Imagine a construct where players can earn a daily wage just from playing and being good at their favorite gaming titles. This is the ultimate form of play-to-earn (P2E) gaming — a contained and self-sustaining (yet fun) gaming universe that consistently rewards players with an in-game currency that does not deteriorate in value. We’ve seen P2E games succeed in this regard for a period of time, but in the long-run, these token economies have generally faltered as a result of supply/demand imbalances for their rewards token.

For those who are building a true P2E economy, the million-dollar question becomes how to structure tokenomics such that a proper balance between money supply and demand of their rewards token is reached. Countless projects are currently building at the forefront of this nascent niche in the gaming industry, but without serious consideration of tokenomics, many of these projects are destined to fail before they even start. In this piece, I’ll discuss the challenge true P2E economies face and consider various strategies to increase the odds that a game is structured for long-term success. There is no one size fits all solution, but hopefully this article raises awareness and sparks potential ideas for projects that are currently building.For those who are building a true P2E economy, the million-dollar question becomes how to structure tokenomics such that a proper balance between money supply and demand of their rewards token is reached.

TL;DR

The Challenge

To date, we’ve seen P2E games experiment with both single and multi-token economy models. Although having multiple tokens in an ecosystem may bring certain benefits (e.g., clear separation of governance from gameplay), the long-term success of a P2E game really only depends on one of them — the token that players earn in-game (i.e., the rewards token).

The appeal and profitability of a P2E game is naturally tied to its rewards token. As the token price goes up or maintains a value such that players can earn a decent return from playing a game, more and more players will start playing in an effort to participate in those earnings. However, with more players and earnings comes a larger supply of tokens eventually being sold off. If the in-game demand for a token is not built to counteract and balance the inevitable supply dump from players selling en masse, the token price will drop and players will eventually become less interested in playing a game as the earnings potential falls with it. As the token price begins to fall, a price death spiral may even occur which sees more selling from loyal players in fear that the price will drop even further. What may have once been a game with a thriving ecosystem is now seeing a mass exodus of players amid a slowly declining token price. Combatting this seemingly inevitable decline is the main challenge that P2E games face today.

Axie Infinity — An Early Example

Axie Infinity is a pioneer in the P2E gaming space and is considered one of the first truly successful P2E games that has come to market. It is useful to look back on Axie as an example of what may occur when there is an imbalance of in-game supply/demand for a rewards token.

Axie’s economy currently utilizes two tokens — Axie Infinity Shards (AXS) as the governance token and Smooth Love Potion (SLP) as the in-game token. The total supply of AXS is capped, whereas there is an unlimited supply of SLP tokens. SLP is rewarded to players whenever they win a battle in the game, and burned and taken out of the circulating supply whenever an Axie is minted. SLP is also needed each time an Axie breeds.

Both AXS and SLP exploded in value during Axie’s rise in 2021. In the Philippines where the game really took off, entire communities were able to put food on the table by playing the game. However, both tokens have been on the decline since their respective peaks, with SLP in particular having steadily fallen to under one cent after having exceeded 35 cents at one point. With the decline in token price has also come waning player interest in the game itself. The number of daily active users (or DAUs) for Axie has fallen over 50%, and the recent Ronin Bridge hack has not helped matters in the least.

A primary reason for the decline in SLP’s price during this timeframe was the supply/demand imbalance for the token. As shown in the graphic below, in the second half of 2021, the number of SLP minted significantly outpaced the number of SLP burned. Although a period of retail mania can offset an influx of supply of an asset over a short period of time, in the long-run, an asset’s price will decline if fundamental demand does not exist in equal or greater force (which was the case with SLP).

However, why has the price of AXS declined alongside that of SLP? AXS serves a different purpose and has separate tokenomics from SLP. Macro trends are always to be considered, but the answer may simply lie in the fact that AXS’s price is inevitably anchored to the game’s rewards token (SLP). This relationship is important to note and highlights the importance of rewards tokens in P2E economies. If the price of a P2E game’s rewards token cannot be stabilized and earnings potential falls dramatically, players will move on to the next game or trend where the opportunity is better. Holders of the governance or other non-rewards tokens (like AXS) in a multi-token P2E economy are therefore remiss to think that the value of these other tokens will also not decline to the extent the rewards token, and corresponding interest in a game, falls. If nobody is playing a game, the value of contributing to governance or any other aspect of a game is severely diminished.

