Exploring GameFi Economics

Foreword

Since the decline of the Play-to-Earn (P2E) model in GameFi, there has been much debate about the design of GameFi. The two most mainstream design directions are: AAA-level blockchain games focusing on playability, and fully on-chain games emphasizing fairness and the spirit of an Autonomous World. With the recent explosive growth of both ecosystems, the blockchain gaming sector has finally emerged from a prolonged winter into a long-awaited spring. As one of the hottest sectors currently, discussions around GameFi’s different mediums (from game types to on-chain and off-chain integration) are a major topic in the industry. However, this article does not discuss the superiority of these two mediums, but rather how the core “Fi” (financial system) of GameFi is presented in top traditional games, and what directions these new mediums should take.

Definition of GameFi

GameFi was initially defined as blockchain games that provide economic incentives, allowing players to earn while playing. Players could earn cryptocurrency and NFT rewards by completing tasks, battling other players, and leveling up, with in-game items being unique NFTs. Since the rise of Axie Infinity, the concept of GameFi and P2E quickly gained popularity, with similar breeding games (like Farmer’s World, STEPN, etc.) emerging rapidly. However, their failed dual-token (governance token and output token) economic model plus NFTs (pets, farming tools, running shoes, and other items continuously producing tokens) led to a rapid death spiral once there was no one left to buy in. These games typically had a lifespan of a few weeks to a few months, and at that time, the term GameFi was almost synonymous with Ponzi schemes. The later mainstream direction first improved towards AAA production and playability, hoping to attract Web2 players with high-quality game content and achieve a paid game economy. Currently popular games like Big Time and Illuvium, and YBB’s early investments in two AAA blockchain games, are early representatives of this type of game.

Another direction that has only started to heat up this year is fully on-chain games. Although the history of fully on-chain games can be traced back to “Huntercoin” a decade ago, due to early technical limitations, the experience of fully on-chain games was relatively poor, making it a very niche type. However, with the development and improvement of infrastructure like Rollups and fully on-chain game engines (MUD, DOJO), the feasibility of this concept has gradually matured. It has started to gain popularity due to the endorsement of some core industry figures, but current fully on-chain games are still in their early stages and have many design issues.

The definition of GameFi has also begun to shift to Web3 games (fully on-chain games) and Web2.5 games (currently mainly AAA blockchain games, though most past blockchain games also fall into this category). The main difference between them lies in the degree and manner of blockchain technology usage, and their specific definitions are as follows.

Fully On-Chain Games

(based on the views in “Autonomous Worlds”, more detailed content can be found in our article “Analysis of the Core of Fully On-Chain Games: MUD Engine and World Engine” https://medium.com/ybbcapital/analysis-of-the-core-of-fully-on-chain-games-mud-engine-and-world-engine-80b41d6abb):

• Data sourced from the blockchain: The blockchain is not just auxiliary storage for data, nor just a “mirror” of data stored on proprietary servers. All meaningful data can be accessed on the blockchain, not just asset ownership data. This allows games to fully leverage the advantages of programmable blockchains — transparent data storage, permissionless interoperability;
• Logic and rules implemented through smart contracts: For example, battles in the game, not just ownership, are conducted on-chain;
• Game development follows the principle of an open ecosystem: Game contracts and accessible game clients are open source. Third-party developers can fully redeploy, customize, or even fork their own game experience through plugins, third-party clients, and interoperable smart contracts. This, in turn, enables game developers to leverage the creative output of the entire (incentive-aligned) community;
• Permanent presence of the game on the blockchain: This is closely related to the above three points, as the litmus test for whether a game is crypto-native is: if the client provided by the core developers disappears tomorrow, can the game still be played? The answer is often yes, if (and only if) game data storage is permissionless, if game logic can be executed permissionlessly, and if the community can interact with the core smart contracts without relying on interfaces provided by the core team;
• Interoperability with things we consider valuable: Blockchain provides a native application interface for the concept of value itself, with digital assets by default interoperable with other assets we care about. This reflects both the depth and significance of the game, helping to enhance the depth and significance of the game and connect the game world with the “real” world;
• Supported game types: As fully on-chain games, they are only suitable for game types that do not require a low-latency environment, such as turn-based RPGs, puzzle ACTs, simulation, adventure, card, management, sandbox, gambling, etc.

