Discover more from Economics Design Newsletter
Consumption and Investments in Web3 Gaming Economies
An initial GDP comparison between gaming protocols and countries
Welcome, subscribers! Thank you for subscribing. What will be shared today and the days ahead are alpha from our Economics Design's researchers. Please keep these mails secret and do not share them with any one because these alpha are confidential. Enjoy your reading.
Disclaimer: This is not financial advice
The article compares Web3 gaming projects to national economies through two categories of the GDP macroeconomic framework, Consumption and Investment. Both Web3 games and countries are marketplaces where the transfer of value happens. Countries measure this value through GDP, therefore we try and analyze what the Consumption and Investment category will look like for blockchain games that make use of a two token economy. Current and future games like Axie Infinity, Pegaxy, and Heroes of Mavia are used as case studies for the analysis.
The Ups and Downs of Blockchain Gaming
2021 saw the rise of Non Fungible Tokens (NFTs) and Play-To-Earn blockchain games where users earn cryptocurrency by playing a game that they got access to from owning a digital asset. Spearheading the revolution for this new blockchain industry is popular blockchain game, Axie Infinity, a videogame that grew over 200 times over the course of the same year (Weisenthal and Alloway, 2021).
This quick rise in 2021 saw the pull of gravity shortly after as the game’s tokens, along with other similar projects, went on a downward trend in 2022. $AXS, Axie Infinity’s native token, is currently trading at a fraction of its all time high price in 2021 (Somraaj, 2022). Though much of it can be attributed to the current bear market the industry is experiencing, Axie Infinity, which relies heavily on marketplace transactions and breeding fees for income, has seen a decline in its user base as it made shifts in its economic model during the year (Kelly, 2022).
Axie Infinity, and many other similar blockchain games, currently have a two token economic model featuring a governance token, $AXS and a utility token, $SLP. The token sinks in the economy mainly focus on breeding, a lever that the team has been adjusting depending on market conditions. While $SLP minting has soared to a point where the token has inflated inside the economy.
Consumption and Investment
Protocols function similarly to countries in the sense that both are considered marketplaces where value is being transferred. Measuring this value for countries is done through measuring their Gross Domestic Product, which is the market value of all final goods and services produced in a region. Similarly, we can use this calculation to measure the value inside a protocol.
GDP = C + I + G + (Export - Import)
Gross Domestic Product is the sum of Consumption, Investments, Government expenditure, and Net Export. For the purposes of this article, we will focus on two of these four categories in order to differentiate the assets present in protocols, Consumption and Investment.
Consumption is calculated as the sum of all goods and services consumed by households in the economy. These are the food, groceries, haircuts, spas, and other similar purchases that can happen within a particular region. Investment, on the other hand, is all the assets bought and held by the private sector which will be for future use.
For protocols, some transactions that can be considered part of the consumption category are utility or cosmetic consumables, breeding costs, and maintenance or upgrading of NFTs. Ideally, this category measures all transactions that have to do with utility or cosmetic sinks in the economy. Investments, on the other hand, relate to the NFTs that users buy in order to start accessing the game. Expensive and speculative special NFTs, like land, unused cryptocurrencies within the economy, and single or liquidity provision staked tokens can be classified under the investment category as these are assets users purchase, undertake, or hold for future use.
Two Token Economy
As previously mentioned, a lot of blockchain gaming economies follow a two-token structure. CoinMarketCap mentioned in their glossary that crypto projects prefer a two-token economic structure due to legal compliance concerns, especially in the US, but also highlight more incentives holders receive as the project can be flexible in designing their incentive structures (CoinMarketCap). Both tokens have real monetary value, just like any other cryptocurrency, but have slightly different functions in the economy.
Typically, two-token structures have a governance and utility token present inside their economy. The governance token represents a stake of ownership, similar to a stock, in the protocol and is usually capped at a certain fixed amount. Governance tokens are usually distributed following a vesting schedule, so as not to overinflate the economy with too many tokens than it needs. The existing supply in circulation is usually distributed as staking rewards, or bought off exchanges. Its price ideally should give a good measurement of the overall state of the project.
The other token in the economy is the utility token. This token gives the flexibility for projects in how they can structure their economy. The utility token has the most association to gameplay within blockchain games, especially since interacting with the game economy rewards players with freshly minted utility tokens. Utility tokens are uncapped, meaning the more users get introduced into the ecosystem and interact with the game, the more utility tokens are minted as a result of gameplay. Therefore, the token is considered inflationary in the economy if not designed and partnered with appropriate sinks in the game.