Single v. Multi-Token Economies

As was seen with Axie, any potential benefits from having a multi-token P2E economy are put in jeopardy to the extent the rewards token is inundated with supply and cannot maintain a stable value. But how can projects ensure that their rewards token maintains value when it is extremely difficult, particularly pre-launch, to predict a token’s in-game demand? Any imbalance here could prove fatal to a project, and adjustments to demand can take time to implement. See Axie once again for an example here. In February 2022, Axie’s developers proposed various changes to its rewards structure in an effort to re-balance its economy in the face of high SLP inflation. Whether these changes will alienate Axie’s core user base, or have any major effects in reviving interest in the game, is yet to be seen. However, if there were a more flexible supply/demand framework at the outset, much of this rebalancing could potentially have been avoided — enter the single-token P2E economy.

Added Rewards Token Sinks in Single-Token P2E Economies

In a well-structured P2E economy, there needs to be enough rewards token sinks to prevent cascading sell-offs from players. These sinks can either be built into the gameplay (e.g., players purchasing in-game assets) or created through financial infrastructure using innovations in DeFi. Axie Infinity separates gameplay from governance / financial infrastructure with a dual-token structure. However, if both of these means were somehow combined into a single-token economy, the number of sinks available for a rewards token increases. More potential rewards token sinks = improved odds that projects can counteract selling pressure from gamers in the long run.

Since most games are unique in their playing style and strategies, ways to incorporate demand for a token through gameplay will not be discussed here. However, below are a few examples of financial infrastructure that are potentially at the disposal of all projects. Although not all-encompassing by any means, for single-token economies, these additional sinks ideally provide projects with a cushion for stabilizing token value even if in-game supply/demand estimates for a rewards token are off (such as was the case with SLP).

Long-Term Locking / Governance

The long-term locking of tokens ensures value alignment between token holders and a project — as a result, within DeFi, governance decisions are often decided by locked token holders. Locking can be accomplished through a vote-escrow (ve) model (pioneered by Curve), which sees token holders locking their tokens up in exchange for a separate governance token (e.g., swap CRV for veCRV). The exchange rate between the governance and native token is based on a linear function to time. For example, with respect to CRV, at a 4-year lock-up, 1 CRV = 1veCRV, and at a 1-year lock-up, 1 CRV = 0.25 veCRV.

Through wrapping mechanisms and other recent innovations such as Bancor’s Vortex system, it’s also possible to trade out of locked positions, so token holders who lock aren’t necessarily stuck in their position for an extended period of time. Having this liquidity is important or else a project might face very limited demand from token holders for this governance structure.

The vote escrow model therefore provides projects with not only a token sink but also a way to structure governance through a single in-game token instead of requiring a separate / second token just for governance.

Staking / Liquidity Pools

In order to minimize large and unpredictable price swings in the value of a token, it’s also necessary to have sufficient liquidity on any decentralized exchanges (DEXs) that a token trades. As a result, projects need to attract and retain liquidity providers so that there are sufficient tokens held in liquidity pools to absorb trades.

Governance therefore isn’t the only reason token holders might stake their tokens — they can also be incentivized to lock their tokens into liquidity pools. In return, stakers typically receive a portion of the transaction fees paid by traders on a DEX for each trade. Projects may also offer their own tokens as a reward for staking into these pools.

For purposes of stabilizing token value, the benefits of locking capital into liquidity pools can therefore be severalfold — not only does it potentially decrease sell pressure if the total value locked exceeds the effects of any staking rewards, but it also improves liquidity on any DEXs that a token trades.

Buyback / Recycling Mechanisms

A project may also self-initiate demand for a token through buybacks on the open market. Buybacks might occur for a variety of reasons. For example, in a P2E economy with a limited supply rewards token, there might be a need for a project to use a portion of its revenue to acquire more tokens on the open market to the extent the number of tokens initially allocated to the rewards faucet is running low. Any buybacks here would support the price of the token and would later be distributed to players as rewards.

