Inflation in GameFi and Traditional Game

1. Introduction

Whether it is a traditional game or the current emerging GameFi, as long as there is a monetary mechanism, it will inevitably face the problem of inflation.

Inflation is an issue between demand and supply. When there is more currency circulated in the market with demand staying the same, the currency’s purchasing power decreases, meaning that inflation happens.

M represents the total supply of money, V is the velocity (i.e. the circulation of money), P is the price level, which is a measure of inflation, and T is the total exchange volume, which is the total output in the economy.

Whether it was Angola in 1991 or Bolivia in 1984, the consequences of runaway inflation have rippled through many market economies. Zimbabwe has even become an example case of the failure of economic governance and the emergence of hyperinflation.

In relation to a gaming system, inflation is inevitable due to the fact that the number of in-game tokens is always increasing at a higher rate than the number of players.

• Traditional games: Most tokens are rewarded to players for their in-game performance. Players can burn tokens to level up their heroes or weapons. These leveled-up heroes/weapons will then reward players with a higher amount of tokens. And the cycle continues.
• GameFi: Players entering the game must first purchase in-game assets (NFTs) which will generate tokens with an unlimited total supply. Although players can use these tokens inside the game ecosystem, the presence of a marketplace allows players to sell (tokens & NFTs). With the enormous amount of tokens accumulated over time, market selling pressure will be added on, and inflation is inevitable.

In terms of solving the problem of inflation, traditional games and GameFi share the same pursuit, but their motivations are different.

• Traditional games: The business model is to transform non-paying players into paying customers. Inflation is encouraged because deflation may cause degraded gaming experiences and scare away game players.
• GameFi: The P2E business model attracts more players entering the game, which temporarily stabilizes the market price. Token price is reflected in the average player consensus towards the project.

2. Traditional games: inflation & gaming experience

In a game’s early stage, the prices of in-game items and the exchange rate of fiat currency to game currency were mostly maintained within a stable range. As the game progresses into the middle and late stages, the stable range will be broken: although fiat currency can be exchanged for more in-game currency, it will also cause high in-game prices. Players cannot reduce their playing cost of the game from the devaluation of the currency. Instead, the difficulty of accumulating players’ wealth grows, which then caused damage to the interests of guild players, resulting in an overall decline in the game experience. This is the damage caused by hyperinflation to game’s economy and ecosystem.

For traditional games, moderate inflation is conducive to the operation of the game ecosystem, and blindly pursuing deflation will also have a negative impact.

We will analyze it in three levels:

2.1 Hyperinflation Hurts Gaming Experience

We know that structural inflation in a real society drives wages up. Consequently, both commodity prices and wages become resistant to falling. In the game society, the official will not increase the output of game currency in-game rewards because of the rise in market prices. Meaning players need to invest more real wealth to meet the advanced needs in the game. Under the premise of rising prices, the reward value, given to players through additional content such as game tasks and activities, will decrease accordingly. Increasing the difficulty of accumulating wealth in the game reduces the enthusiasm of players to participate. Eventually, this process leads to the loss of players.

2.2 Deflation Hurts Gaming Experience More

With high inflation rates, the in-game prices of high-end equipment/props will decrease. The in-game currency will have an increased purchasing power compared to fiat currency. The in-game survival cost of players will increase on the basis that the prices of basic props provided by the official remain unchanged.

Under excessive deflation, the in-game currency will appreciate relative to the fiat currency. Players’ spontaneous demand for tokens increases, in-game assets decreases in value, the in-game economic cycle weakens, and the overall in-game experience declines. Deflation reduces players’ desire to play in the ecosystem, and the game has to downgrade its intended business model.

2.3 Improved Gaming Experience Can Curb Inflation

The gaming experience consists of two parts:

• The enjoyment of in-game activities.
• The materialistic awards gaming and trading brings to players.

