Economic Stability: GameFi v. Central Banks

Authors: 0x长安 & medianoche.eth

Acknowledgment: thanks @BriefKandle for his support

Introduction

Inflation occurs when the money supply is greater than the actual demand for money. The purchasing power of money becomes less than the output supply, which eventually leads to the devaluation of the currency. The resulting phenomenon is a sustained and general rise in prices over a period of time. The virtual/digital economy, like the real economy, is comprised of constant communication. As a result, many of the fundamental principles of real-world economics will apply to the virtual economy as well.

I will list the causes and governance methods of inflation in the real world below. I will also list the causes and solutions of inflation in GameFi (a type of virtual economy). By comparing the real world and the GameFi ecosystem, we can explore the similarities and differences between the two worlds.

Real-World Economic Reasons for Inflation:

1) Demand Increases

Demand-increased inflation refers to an inflation caused by the increase in the price level of consumer goods. When the total social demand is greater than the total social supply, the entire social market will be in short supply, which will lead to an increased price and therefore inflation.

2) Costs Increase

Inflation caused on the supply side is from the increase in the general price level. The price level rises due to the increase in production costs of manufacturers. There are three types of reasons for the increased cost. Cost-push inflation can be divided into three types depending on the reasons for the rise in costs: wage-push, profit-push, and import/export-push. All three of which lead to higher costs. For example, if workers ask capitalistic companies to raise wages, costs of labor increase which causes the price of goods to rise. Workers will ask for higher wages again, which will cause wages and prices to rise together.

3) Structural Reasons

Structural inflation refers to the sustained rise in the general price level caused by changes in economic structural factors without demand and costs accidentally impacted. Structural inflation is a sudden increase in the price of some materials, such as pork and steel. If the price rises for a long time and there is no way to come down, then it will cause full-scale inflation. Inflation is caused by the imbalance of a central banks’ industrial structure and other national economic structures.

Real-World Ways to Manage Inflation:

There are many ways for a central bank to manage inflation, and this article will not list them all. However, a few are explained below:

1) Interest Rate Hike

An interest rate hike is when a country’s central bank raises interest rates. This increases the cost of borrowing by commercial banks to the central bank, which in turn forces market interest rates to increase. The overall purpose of raising interest rates is to reduce the money supply, suppress inflation, slow down market speculation, etc.

2) Shrinking the Balance sheet

Shrinking the balance sheet refers to the behavior of the central bank to reduce the size of the balance sheet. The central bank realizes the direct recovery of the base currency by directly selling the bonds it holds or stopping the reinvestment of mature bonds. Compared with raising interest rates, it is a more severe tightening policy.

Although shrinking the balance sheet is also a governance policy to reduce inflation, it is fundamentally different from raising interest rates. This is due to 2 main reasons:

1. Raising interest rates means higher borrowing costs so people will eventually start spending less. The demand for goods and services will then drop, which will cause inflation to fall. Shrinking the balance sheet is to reduce the debt of the central bank, which directly affects the market liquidity of currencies.
2. The increase in interest rates affects the price of bonds, and the shrinking of the balance sheet affects the amount of bonds circulating in thee economy.

3) Foreign trade

Foreign trade refers to the exchange of goods and services between one country and another. The exchange with the outside world is conducive to improving domestic production efficiency and promoting the continuous expansion of production. When productivity increases and the total quantity of goods increases, so the price of goods will fall due to supply and demand.

GameFi Reasons for Inflation:

1) Growth Rate discrepancies

The growth rate of the number of tokens in circulation does not match the growth rate of the game content. That is, the output rate of game tokens is greater than the rate of consumption in the game, resulting in the currency supply circulating being greater than the actual demand for currency, resulting in inflation.

2) Growth Rate rises too quickly

The growth rate of the token will grow faster and faster over time because players in the game will only get better and more efficient at earning tokens. The higher the level of the player, the more tokens they will earn. The number of great players will only get higher and higher, so the speed of token production will grow faster and faster.

3) Profit Seeking

Play-to-earn games’ inflation is unavoidable due to players gaming the system to earn money quickly. Tokens in the game are the source of income for profit seeking players, and the tokens produced are constantly sold by game players. This causes unstable prices since this playing strategy creates an increase in the circulation of tokens.

GameFi Ways to Manage Inflation:

1) Token Consumption

Increase the consumption of tokens in the game. For example, in the AXIE game, the development team increased the ratio of $AXS- $SLP required for breeding, and increased the amount of $SLP required for reproduction. The lower number of circulating tokens, helped to retain the purchasing power of their in-game tokens.

