successful project in the space, Bored Ape Yacht Club, did and it worked for them. Selling too many NFTs is just a cash grab.
3. They sell different levels of NFTs. Most devs try to create false scarcity by selling differently-classed NFTs before game launch. They don’t even realize this will screw up their gameplay, and therefore their in-game economy.
For example, let’s say you can buy a Level 5 Spaceship for $400, but you can buy a Level 10 Spaceship for $800. That’s a huge problem.
Because people with more money can buy more expensive and more powerful ships. This turns the game into pay-to-play, rather than play-to-earn. (Imperium Empires is going to run into this problem.) I don’t think most devs even think about their NFT sale like this, because they’re just thinking about pumping their bags by selling different level NFT characters.
Because P2E game devs are so desperate for funding that they let it blind their choices. Therefore, we need enough VC funding to create the game ahead of the NFT sale. That transforms the NFT sale from a fundraising event to a buy-in event, as it should be.
We’re a long way away from this being a reality, but creating games before the NFT sale is one of the only ways P2E gaming can work.
For Cloud Striker, the NFT characters can only be leveled up through gameplay and other actions within the game economy.
Imagine you can mint different classes of characters with different strengths and weaknesses:
Monks who have high intelligence, but low fighting abilities.
Warriors who have low intelligence, but high fighting abilities.
Sorcerers with magical powers, but slow movement.
Dwarves with high strength, low mobility
And so on.
The different classes have different abilities, but overall they each have similar power levels.
As such, here are a few rules for our NFT characters:
- You can only play Cloud Striker if you have an NFT character.
- You can only mint a character using Bitcoin, our Gold Standard currency.
- You can, of course, buy and sell your NFT character on secondary markets, but we will add a prohibitively high creator fee: 10%. The isn’t for cash grab purposes — this is to incentivize use of our internal marketplace, where you must trade using Bitcoin (BTC), and we only take 1% fees.
- We will cap the initial NFT mint at 6,000 characters. That means at first, only 6,000 people max can play Cloud Striker. If those are the only players we ever have, so be it. However, we also have a mechanism that allows more players to enter the game, but only commensurate with demand (more on that in a bit).
- Similar to Wörgl depositing its Schillings for a 6% return, the Bitcoin proceeds of our NFT sale will be held in a yield-bearing account on a crypto exchange.
Our Risky Solution to Fight Ponzinomics
Now, we don’t have a similar means of pumping $SKY into our economy as Wörgl did with the Freigeld: they compensated municipal employees with their new currency.
We’re going to try something similar, but riskier:
Every player will start with an amount of $SKY coin that is directly equivalent to the amount in BTC they paid for their NFT character.
This will do several things:
- It creates an initial artificial boost for $SKY, since the players are basically exchanging their BTC for $SKY coin (+ an NFT).
- It eliminates any Ponzinomics, since a player’s investment is returned to them immediately.
- It pushes the $SKY coin into the in-game economy.
Now, we can’t predict how the price of $SKY will respond to these choices.
Over time, the amount of $SKY each new player gets will fluctuate. But that amount will always match the amount of BTC they initially invested.
No $SKY Team Compensation
Another unusual choice we’ll make:
$SKY will only be used for in-game rewards and other in-game economy requirements, not team compensation.
Most projects allocate +50% of their coin allocations to team compensation, marketing, and other nonsense.
This creates an adverse incentive for the team to pump their coin then dump it, thus destroying the in-game economy.
Fuck that. All Cloud Striker operations have to be either:
- VC funded, or
- Player BTC funded
That creates incentive for the team to grow the project and in-game economy, not dump it.
Before we start talking about stamp taxes and conversion surcharges, let’s look at some hypothetical math to illustrate where we are so far.
Only 6,000,000 $SKY coins will ever exist.
It is allocated like this:
- 2,000,000 $SKY goes to the 6,000 players who mint the initial NFTs
- 2,000,000 $SKY is set aside for future players (more on that in a minute)
- 2,000,000 $SKY is set aside for in-game rewards/economy
Again, we have an initial mint of 6,000 playable NFT characters.