AAA Blockchain Games:

• Combining traditional games and blockchain technology: Web2.5 games are a transitional form between traditional games (Web2.0) and fully blockchain-based games (Web3.0). They typically combine features of traditional games with certain blockchain elements;
• Partial decentralization: These games may include decentralized elements, such as using blockchain to manage game assets or player transactions, but other parts of the game, such as game logic and operating environment, are generally centralized;
• Higher performance and availability: Compared to fully on-chain games, Web2.5 games may offer better performance and wider availability because they do not fully rely on the underlying architecture of the blockchain;
• Balancing traditional game experience and blockchain advantages: Web2.5 games try to find a balance between the user experience of traditional games and the new features brought by blockchain (such as asset ownership and transparency);
• AAA level: Traditionally, AAA games refer to games with high budgets, high-quality graphics, deep storylines, and fine production. These games are usually developed by large game companies and offer top-notch gaming experiences. The so-called AAA blockchain games are Web2.5 games that meet this standard;
• Game types: As asset-on-chain models, theoretically all game types are supported, and the most mainstream game type currently is MMORPG (Massively Multiplayer Online Role-Playing Game), which is also the main type discussed in the following text.

Token Model Overview

The token model in blockchain games can generally be divided into two categories. In addition to the dual-token model mentioned earlier, there is also a single-token model (which is currently more widely adopted). Let’s briefly overview these two models.

Single Token Model: This model involves only one type of token, with the entire economic cycle relying solely on this single token. Games like Crypto Zoon, Playvalkyr, Hashland, and Big Time have adopted the single-token model, which is essentially similar to traditional gold farming online games, but with the introduction of a single token, four different modes have emerged.

Four Modes of Single Token Model:

• Mode A (Gold Standard In, Token Standard Out): Players buy NFTs with USDT, BNB, ETH, etc., and earn tokens (TokenA) through gameplay. The entry barrier is fixed, and earnings fluctuate with token price.
• Mode B (Gold Standard In and Out): The entry barrier and daily earnings are fixed. This mode maintains a stable payback period when the token price rises, and the daily gold-standard earnings remain unchanged when the token price falls.
• Mode C (Token Standard In and Out): Both the entry barrier and earnings fluctuate with the token price. This mode significantly increases the earnings of old players when the token price rises.
• Mode D (Token Standard In, Gold Standard Out): This mode is almost not adopted by any project currently, as it is unfriendly to both the project and players.

Dual Token Model: Consists of a parent token and a child token. The parent token usually serves as the game’s governance token, while the child token acts as the in-game economic token. Axie Infinity, mentioned earlier, introduced the child token SLP to take on the selling pressure originally borne by the single token AXS. Most of the game’s output is primarily in the form of the child token, with the parent token being secondary.

Modes of Dual Token Model: Most new dual-token models adopt a token-standard-in, token-standard-out mode, like BinaryX’s parent token in, child token out; Starsharks’ child token in, child token out. This model offers flexible adjustment space and does not require the somewhat centralized adjustments of the gold-standard mode. However, the problem with this internal circulation model has been briefly mentioned earlier, and most blockchain games no longer adopt this model.

Economics in Games

Games and economics seem to be two entirely different fields, but in reality, they are closely linked. Economics studies choices under conditions of scarcity, and one perspective of exploring game motivation is through economics. When a game serves as a virtual economic system, players need to maximize their utility through microeconomic actions, while the game itself requires macroeconomic theory to establish a stable economic system, maximizing its lifecycle value.

Economics was initially built on the most primitive rules of trade, and it can be said that economics originates from trade. Similarly, for games, although they are entirely virtual worlds, as long as a trading market is opened, allowing free buying and selling among players (or between players and NPCs), an economic ecosystem will inevitably form. In the past P2E era, games had fewer elements, and their economic ecosystems were naturally simpler and more fragile (basically only providing the basic elements needed for mining and selling). However, with the maturity of AAA blockchain games today, the complexity of game elements has increased, and the resilience and malleability of their economic systems have improved significantly, especially for the now mainstream MMORPG-type blockchain games. Although there is a mainstream opposing view that blockchain games currently lack sufficient playability to create an economic system like traditional games, I personally believe that both aspects are equally important and complementary. Even a game with high playability can die due to economic collapse (like Miracle MU, Legend of Blood, Diablo 3, etc.), but an early average game can continuously iterate alongside an excellent economic ecosystem, turning the game into a healthy “developing country” and gradually improving playability.