These sinks represent the consumption category of GDP measurement. How these sinks are structured is crucial in managing the token supply of the utility token. Ideally, these tokens should be game-related recurring sinks catering to the majority player type present in the economy. It should push players to reinvest their utility token in the economy instead of just extracting them and creating sell pressure to the token. Spending the utility token on upgrades or regular maintenance of an asset can be a possible sink to create that helps the economy in the long run.
Currently, popular two-token economy blockchain games anchor on breeding as their main token sink. This particular sink caters to a specific player type, the breeder, which, depending on how the game is structured, is usually not the majority of the economy. It is also remotely game-related as there is always the option to purchase the NFT instead of breeding it. The lack of a recurring game-related sink pushes non-breeders to just extract the value they get from the economy rather than reinvesting it.
Next we take a look at how some two token economies designed their game. For the purposes of this article, we will take a look at only the consumption and investment categories of three blockchain games, Axie Infinity, Pegaxy, and Heroes of Mavia. We won’t go in-depth as to what these protocols are, but rather determine what falls under consumption and investment for each one.
The Axie NFTs are the most prevalent investment item in the ecosystem as these give access to the game. Land and Land items are NFTs that select members of the Axie Infinity community have been holding and speculating on the price as the project’s land gameplay is not out yet. There are also rare special edition Axies, called Mystic Axies, that the community highly values. These Axies can be acquired by using Axie Origin Coins (AOC), which are limited in supply. Unused AOC tokens, $AXS, and $SLP, as well as any LP tokens fall under the investment category of Axie Infinity’s GDP.
Consumption, on the other hand, is limited to breeding and using AOC tokens in the current form of the game. These two sinks in the Axie economy are mainly catered to the breeder and investor player type, which is not the majority of players present in the ecosystem, a major reason why most players would opt to extract value instead. The team is looking to add new sinks, including Axie sinks, in future versions of their game. A crafting mechanism for runes and charms is currently available in Axie Infinity: Origin, and is seen to become an $SLP sink related to gameplay once the protocol migrates from their classic gameplay.
Pegaxy’s ecosystem is similar to that of Axie Infinity’s. Their main investment assets are the Pega NFTs as these give access to the game. This protocol also has a similar mechanic to Axie Origin Coins called Fabled Tokens, as well as cosmetic consumables, called tickets, which, when used during breeding, give your pegas that added rarity and flare. Any unused tokens and tickets, $PGX, the project’s governance token, and $VIS, Pegaxy’s utility token, are part of the Investment category of Pegaxy’s GDP. In the future, the protocol is looking to introduce stadium NFTs, which are land NFTs that races can take place on.
As for Pegaxy’s consumption category, the main sinks present in the economy are also similar to that of Axie Infinity’s in the sense that they cater to the breeder and investor player type. Breeding and using the Fabled Tokens and tickets are the main sinks in the economy. The team did mention the use of one-time consumables that give off stat boosts to your Pega during races on their roadmap, but it is not currently live in the present version of the game.
Heroes Of Mavia
Heroes of Mavia, a game that draws inspiration from Clash Of Clans, has not yet been released. Therefore much of what we know of the protocol is based on publicly available documents that the team has released. From an Investment perspective, the main NFT needed to play the game is the land NFTs. There are also Hero NFTs that help you in battle, as well as other more structural NFTs that give off bonuses for your base. Unused governance tokens, $MAVIA, and utility tokens, $RUBY, are also part of the investment category of the protocol’s GDP.
For the consumption category, this blockchain game has a more complex use for its utility token. To start with, $RUBY can be used to purchase hard currencies, gold and oil, that a player would need in order to develop their base. $RUBY is also needed in order to upgrade your NFTs, and for microtransactions present in the economy. An example of one of these microtransactions is the speeding up of upgrades being done to your base. Compared to the first two protocols, the sinks present in Heroes of Mavia cater specifically to the users looking to play the game. It incentivizes these users to continually reinvest in the economy as they will constantly need to attack other bases while defending their own in order to get $RUBY rewards.
What does this mean?
Those looking to design a blockchain game can have a better idea of the mechanisms that need to be present when structuring the economy. The consumption category of GDP is an area that needs to be better understood and crafted in a way that is relevant to the gameplay of the project. Sinks should be designed in such a way that it targets the majority player type of the game’s population to push users to spend the utility token within the economy instead of just extracting its value. This way, value is being reinvested inside the economy.
The games currently in the market have this major issue, causing a lot of sell pressure for their utility token as players look to exit the economy each time they generate the utility token. Newer games have found a way to introduce a mechanic that funnels the value back to the economy, something that existing games can still develop as they continue to improve their economy.