And let’s say Bitcoin is at $50,000 at the time of mint.
We charge .001 BTC to mint each playable NFT character, which is the equivalent of $50 fiat. This is roughly equivalent to the cost of a console game.
6,000 sales at .001 BTC per NFT works out to $300,000 that we add to our Gold Standard backing (our Schilling equivalent). In theory, that BTC is meant to match the 2,000,000 $SKY set aside for our first 6,000 players who mint NFTs.
Then our team will match that investment for the remaining 4,000,000 $SKY, adding $600,000 in BTC to our coffers.
This brings us to a total of $900,000 in BTC backing.
(Again, this stuff only works with initial VC funding.)
Our $900,000 in BTC also establishes our initial price for $SKY coin:
If we allocate 2 million $SKY to our players, and there are 6,000 initial players, and 6 million $SKY overall, that means:
$SKY starts at $0.15.
And every player starts with 333.33 $SKY
Here’s where that leaves us:
- 6,000 NFTs sold
- 2 million $SKY in the hands of players
- 2 million $SKY waiting to be allocated for in-game rewards
- 2 million $SKY waiting for future players
- $300,000 in BTC from players earning ~5% interest
- $600,000 in BTC from team investment earning the same ~5% interest
New Players + Price fluctuations
No game or economy exists in a vacuum. Bitcoin price will change. $SKY price will change. Players will want to leave. Players will want to join. The Austrian government might want to shut our asses down.
How do we handle these fluctuations?
- If players want to sell their NFT character, and therefore leave the game, they can of course sell it on a secondary market (likely OpenSea, since our NFTs are on Ethereum). But we’ll add a 10% fee. Again, this isn’t a cash grab. This is to disincentivize use of secondary markets and incentivize use of our internal market. All internal market transactions are done in BTC and we take a 2% royalty fee, the proceeds of which get added to our $900,000 in interest-bearing BTC.
- For one reason or another, the price of $SKY will drop at some point, even if only temporarily. Let’s say to $0.007. How does that affect our new player $SKY allocation?
We still have 2 million $SKY set aside to allocate to new players who enter.
It’s possible that the game sucks. This might cause the first 6,000 players to sell their NFTs on the market and nobody else wants to play. Therefore, there’s no incentive to do a secondary round mint. Fair enough. We’ll close up shop and move on.
But let’s say more players want in. After a certain amount of time, we’ll do a secondary mint after the initial 6,000. This mint will be 100% demand-based and will only happen in accordance with the number of new players who want in.
How does the secondary mint work?
Well, if $SKY is $0.007, and we charge the equivalent of $50 in BTC to mint new characters, that means each player that mints a new NFT will be allotted:
7,142 $SKY to start the game.
That means, for as long as $SKY price is low (indicating lower demand), only 280 new players can enter the game. How do we figure? 2,000,000 $SKY is set aside for new players. If each is compensated 7,142 $SKY to start, that’s only 280.
That’s a low number of new players to match the lower demand. It works out perfectly.
But what if way more players wanna join? What if $SKY price goes higher?
The number of playable character NFTs available will match that demand.
Let’s say $SKY raises to $0.50, and we charge the equivalent of $50 in BTC for new players to mint a playable character.
That means each player starts with 100 $SKY.
With 2 million $SKY set aside for new player allocation, that means we can accommodate 20,000 new players.
The higher $SKY price implies a higher demand for players, which naturally creates more space for players.
Before we get to in-game utility, what’s to keep players from immediately dumping this $SKY allocation for fiat?
The Conversion Surcharge
One of the simple and brilliant aspects of the Freigeld was the 2% surcharge incurred if people wanted to exchange it to Schilling.
Similarly, we’ll charge players 5% to exchange their $SKY to BTC. Not as a means of procuring more revenue. But, similar to the high royalty fee we’ll charge in secondary NFT marketplaces, this instead serves as a disincentive to convince people not to exchange $SKY back for their BTC.
Now, because the in-game coin will be a fungible token, we can’t control what people do with it outside of our game — there will be no 5% exchange fee if they go to a DEX and trade it for Ether.