Is “Play-AND-Earn” the Future of Blockchain Gaming?

Creating a sustainable, P2E token economy is not necessarily the be-all end-all of blockchain gaming. Alternative models exist which may prove successful in their own right. Enter “play-and-earn” (PAE) gaming — here, entertaining gameplay is the primary focus, and one of the secondary benefits is that you can earn the native token or NFTs while playing. In other words, PAE games treat in-game tokens as an extra reward for playing and not as the core focus.

As more traditional gaming studios begin to incorporate NFTs and other aspects of GameFi into their existing titles, I anticipate PAE structures to become increasingly common. Established titles likely won’t revamp entirely towards P2E, and considering the hefty cost to make quality games, I’m not sure many new titles that put up a lot of capital for game development will risk trying to create a full-fledged P2E economy (at least until we have successful P2E models to work off of).

We are beginning to see this trend towards PAE even now. Although a lot of new blockchain games are being labeled as P2E, looking at their tokenomics, most of these games should probably be considered more PAE.

See, for example, Illuvium, which is a highly-anticipated game currently in beta. Illuvium is an open-world RPG fantasy experience where players mine, harvest, capture, and fight so-called Illuvials (think Pokémon). Unlike the majority of blockchain games to date, the Illuvium experience features a fully 3D environment and in that regard is intended to be more akin to a full-fledged video game and AAA-quality title.

Although Illuvium has a token (ILV) that players can earn in-game through competitions, tournaments, and PVE quests, the predominant in-game currency is ETH, and gameplay is structured around collectible NFTs, where every successful Illuvial capture, farmed material, or crafted item is a non-fungible token that can be sold on an in-game marketplace (called the Illuvidex). Only 1 million ILV are reserved for in-game performance — however, it is not yet clear how rewards will be distributed to players or over what timeframe such distributions will occur. With ETH as the predominant in-game currency, it’s possible these rewards are intended more as a carrot to attract players pre-launch, and will not serve a core purpose long-term. More details concerning these rewards could prove me otherwise. The end result is a collectible NFT game primarily focused on just that — NFTs and gameplay (and not solely earnings).

The core functions of ILV are rather governance, liquidity mining, and vault distributions (which are funded through in-game purchases and fees). In effect, unlike Axie with SLP, player interest in and the success of Illuvium is not necessarily tied to the ILV token price. It will likely be how fun and engaging the gameplay actually is, in addition to the value and long-term utility of the game’s NFTs, that will determine the game’s ultimate success. This structure resembles more a traditional game with “play-and-earn” components, and is built less for the full-time grinders we saw with Axie.

Final Thoughts

Blockchain gaming as a whole can exist without full-fledged P2E gaming economies thriving in the future. We are already starting to see this fact with many quality titles coming to market embracing the PAE model. Besides Illuvium, see Treeverse as another example, which is a highly anticipated MMORPG launching later this year that has the mindset of building a fun game first. Any rewards earned in-game are just a bonus.

“An average player shouldn’t think about ‘earning $’ from the game. Think like a tournament with rewards, you win more if you are skillful, and probably nothing if you aren’t.” — @Loopifyyy, Treeverse Founder

However, I am confident some project will crack the code in building a self-sustaining P2E economy in the near future, or at least build an infrastructure that will last longer than what we’ve seen projects accomplish to date. See NFT Worlds as a potential candidate here. NFT Worlds is a cross-platform (computers/consoles), community-driven and developed play-to-earn gaming metaverse competing with the likes of Decentraland and The Sandbox. Its founders, @iamarkdev and @Temptranquil, are actively studying ways to stabilize the metaverse’s in-game currency ($WRLD). Updated tokenomics are expected very soon, and I anticipate some of the strategies for increasing demand and decreasing sell pressure that were discussed in this piece to be incorporated with $WRLD soon. It will be interesting to see whether these updates contribute to stabilizing the price of the token in the long term.