A Simple Framework for GameFi Analysis

Published in

MetaWeb.VC

9 min readOct 23, 2021

Started by Axie Infinity, “play-to-earn” has become the single most important catalyst for blockchain gaming. A natural integration of DeFi and NFT games gives birth to GameFi. In this research we try to provide an analytical framework to study various kinds of blockchain games and their economic designs. Since NEAR as a blockchain is highly suitable for games, we expect high quality and sustainable games to be built on NEAR.

Categorizing GameFi tokenomics

In-game economy is not a new topic. It can be as simple as buying items in a Mario game, or as complex as growing your fleet and waging a war in EVE Online. No matter how complex the economy is, it’s only going to be “in-game”, which means while you can buy game items with real money, there is no other way round: there is no official channel for players to sell game assets for real money.

The emergence of blockchain and NFT has brought the other half of the loop to games. “Play-to-earn”, the mechanism promoted by Axie Infinity that encourages players to earn in-game tokens and sell them for money. While there are many different economic setups among NFT games, we abstract the skeleton mechanisms and analyze them in groups.

Three components: NFT, medium, governance

All NFT games we currently see have all or some of the following components in their tokenomics:

NFTs. They represent in-game assets (Axies, heroes, land slots, etc.) which are the core of NFT games. Players buy NFTs using hard currencies like Ethreum in order to play the games.
Medium tokens. They serve as the in-game exchange medium. Players usually earn medium tokens in PvE or PvP battles or through other in-game activities. Medium tokens can be used to purchase accessory items and facilitate in-game operations.
Governance tokens. Some games adopt a DAO governance structure and issue governance tokens. Token holders usually have the right to vote on proposals and control game treasury, which consists of in-game tax on all activities.

Basic profit model

The most fundamental profit model for NFT games is simply NFT selling and transaction fees. The game team mint NFT items, and sell them for ETH. All subsequent in-game trades of NFTs between players are subject to a substantial fee which is also collected by the team (or by the game treasury controlled by DAO). If the game NFTs and the game design are good enough, an NFT game can prosper without medium or governance token.

Hard and soft medium

By “hard medium”, we refer to ETH or major stablecoins like DAI. They are hard currencies that don’t exclusively belong to the game, which means players can safely earn those medium tokens without worrying about depreciation. On the other hand, since hard medium tokens are exogenous to the game, the game team has no control over their in-game monetary policy.

By “soft medium”, we refer to game-specific medium tokens, like SLP for Axie Infinity. Soft medium tokens are usually cap-less and whose remittance is fully controlled by the game team. The team can adjust the supply in whatever way they see appropriate. Soft medium tokens have no intrinsic value.

Play-to-earn incentive

If you write “play-to-earn” on your website, then players will come to your game, not for fun, but to earn. Players have to buy NFTs with hard currencies in order to play the game, which is a different type of “entrance fee”. What they earn through game play in return, are medium tokens. Therefore, a rational player would want to sell earned medium tokens as soon as possible to reach the breakeven point. After that, he can play on the house money if he wants.

Hard medium

Some games use hard medium tokens, giving up the direct control over in-game economy. The income of the game, therefore, is fully driven by new demand on NFTs and economic effects of game mechanisms. Examples of hard medium games:

ZED RUN

ZED RUN is an on-chain horse racing game. Players buy and breed horses with ETH, and participate in races. They can earn ETH by winning races, resell horses, stake their horses and share breeding fees, etc. ETH is the one and only medium in ZED RUN.

League of Kingdoms

League of Kingdoms (LoK) is an MMO strategy game. The major NFTs in LoK are land slots, which can be bought with ETH. DAI is the in-game medium token, which will be used for in-game purchase, and for paying the land owners their take. For land NFT owners, they spend ETH, and earn DAI as income.

Soft medium

More games use soft medium gokens, which means the game team mint a new token that’s specific for the game and fully controlled by the team. In this case, players still spend ETH or other hard currencies to play the game, but their earnings are in the form of a soft medium. An example of soft medium games is F1 Delta Time.

F1 Delta Time

F1 Delta Time is an F1 car racing game. Players can buy NFTs (cars, keys, etc.) with ETH or credit card, and their earnings are in the form of REVV token, a soft medium token whose total supply is capped at 30B.

Medium as governance

Not all NFT games have governance tokens. After all, games require frequent iteration and swift upgrades, which may not suit a DAO structure, unlike DeFi protocols which can stay unchanged for relatively longer periods of time. Nonetheless, there are still many games who adopt DAO, and issue governance tokens, which makes them much closer to the “Fi” part in GameFi. Medium tokens can be used for governance too.

Illuvium

Illuvium is an open world RPG game, where players purchase in-game items with ETH and subdue “illuvials”. The medium and governance token for Illuvium is ILV, part of which will be allocated as gaming reward.

