Web3 Gaming Token Economy

o7 gamers and game developers.

Today, I would like to discuss my personal take on web3 gaming economies. This piece is a synthesis of different pieces on the subject, coupled with my own experience having looked at many projects that have attempted to solve the token economy problem in web3 gaming.

My name is Kevin Eun. I cover web3 gaming at Shima Capital. I previously worked at Griffin Gaming Partners and Nomura’s IBD team in San Francisco. I am an avid RTS gamer who competed in Starcraft 2 leagues for my high school and college teams. I also have no-lifed CCP’s famous Eve Online with more than 10,000 hours under my belt, having lived in wormholes, nullsec, lowsec, and hisec while maintaining around 14 subbed accounts without ever using RL currencies.

In order to understand web3 gaming token economies, we need a basic understanding of what exactly an in-game economy is.

What is an in-game economy?

It is paramount to understand what an in-game economy is and its role in games. Video game economies may be less complex than real-world economies, but they still follow the same principles and contain plenty of the same elements including buying, trading, and selling of goods. Virtual currencies can be tied to real-world money, or something obtainable through in-game actions, and it can greatly impact how people play games.

An in-game economy is a focal point for monetization, engagement, and player retention. Even the most complex looking game economies are effective because they get the basics right. As games design their economy and the mechanics that keep it ticking, developers have to decide how resources are valued and distributed in their games. This has a significant impact on the game’s overall revenue, so gaming companies need to get this right.

Economy in Action

To understand how economies function in games, consider merge games like Merge Villa. These are puzzle games that revolve around generating items and then merging them together to create more effective versions of those items. For example, a merge game may involve creating an empire of houses. This is how it could work:

1. Players start their game with small houses that generate revenue over time, usually in the form of coins
2. They can use coins to buy more houses and merge them together to upgrade them
3. Upgraded houses (such as mansions or palaces) generate more coins and create a feeling of permanent progression

Determining Resources

In the example above, houses and coins are the crucial resources that play different roles. Houses (virtual goods) are bought and consumed (merged) by players. Houses also dictate player progression. On the other hand, coins (virtual currency) are the common currency used for in-game transactions. Coins are available in the in-game store, and may be exchanged for real money. The economy of this game depends on the flow of the resources (houses and coins) between different systems and loops of the game.

Understanding Sources and Sinks

To properly understand the flow of resources between different game loops, you need to categorize them as sources or sinks. Sources represent places or ways that players can get currency, and sinks represent places or ways that players spend currency. In the previous example, the source is the revenue generated from the houses, and the sink is the price for new houses. Sources and sinks are inextricably linked, and the way they interact with each other is a key element in how driven your players are to keep playing. If there is a serious imbalance, it can hurt the playability of the game.

How to Balance Sources and Sinks

Sources / faucets in a game is where players are able to gain income / resources. Sinks are where the income / resources in a game are burnt to keep the balance of an in-game economy. For example, slaying monsters in a game gives you an in-game currency called “gold”, which can be defined as a source. In that same game, you can also use that gold to buy weapons at a shop, which is a form of a sink. This is the same for real-life economies too and how inflation / deflation works.

If the source of revenue is significantly higher than the sink (price), then the game lacks challenge and might become boring. This also gives players no reason to purchase coins in the store. An extreme example of this would be where a player in a game has access to unlimited income, which allows the player to be able to purchase everything within the game with ease and ultimately become unenjoyable and no incentive for players to purchase coins, a method of monetization for game developers.

If the source of revenue is significantly lower than the sink (price), then the game might become too difficult or punishing. Players might become frustrated if they need to grind currency excessively. Another example would be where players can gain income in a game but the amount of time needed to grind for income is far longer to be able to obtain items to progress through the game at a relatively balanced speed. This would cause players to lose interest and therefore player base in a game.

Once a game establishes currencies and understands resources, it’s time to identify sources and sinks. Sources include coins earned in levels, periodic rewards, or prizes for completing events. On the other hand, sinks include using coins to refill lives, buy boosters, or obtain extra moves to finish a level. Keep in mind that the way a game spreads rewards and resources across different sources impacts player experience, and that an optimized game economy will have the sum of sources balanced with the sum of sinks.