Game experience determines players’ willingness to pay:

• In traditional games, the in-game equipment purchased by players is sold for a lower price than its original price.
• Example:
• The player spends $100 to buy a weapon. Affected by the depreciation, the player later sells it for the equivalent of $70 in-game currency. The $30 price difference is viewed as how the player pays for her in-game experience.
• “I own this weapon, and my gaming experience is more enjoyable”. Transactions based on this starting point, invisibly, will complete the transfer of the cost of the game experience. If the weapon is sold at a price higher than $100, it is equivalent to new buyers recognizing the value of the game experience brought by the weapon. Therefore, if the overall experience of a game is very good, it will attract more players to pay for it, which ultimately will bring down inflation.

3. GameFi: Inflation & Marketplace

3.1 GameFi’s Inflation Problem

The presence of marketplace is inherent in blockchain technologies: Players need token liquidity to find project value reflected in the market price

Currently, almost all GameFi projects issue cryptocurrencies on blockchain and circulate them in the secondary market. Some GameFi projects issue two or three cryptocurrencies to complete the construction of complex economic models. For example, Axie Infinity has a three-token mechanism that consists of a dual-currency (AXS & SLP) plus Axie NFTs.

Tokenomics: Why inflation is delayed, but not solved

• The game development team will seek the maximum profit for itself through the design of the game mechanism and the management of the average player consensus. In GameFi, the team not only undertakes the task of game operation but is also one of the major players in the complex consensus game of the entire game ecology. Therefore, the token mechanism in GameFi will naturally generate inflation and will transfer the consequences of inflation to players through the ecosystem.
• Let’s take Axie Infinity as an example, its governance token AXS has a long-term deflationary model. Its special mechanism of two tokens (AXS&SLP) together with the use of NFTs makes SLP bear all the selling pressure of the three assets. On the other hand, the emergence of inflation is officially supported. Moderate inflation keeps the price of AXS in a stable state, which will lower the entry threshold for new players and expand the volume of entry.
• In Axie Infinity, the team holds a large amount of AXS, while the gold farming guild, YGG, holds a large amount of Axie NFT (NFT is similar to a production tool, YGG leases Axie NFT to gold farmers to help them make SLP, and charges a handling fee). The majority of players and gold farmers hold a large amount of SLP, the consumption tokens to be used in the daily activities of the game.
• With more SLP generated than being consumed, SLP is destined to flow into the “death spiral” of falling prices. In the meantime, AXS and Axie NFT prices might keep increasing. This increases the barrier of entry and reduces the income of gold farmers. Thus, the falling SLP price prompts them to leave the market.
• In the long run, the inflation trend will have a negative impact on the earnings of the Axie team. The team has made a series of adjustments to the exchange ratio between the three token mechanisms, as well as market-making in the secondary market. These changes (exogenous factors) resulted in a temporary increased price of SLP which delayed the loss of players.
• Although inflation will not be resolved, Axie Infinity demonstrates specific ideas for slowing inflation for GameFi projects:

1. From its economic model setting:

• the multi-currency & NFT model allows the inflation of a single currency to continuously transfer its selling pressure to its associated currency, and gives the game development team more regulation room. This regulation in the long run delays losses and manages to retains players.

2. From its supply-demand setting:

• (1) Increase SLP consumption →Adjust the Axie NFT breeding formula →SLP cost is increased by 3 times →AXS cost is reduced to 0.5⇒SLP usage scenarios are increased.
• (2) Reduce the amount of SLP released →Cancel the daily rewards SLP for players after ranking 800 → Players no longer get SLP from adventure mode →SLP output mode becomes PvP mode⇒Gradually reduce or even cancel daily quests and Rewards in PvE mode.

3.2 GameFi’s Methods to Curb Inflation

GameFi has four main strategies to curb inflation:

• Charge user’s transaction fees and burn a portion of them.
• Introduce NFT, so that the selling pressure is locked into NFT with lower liquidity. Through conceptual empowerment of NFT (i.e. social avatar, new currency production, asset certificate), the creator reduces user selling behavior.
• The multi-currency/token model transfers inflationary pressure and continuously transfers the selling pressure of a single currency. For example, players burn AXS and SLP to generate Axie NFTs, and then stake it in the gaming activities to generate SLP.
• The release of token’s positive expectations is mainly aimed towards token holders in the secondary market. Improving Token’s positive expectations will lower the selling pressure from token holders. On the other hand, new users may enter the market with positive market expectations.