2) Reduce vehicles to generate tokens

Reduce the ways of getting tokens in the game helps to control token velocity and tokens in circulation. In AXIE, players can no longer get $SLP from adventure mode. Daily quest $SLP rewards will be removed. Changes were made in the production method of $SLP to PvP mode, and rewarding $SLP according to the player’s Match Making Rating (MMR) in winning games. The higher the MMR, the higher the $SLP reward.

3) Guild Royalties

Collect royalties when players trade NFTs, collect taxes when receiving tokens, and destroy tokens to limit the outflow of funds.

4) Stored-Value

Encouraging players to use the in-game currency to mint illiquid NFTs will delay the selling of tokens. This is currently the most common way to prevent selling pressure in GameFi. This method largely delays players’ selling tokens, and is the biggest place for maintaining GameFi’s funds at present.

GameFi v. Real-World →Inflation differs:

1. The inflation in the real world is relatively stable compared to GameFi. Liquidity is provided by the central bank’s money supply, and the government will control the printing of money according to the market situation. Yet, GameFi’s inflation is determined by the output formula originally set, and the formula does not reduce output as the market inflates.
2. There is also a difference between the central bank and the game party that controls the inflation rate. The central bank can reduce the amount of currency circulating in the market by raising the reserve ratio and other means. A typical GameFi game does not have a centralized banking mechanism, and cannot actively control the amount of currency in the market. The development team can only modify the gameplay to make the currency circulating in the game be consumed at a higher rate.
3. Moderate inflation in Real-Life is conducive to stimulating consumption. This allows enterprises to expand production and drive up the employment of people and lead to economic prosperity. The moderate inflation in GameFi will lower the barrier to entry for players and help attract new players to the game.

Problems to be solved by the Central Bank and the Development team:

The valuation of tokens in GameFi relies on the maintenance of liquidity. The inflow must be greater than the outflow. The inflow depends on the entry of new players & the reinvestment of old players. However, in the past, most GameFi games’ value has gone to zero. The reason is that everyone wants to earn and sell their profits. Therefore, the game content is not enough to support the continuous development of the game. Only when new players enter in the future can the price of the token be maintained.

We know that inflation is bad for the ecological health in any world. The output of a large amount of currency leads to the rise in the price of raw materials. This starts on the supply side and carries over to the consumer side. The harm of inflation becomes evenly distributed to everyone. How can someone control inflation within a reasonable range and maintain the stability of token prices? This is a question we need to discuss and think about.

Both games and central banks face the problem of inflation, but since GameFi is different from the underlying logic, it is difficult for GameFi to operate like the real world. Although the problems encountered are similar, the solutions cannot be copied.

1) The game world is missing a value bundle

• In the real world, the central bank is tied to the interests of the people and the means of production of this land. The central banks’s interests are tied to the people, because the government’s income comes from the taxes paid by the people and from the money earned through governance on its land.
• In the GameFi world, there is no bundling of interests between the development team and the game experience. GameFi teams rug projects from time to time. Although the token of the development team will be locked and released linearly, the rug phenomenon can occur when the value of the token released in the early stage has already satisfied the ROI of the development team. Therefore, the tokens’ stored-value has limited constraints on who is on the project side.
• In GameFi, players invest their time and energy in order to get returns. When the token price of the game falls, or there are other projects that will bring higher ROI, players will choose to sell their in-game assets. Because the blockchain world is open-sourced, the exchange of games and external funds is convenient, resulting in the easy conversion of funds from one game to the next.

2) The GameFi world lacks consumer goods/hard currency/value savers

• Humans exchange various services and goods through monetary consumption and working for a means of production. In the process of earning and consuming currency, it promotes economic prosperity. The tokens in GameFi only have financial attributes, not commodity attributes, resulting in the tokens only being used as financial investment products.
• GameFi lacks value savings items, and lacks consensus-based props in the game. No matter what industry or business, there are always whales. These big whales always hold a lot of funds, and these funds need large storage spaces to accommodate them. For example, in the real world, a lot of money flows to real estate, the stock market, and gold. Gold has the property of resisting inflation. People are unwilling to depreciate their assets and will exchange their currency for gold as a store of value. If there is a rare item in the game, which is a necessity for advanced players to continue earning toekns, then an item formed by consensus will have a very considerable anti-inflation property.
• At present, the playability of GameFi is not strong, and the development team can only attract players to enter the game through a high APR on their tokens. For example, let’s discuss Avalanche’s Pizza Game. By staking an NFT, you can obtain token1 in the game, and token1 can purchase props to accelerate production, mint an NFT, provide liquidity, and obtain token2. And token2 can only be used to upgrade an NFT. This increases the output efficiency of the game’s currency. Although this method will consume a lot of tokens in the short term and will obtain high returns, it is essentially accelerating the output of tokens, making the game more prone to inflation, and the economic system in the later stage of the game is difficult to maintain.