Basics of an In-Game Economy

Now that we have defined what an in-game economy is, we can dive into the basic pillars of an in-game economy. If games can balance their sources and sinks effectively, while keeping their players in the sweet spot between boredom and frustration, players won’t resent economic mechanics — they will be motivated by them, and games will be all the better for it. Here are some examples:

Energy and Lives

Energy refers to the maximum amount of stamina a player can sustain before losing a life, whereas lives refer to a finite number of total tries before the game ends. To help develop habit formation where these habits would allow for players to come back and continue playing the game, games may have players wait a certain amount of time before their lives are replenished. Games can also put a cap on the number of lives that players can have at a time, which limits the length of a play session and encourages players to return. Finding the right balance between cool-down time and capping energy or lives will be crucial to make players experience games the way games were planned for it but also note that players will often try to break games and look for ways to experience the game differently than imagined. Therefore, it is also important to consider all these different factors when thinking about designing a game economy.

Soft Currency vs Hard Currency

Soft currencies are the most commonly found currencies in free-to-play games. Players can earn them easily and they are widely available from rewards in the core game loop. For example, players may earn coins for finishing levels, which they can then use to buy lives, boosters, or other resources. In other cases, players may use such coins as a buy-in method to access certain levels. Providing enough enticing places for players to spend their soft currency, and finding the right balance between sources and sinks, will ultimately drive monetization.

Hard currencies, often represented by high-value items like gems or gold, give players access to exclusive items and features. Hard currencies can help games offer flexibility to players. For example, they can allow players to accelerate their progression by skipping steps. This is an important consideration in game design as it allows for players of different skill levels to feel motivated. Hard currencies are offered through in-app purchases made with real money, while soft currencies are available through virtual purchases made with hard currency.

Resources and Game Progression

When building an in-game economy, developers should consider how currencies and resources will impact player progression in order to ensure a fun and smooth experience. The main currencies of the game will always have a direct impact on progression because game economies are a quintessential part of the core game experience, as well as certain types of resources. If the goal of the game is to manage a farm, then obtaining farming equipment will be crucial for players to advance. Other resources, like boosters, may have an indirect effect by making gameplay easier. It’s useful to offer players different options so the game can be enjoyed at different levels of difficulty.

Player Behavior and Game Economy

Payers vs Non-Payers

In free-to-play (F2P) games, most players don’t spend any money to the point that only 2.2% of mobile users pay in F2P games. However, it’s essential to keep the minority, who will spend, in mind. Games want to make sure that the planned progression won’t allow paying players to burn through the game, while also not making the game too challenging for non-paying players. Adding premium features and different progression vectors can give paying players more sinks for their currency.

Different Levels of Engagement

Players will also differ in terms of how engaged they are. Some will want to play games casually, while others will be heavily engaged and willing to play for long periods of time. To ensure that heavily engaged players are not getting through the game too quickly or easily, games should limit the number of game sessions and session time. Games can use lives and periodic rewards to encourage this type of session-based behavior and fine tune pacing.

Player Motivations

Players have many different motivations. Some may be looking for excitement and action, and others will feel more enticed by the social elements of a game. Some may be highly competitive, while others will seek an immersive experience. Understanding the different types of players in a game, as well as their motivations, can help developers design the optimal sources and sinks.

For example, cosmetic items or avatars may be an appropriate sink for a community-driven game. On the other hand, if players are motivated by achievement, premium weapons or tools may be a better option as a sink.

Planning the Player Journey

The graph above represents player progression, where sources and sinks are mapped out according to the amount of time a player has spent in-game. While sources and sinks are balanced, there are fluctuations in the sink where the difference between the sink and source can vary. This will create pain points and incentivize players to spend. Dips are followed by moments of release, ensuring that players stay engaged.

During the early stages of a game, players should not only have currency to complete the first levels smoothly, but have enough rewards to have a good first time user experience. Difficulty should be introduced slowly and carefully .

Putting Things into Practice

The reality is that most games will not get this right in their first attempt. Games might put a lot of effort into trying to predict their players’ behaviors, but it will take at least a couple of tries. The good news is that there’s always room for optimization.