Soft medium plus governance

This is probably the mechanism that people are most familiar with, the dual-token system: games issue soft medium tokens, and launch DAO with a different governance token. Examples including some of the most popular play-to-earn games:

Axie Infinity

Players purchase “Axies” with ETH, enter PvE and PvP battles, and earn SLP, the in-game medium token. AXS serves as the governance token of Axie Infinity, which is only used in Axie breeding.

Splinterlands

Splinterlands is a turn-based digital trading card game similar to Yu-Gi-Oh. Players buy card packs with hard currencies, in return they could earn in-game medium token “Dark Energy Crystals (DEC)”. The governance token for Splinterlands is SPS.

Star Atlas

Star Atlas is a space-themed game built on Solana. It hasn’t been released yet, but both of its tokens are being traded actively. It has an in-game medium token ATLAS, together with governance token POLIS. ATLAS will be players’ reward.

Economic system failure

The key question for all play-to-earn games to answer is, how does a game allow continuous earnings for players without the team giving out money. We know that almost all NFT games get their first pot of gold by selling NFTs, which guarantees that the team gets a substantial money reward at the launch of the game. After that, players enter the game, and they seek for earnings. For hard medium games, this is quite straightforward: older players earn extra money that’s contributed by newer players. For example, in ZED RUN, you can resell your horse for a higher price, or collect breeding fees by staking them. Newcomers bring more ETH to the system to benefit everyone.

For soft medium games, things become more complicated. Ultimately, earnings are still brought by new demand, but there exists one more layer of mechanism: the soft medium token. For example, in Axie Infinity, the in-game currency SLP has no supply cap, whose emission is under full control by the team. SLPs can be earned by completing in-game tasks, and have to be burnt when breeding Axies. If there is a strong demand in Axies, which means a lot of new players want to enter the game, the price for Axies (denominated in ETH) will rise, which makes breeding Axies more profitable, resulting in an increasing demand for SLPs, pushing the price up. At last, new players earn SLPs and sell them to cover their sunk cost.

Feedback failure

A big advantage of soft medium games is that they can bootstrap the game much faster even if the demand is not that strong. Since the medium token is issued by the game team, it’s not hard to manipulate the token price at the early stage of the game to attract new players. While for hard medium games, teams have no such easy monetary instruments to create earnings from nowhere.

It all looks good until new demand begins to fade. Once there is less new demand, the constant selling pressure on the soft medium token starts to dominate the tokenomics. Players want to sell tokens as soon as possible to secure their earnings, dragging the price down, once again reducing the incentive for new players to join. The game team, as the central bank in this case, still has the monetary instrument. However, they now face a dilemma: reducing the supply may further deter new demands, while increasing the supply would make the price even lower. The recent price trajectory of SLP is quite interesting:

*SLP (Axie Infinity in-game currency) price*

Beginning from late July, the price of SLP has been demonstrating a periodic pattern while going down. It can somehow be related to the 14-day lockup period for every player between two SLP withdrawals. For soft medium games, decreasing demand means monetary policy failure.

Siloed dual token system

Governance token and soft medium token form a dual token system. In reality, medium tokens are the income source for players, while governance tokens are often the biggest cash reward to the teams. The two kinds of tokens are inherently different in terms of value derivation and governance goal (unless they are the same token, like Illuvium). In theory, the value of soft medium tokens fully depends on players’ belief in the future demand of the game and the economic system, which means there is no “real” value source. Governance tokens, instead, are supposed to capture the value of the whole game, since in theory you can own the game by owning all governance tokens. No room is left for soft medium tokens. Therefore, the dual token system is actually quite siloed. On one hand, players have no incentive to hold medium tokens — their income — because of the insecure value derivation. They simply want to cash out and turn those tokens into hard currencies. On the other hand, governance tokens become a DeFi project for their holders, who don’t have to be players at all.

The “play-to-earn” curse

Play-to-earn is the single most important boost behind NFT games. However, the gifts of fate come with a price. After all, players are essentially earning money from newer players, who come with the desire to earn money from even newer players…… “Ponzi” is a dreadful word, but many projects, especially non-gaming projects, took advantage of it to bootstrap, and finally reach a healthy state where the projects create endogenous value to benefit users. The question left for play-to-earn games is, then, will they ever create endogenous value for players? The only endogenous value a game can provide is fun.

The only long game is play-for-fun

Earning is not a new incentive in games. Before blockchain and NFT, assets from certain games have already sold for millions of dollars, which obviously have attracted play-to-earn players. However, “earn” has always been the secondary slogan until now. We see organizations like YGG who treat play-to-earn as a real job and organize players like a sharecropper labor union. It’s indeed questionable whether such a mechanism is sustainable. We very much look forward to fun games on blockchain that urge players to play for fun.