However, in order to play the game, players will be required to stake their $SKY. They can play and earn as much as they want for as long as they want, but if they want to take their $SKY to the open market, they’ll have to unstake it from Cloud Striker directly. When they do, they won’t get $SKY directly — we’ll give them the equivalent in BTC, minus the 5% exchange rate.
Although we can’t do anything about players who want to dump their $SKY before playing, this surcharge will at least disincentivize current players from trading their $SKY for BTC.
But if they do make that choice, we’ll take that player’s $SKY coins and put it back into our new player allocation allotment.
No Burn Mechanisms
Now, here’s the point at which most GameFi projects would introduce their burn mechanism.
They’d say, “Every time someone exchanges their $SKY for BTC from our treasury, we burn their $SKY.”
They call this “deflationary tokenomics” and it’s bullshit. We don’t burn a fuckin’ thing at Cloud Striker.
Burning your coin is an act of deep insecurity.
If your coin is truly a useful tool, why would you want less of it in the world?
Burning suggests you don’t trust your initial allocations, and you sure as hell don’t trust its utility.
So we burn nothing.
Our Stamp Tax
The main genius of the Freigeld was the stamp tax:
Freigeld holders had to pay a 1% tax every month.
Because we can’t forcibly tax $SKY because it exists on a blockchain, the mechanisms of the game will be such that players have to pay 1% of their held $SKY into the game economy every month in order to keep playing.
These “proceeds” will be added to the $SKY pool allocated for in-game rewards.
Similar to the Freigeld, this will incentive players to spend their $SKY, rather than hoarding it, thus boosting the in-game economy.
Which brings us to $SKY utility.
In-Game $SKY Utility
Imagine an open-world game like Red Dead Redemption 2 or Grand Theft Auto.
There’s a storyline, and a big, beautiful open world with tons of details.
The details are what make games fun to play. There are entire YouTube compilations about the details in RDR2.
- If you kill a person in a town and show up later, they’ll be having a funeral for the deceased.
- If you shoot an animal, you can track their blood.
- If you leave a dead animal, you can watch their corpse decompose over time.
Contrast that with current blockchain games like Decentraland.
Decentraland is an open metaverse where you can buy virtual land, create a store to sell digital assets (NFTs and otherwise), and interact with friends in virtual reality.
Compared to a console game like RDR2, there’s no storyline, not the same level of graphic details, and it’s not nearly as fun.
But what Decentraland does have is an in-game economy, powered by $MANA coin, as well as the ability to build your own virtual store.
Now imagine a combination of the two:
Imagine the cinematic storyline of an open world console RPG, combined with the in-game economy of a metaverse like Decentraland.
The Game Modes
Cloud Striker will have two game modes:
- You have the campaign mode, where you’re playing the storyline like a console game. In this game mode, you earn $SKY by completing missions and accomplishing other in-game tasks.
- Then there are different portals in the game, where you can transport to the blockchain-connected metaverse, similar to Decentraland. Here you can enter shops created by other players, or build shops yourself, where you buy and sell accessories you can use in the campaign mode, all using $SKY as the currency.
All transactions in the metaverse area incur a 3% tax, which supplements our in-game rewards $SKY pool.
Who Knows What Will Work
Some historians think the Freigeld’s time was coming to an end when the Austrian government intervened in September of 1933.
We don’t know exactly what would have happened if they’d stuck with it.
And I don’t know if the framework I’ve laid out will be effective with play-to-earn gaming. But at least it’s something different. At least I know that I don’t know.
So much of what tanks Web3 projects is arrogance. Arrogance that we’ve developed something new. Arrogance that we’ve thought through everything already. Arrogance that this is sure to work. Arrogance that we can predict human behavior.
We can’t. We don’t know. And the vision I’ve laid out here might fail horribly.
I’m okay with that.
As long as we keep trying new things, there’s no telling what GameFi could become. Sadly, in the Web3 world we’re seen as a bunch of scammers. In the gaming world, we’re seen as an unnecessary feature that nobody asked for. And in the real world, nobody even knows we exist.
They will know us. They will. But only if we admit that we have no fucking clue what we’re doing, and we keep trying anyway.