It’s important to A/B test different variables, as it’s the only way of knowing what is working for a game’s monetization and engagement. Some of the variables games can A/B test when designing an in-game economy can include:

• Initial currency balance
• Value of periodic rewards
• Cool-down time for lives and energy
• Cost of lives
• Cost of progression
• Progression of rewards

What is a Web3 Gaming Token Economy?

A web3 gaming token economy is an open game economy where web3 components such as non-fungible tokens (NFTs) and fungible tokens (FTs) are placed into a game economy. The way in which NFTs and tokens interact within the game is totally dependent on the game and adds even further complexity to build a sustainable game economy with web3 components. In order to fully grasp what this token economy entails for gaming, it is also important to understand different economies:

Closed Economy

A closed game economy is where players are not allowed to trade items or currency from within the game economy for items or currency outside of that game. However, it can be broken down into non-trading and trading sub-categories:

• Non-trading game economy: Players are not able to trade assets with one another
• Trading game economy: Players are able to trade assets with each other for items and currencies inside the game economy

Open Economy

Open economies embrace the ability to trade assets outside of the game. It legitimizes trading items for currency with real value, allowing time and money spent acquiring assets in that game to have broader meaning. It also can mean that game currencies have exchange rates with external “foreign currencies” and game items can be interoperable. This is where web3 gaming token economies would be categorized as.

These types of economies leave game studios with varying levels of control over monetization and difficulty in economic balancing. Balancing open economies in games is still a work in progress, so the jury is still out on which approaches will best help build durable and sustainable economies.

Web3 Gaming Token Economy Problems

There have been different approaches in tackling the problem and we may be able to see a future in which web3 games have a sustainable economy but it might not be a version that people would like — for example, a web3 game without fungible tokens but with NFT implementations within the game economy.

There have been many attempts so far up until this point and we will continually see different web3 gaming token economies. It is also important to look at all attempts to create a successful web3 game economy, like Mir4. Mir4 is an amazing web3 game that is actually fun to play, but has had major issues with the token economy. For example, only the top percentage of Mir4 gamers are able to properly earn income via tokens and the rest barely earn anything at all, which drives down participation from casual gamers. Mir4 is not the only game that has faced this problem and there are more live games facing the same problem.

Another problem with web3 games has been around different numbers of token models. There have been many attempts at using different numbers of tokens in a game and there is no clarity as to which model is a clear winner. Two token models are not by nature unsustainable. Most failed games with dual token models had poorly controlled inflation. This has led many teams to combine both spending and holding incentives into a single token, which causes a major conflict. Economies can have one, two, or more tokens as long as developers design them based on first principles, and avoid mixing the medium of exchange and value accrual utility into a single asset. Axie Infinity and other early Play-to-Earn (P2E) games attracted a lot of players but their token models drove speculative bubbles for a lot of different reasons.

It is also important to understand that the state of web3 gaming has been in constant flux. I believe that we are at Stage 3 in terms of the state of web3 gaming, although most games are still stuck in Stage 2 or 2.5. I define the different stages as the following:

• Stage 1: P2E games like Axie Infinity that had the inherent problems of an inflationary economy
• Stage 2: Games that focused on the fun aspect and automatically assumed that fun would solve GameFi problems
• Stage 3: Games being fun is a basic prerequisite and trying to carefully make sure NFTs and tokens work in a sensible way, but the focus is not about earning in a game

One of the fundamental problems that web3 game token economies need to tackle is that most gamers are not here to play games to earn, but rather to enjoy. At the end of the day, most gamers are not here to play video games to earn income — that was never the objective for the majority of gamers around the world. It may have been for the majority of SEA gamers who flocked to Axie Infinity in 2021 but they do not in any way represent the majority of gamers.

Eve Online is a great example of a fun, social game where players come flocking to it because of the core game loop ADDED with a very sustainable game economy where dual currencies play a part (PLEX and ISK). As noted in the beginning of this piece, a good game economy makes the game more attractive only if under the condition that it is an already well designed game.