3) Gamers lack emotional connection

People going abroad and transferring assets are seen in GameFi through the exiting of the game. In the real world, people have feelings for this land, relatives, and friends on this land, good memories of childhood, and local traditional culture. For all the reasons discussed, people are reluctant to leave the place where they grew up.

These tendencies are not found in GameFi. The majority of existing blockchain games are for the purpose of making money. Players are pursuing the ROI of the game. When the ROI of this game is very low, they will change to the next game. The game will then have an insufficient absorption of players, and the player’s cohesion is not strong. In today’s fast-paced game in pursuit of ROI, the gaming community lacks emotional communication with players beyond money.

Suggestions for GameFi

Central banks have a long history of managing inflation. As an emerging industry, GameFi can learn from real-life practices. At present, GameFi is considered to be the early adopter of the Metaverse. The feasibility of the play-to-earn model is constantly being verified in GameFi. The small sample size and short history are the advantages of GameFi at present. If the industry wants to progress, it needs to continuously introduce excellent methods from the traditional world

1) Encourage players to make money in another form

In the traditional game industry, a large portion of players do not earn profits in games. However, gamers earn profits by competing with each other in live events. GameFi can also learn from this system. When video streamer is playing a game, the audience can use the game token to reward the streamer. When the streamer earns more tokens than sells tokens in the game, players are more willing to reinvest the earned tokens. This is because the battle for advanced players is more attractive.

Also, the development team should try to allow players to create internally, and encourage players to make screenshots/videos of their gameplay into NFTs. Players can keep NFTs to commemorate or sell them, which not only satisfies players’ consumption desires, but also increases the possibility of getting out of the game, because the NFTs created by players may have stored-value. These NFTs give players the ability to get money into a wallet quickly and the liquidity they desire.

2) Increase a game’s social presence

The social system in the game is very important. Game developers include group activities/social systems in the game. GameFi should not only have gaming guilds, but the guilds/communities in the game are also very important. The formation of a circle between players and the emotional investment in the game will increase the player’s cohesion and sense of belonging to the game. As a result, the players will not easily leave the game, which then attracts more players to enter.

3) Integrating Real-world qualities

If GameFi is a central bank, then trading needs to exist between multiple countries. For example, there are underground whitelist spots. Players can submit the whitelist they want in the game’s discord. Then, the fame will go to help the player who requested the WL. When the development team wants to give a WL spot, the player can spend in-game tokens to buy the WL.

Players can consume game tokens to purchase the whitelist. This move can also increase the possibility of potential players entering the game. When a player needs a whitelist of a certain community, he can propose and buy game tokens in the discord community in exchange. The game party endows the token with more use value, which increases the player’s willingness to reinvest their time and money.

4) Add additional gameplay modes

The singleness of the gameplay and the lack of playability of the game content can be adjusted externally. Repeated games day after day, when there is no randomness, unpredictability, and challenge, will lead to players’ disgust for the game, and over time, they will lose the desire to play the game.

The game structure themselves can add to the rise and fall of tokens. The rise and fall of the game token is unpredictable, and never sleeps due to the global nature of crypto. . Players can put the game token into the reward pool 12 hours ago, and bet the price of the token is higher than the price of the previous trading day. Ups and downs, the winner can win all the tokens of the loser. The development team can collect transaction tax from it.

Conclusion

GameFi is the carrier of the Metaverse to global adoption. GameFi presents itself as the prototype of the Metaverse from its current gaming environments and ecosystems. From Facebook changing its name to Meta and Adidas buying virtual land in The Sandbox, more and more traditional companies are entering the realm of the Metaverse. Traditional gaming is undergoing a paradigm shift, fueled by the Metaverse and GameFi craze.

Presently, the Metaverse is in its very early stages. During this chaotic period, different companies/DAOs create and present their own different interpretations of the Metaverse. Therefore, in order to build a good and collective Metaverse, we need to constantly borrow good ideas from the real world. The microcosm of the Metaverse which we discussed is GameFi. Ultimately, GameFi needs to improve its tokenomics and monetary systems. The future will tell whether GameFi turns to central bank strategies or if more unique ecosystems are built to create positive economic stability.

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