4. Recommendation to GameFi

GameFi’s control of inflation is almost entirely focused on its token economy. This method lacks flexible control from the perspective of game content. With the gradual maturity of GameFi and the use of blockchain technology, GameFi games will bring players closer to a real presence of the virtual world. GameFi concept is regarded as an early prototype for what lives inside the metaverse. It can be expected that the number of Play-4-Fun GameFis will increase significantly. But if its tokenomics are still only regulated internally, its downward spiraling effect may be too significant for the whole market to withstand.

Therefore, a stable token economy is required to lead a mild inflation cycle. Combining the common deflationary approaches used in the traditional games along with an optimal token market design, the GameFi project will enjoy better development and operation cycle so as to materialize its market vision.

GameFi projects are still evolving and growing, so time will tell what is the best way for GameFi to control inflation and create a great mutually beneficial gaming experience.

4.1 Assign assets to multiple attributes and provide more application scenarios

In traditional games, the assets (i.e. rare cards, characters) owned by players are given with different attributes. For example, color, race, level, occupation, skill, equipment, and summoned beasts are all examples of character attributes. The empowerment of multiple attributes increases application scenarios. If players want to obtain higher combat power, they need to invest in many distinct digital assets, which increases the deflation of game assets in disguise.

4.2 Setup time interval for profit-making behavior and reasonable damage mechanism for profit-making props

The game’s “fatigue value”, “time point card” and others are energy measures in a given game. These traits prevent players from producing unlimited game coins and increase the user’s online cost. They are incentivized to play longer hours and spend currency for upgrades.

Specifically, in GameFi, the loss attribute should be added to NFT, and with the generation of loss, the wealth output of NFT per unit time should gradually decrease.

4.3 Increase cost of capital outflow and provide a wealth deflation scenario

The project team will charge auction fees and storage fees (5%-15%).

At present, most GameFi games have introduced the official trading platform mechanism. However, the deflation of huge amounts of money means there is no more innovative solution other than stake mining. This serves as the wealth deflation scenario.

4.4 Launch campaigns and manage reasonable price fluctuations

In accordance with the day of some major global festivals, the project team can simultaneously launch various activities that fit the theme. Moreover, on the festival day, the officials can proactively provide a large number of scarce materials to break the market balance. Although it will have an impact on the entire market economy in the short term, after the balance is broken, the officials can adjust item prices to stabilize the market. Market fluctuations under the intentional guidance of officials will, over the years, become an average consensus on value.

4.5 Creating external utility from internal resources

While the project team can make internal adjustments of token distribution, they should also explore different ways to use external resources. The exchange of rights and interests between owners and advertisers, the publication of IP-derived movies, and literary works and peripheral products function as a potential source of value. Game projects aim to receive more attention on the Internet and attract potential players to enter. At the same time, it can also enrich the way the game content is presented and improve the loyalty and willingness of internal players to pay using data collected from internal products.

5. Conclusion:

According to Newzoo’s latest forecast, the gaming market will grow at a rate of 8.7% and is expected to exceed the $200 billion mark by 2023. This means that more and more people are willing to pay for virtual experiences. Therefore, GameFi can also take advantage of the momentum to increase its market share.

With the implementation of Web 3.0, the traditional business model has gradually matured, and its new application will eventually shift from product-led to user-centric. GameFi, as an important carrier of Web 3.0, creates a community composed of players who evolve from the genesis of Web 3.0 games and continuously support beneficial market distribution.

GameFi, at this present moment, has an excellent economic and ecological self-correction mechanism and a more scientific deflation model that may stand out in the game competition.
The result of giving users compensation for using a GameFi game’s ecosystem is brand new to the gaming market. Furthermore, the intersection of having a coin like AXS as an asset itself shows how Web 3.0 merges with DeFi. The integration of traditional gaming interfaces and improved levels of detail in digital appearance and experience is growing in GameFi currently. Therefore, GameFi has room to grow in terms of UX improvement, players interactions, and mechanism implementation. Yet the new gaming mechanism and tokenomics design show how the longevity of a GameFi ecosystem can create a positive market response and players’ feedback.

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