There is no clear answer to the inherent problems of open economy games that are now being experimented in the web3 gaming space with fungible tokens and NFTs. However, there are some traits that people can look for when thinking about which games might have the best chance at solving these problems. I have attempted to lay out some of the key traits that I look for in the next section.

Potential Traits to Look for in Web3 Gaming Token Economy

There still needs to be a lot of work done to truly balance a web3 game economy. There has been much research into this subject with the likes of great minds in the field like Nick Metzler, Devin Becker, Kiefer Zang, Ryan Foo, and others thinking deeply about what it means to have a sustainable web3 game token economy.

Per my conversation with CCP’s Hilmar, who had built Eve Online, building a closed-economy is already a very difficult task and it took Eve Online to build their current game economy to what it is today with a team led by economist PhD holders and decade plus time to get to where it is now. Through CCP’s efforts, Eve Online’s MMORPG economy is used as one of the standard textbooks of a sustainable game economy. Hilmar told me that trying to build a game with a sustainable open-economy containing tokens and NFTs is even harder given the complexity and layers it adds to building an open-economy game versus a closed-economy game.

There are many ways to approach this problem of solving the web3 game token economy situation. One of the solutions that have been brought forth is that regardless of how many different tokens a game uses, it should always separate out the token that will have value accrual and an in-game currency of sort as a medium of exchange currency. It is also important that the token primarily needs to serve as a container for value accrual as the game’s ecosystem grows in value. The token should not be used as a medium of exchange. This isn’t a solution that will solve the entire industry’s problem of building a sustainable game token economy but it is going in the right direction.

This now leads to an important question — what are the signs of a sustainable game token economy? Since there is no clear-cut way of finding a game that will eventually solve this problem, it is important to note some idealistic traits that would make a game token economy ideal to have the best chance at solving these problems:

• Sound tokenomics + clear vesting schedule
• Sustainable sink & faucet/source outline
• Separation of different tokens: one for value accrual and another for medium of exchange
• Presence of dedicated game economy designers (out-sourced / in-house)
• Strong reasoning as to why web3 implementation makes sense for a game and how exactly tokens and NFTs will act in the game economy
• Any type of simulation of game economy models to prove out sustainable theory and numbers for sanity check (eg. Machination and others)
• Some type of clear way to effectively monitor economic data for the game developers to monitor and use (monthly economic reports as seen with Eve Online provided in excel) — https://www.eveonline.com/news/view/monthly-economic-report-november-2022

I have also included some useful links that I found helpful to further understand what it entails to build the potential sustainable web3 gaming token economy below:

https://www.youtube.com/channel/UClvIMc8iMJxTRXCgOcriSCw?app=desktop

https://twitter.com/namianalytics/status/1603030226354974721

https://twitter.com/namianalytics/status/1603030290124914688

https://www.linkedin.com/pulse/semi-stable-currencies-learnings-from-second-life-china-kiefer-zang/

https://medium.com/@metzlernick2/fun-games-alone-wont-solve-web3-gaming-c2872ba0a48a

https://medium.com/@metzlernick2/what-the-heck-is-tokenomics-please-no-math-ac03b917430

https://naavik.co/podcast/crypto-corner-49

Special shoutout to Alex Wettermann, Nick Metzler, Jack Watters, and others for helping me think this through.

*This post is for informational purposes only and does not constitute (i) an offer to sell or purchase any security or investment product or service, (ii) investment, legal, business or tax advice, or (iii) a basis for making any investment decision. Before making any investment decisions, it is strongly recommended you consult with a licensed financial advisor who can assess your specific investment needs and objectives. Accessing this post or any of its links or resources does not establish any form of relationship between the reader and Shima Capital Management LLC or its affiliates (“Shima Capital”). No representations or warranties are made as to the accuracy, completeness, reliability, or suitability of the information provided. All information is subject to change without notice and may not be updated. All forward-looking statements are based upon assumptions that may not prove to be correct.*

*The opinions and ideas expressed in this article are solely those of the author and do not represent the official stance or views of any employer, past or present.*

Source: Unity and various publications authored by including but not limited to Nick Metzler, Devin Becker, Kiefer Zang, and Alex Wettermann.