Therefore, how to build a reasonable economic ecosystem remains a key issue that most blockchain games must consider. The so-called token model is just the most basic framework of the economic model. The macro design of game elements is the next aspect that needs improvement. From an economic perspective, players playing games in the game world and humans engaging in social activities in the real world are no different; essentially, they are economic phenomena and laws of the real world mirrored in the virtual world. In the game world, when players enter this virtual world as a game character, they will exhibit various microeconomic behaviors: choices, cooperation, and games, etc. Players need to act around the allocation of scarce resources in the game to achieve the greatest utility. On the other hand, in this artificially constructed game world, there are also various macroeconomic principles: scarcity of resources, demand and supply of goods, and monetary systems, etc. The game itself needs to use macroeconomic phenomena and laws to guide its policy formulation and implementation, maintaining a healthy economic ecosystem to maximize the game’s lifecycle value. If AAA-level MMO blockchain games need to find a target to learn economic architecture from traditional games, then Fantasy Westward Journey, which has survived nearly 20 years with a stable game economy, is undoubtedly the most classic case.

Fantasy Westward Journey

“Fantasy Westward Journey,” developed and operated by China’s NetEase (released on December 18, 2003), is an online game set against the backdrop of the classic episodic novel “Journey to the West.” The game, with its Q-version character design, creates a romantic gaming atmosphere. It boasts over 250 million registered users and operates more than 400 paid servers. The game features three races: Celestials, Humans, and Demons, each with six character models and six different sects to choose from, totaling 19 sects. Players can level up and earn rewards by completing various tasks, such as challenging the 28 constellations in the Heavenly Palace for gems and other prizes or completing sect missions for double experience and money rewards. From an economic system design perspective, “New World of Westward Journey” resembles the single-token model type B mentioned earlier, with its core mechanics divided into three points: reservoirs, value anchors, and reserve fund mechanisms.

Reservoirs:

Developers’ macroeconomic control mainly focuses on issuance and recovery, but as players are the main participants in the economic system, serving both as producers and consumers, these two aspects alone cannot regulate the internal functioning of the economic system. Thus, fluctuations in the internal supply and demand sides lead to relative excess.

Relative excess refers to the imbalance in supply and demand in the short term, leading to either relative oversupply or undersupply, primarily manifested in price changes. In an MMORPG like “New World of Westward Journey,” where all development items correspond to fixed game currency and item demands, there are no “substitute goods” to address oversupply issues, and oversupply leading to ineffective circulation of intermediate products can easily result in negative player experiences, a common issue in blockchain games.

This situation becomes more severe for “high-end” demands. For example, in the game’s high-level weapon appraisal market, due to the long production chain requiring a significant amount of game time, low-level equipment, and various materials, each weapon is costly. Additionally, the presence of random attributes and a high depreciation rate in the recycling system means that if a “junk” item is appraised, it results in a total loss. This makes the market’s consumers primarily whale users (commonly known as bosses). Due to the long production chain and high product value, this market’s relative excess arises. The continuous output of “workers” and the temporary, large-scale demand of bosses create a clear contradiction. Without adding a redistribution link, it would lead to a dilemma where either the players’ output has nowhere to go, or the bosses’ demands cannot be met.

To address this, the game needs “reservoirs” to hold these temporary excesses. Interestingly, the game’s two major “reservoirs” come from the development team’s system design and the natural evolution of the economic system itself, namely, the game currency reservoir is a special bank, and the item reservoir is the merchant. The special bank system is easy to understand: it absorbs and stores game currency when there is an oversupply and provides it when the market needs game currency supply. It also stabilizes the economic system by limiting the total amount of game currency that can be exchanged within a specific time frame.

Merchants are a type of player that inevitably exists in games adopting a “free market economic model.” Essentially, they are a profession that emerges whenever there is profit to be made. In the economic system of “Fantasy Westward Journey” all profits made by merchants are essentially taken from the developers, and they are allowed to make these profits because they take on the function of the item “reservoir” and resource redistribution, becoming an indispensable part of the economic system’s operation.

Theoretically, merchants who hold more inventory are allowed higher gross margins due to their rising inventory costs. When we see certain merchant categories that seem to have high profits, we must consider their inventory costs for a comprehensive analysis, often revealing that their “excessive profits” are still within a reasonable range.

Value Anchors:

The second major flaw is the risk of monopolization due to limited short-term system output, where the cost and difficulty of monopolizing a module in the game are relatively low, and a large amount of monopolistic behavior can lead to a very unhealthy economic ecology, thus affecting the gaming experience and game revenue.

The solution is simple: provide official value anchors. Since the value of in-game items is actually equivalent to the average expectation of the point card consumed to produce these items, we can see that even though the situations on different servers may vary, the pricing fluctuation range for most items is relatively consistent.

In other words, if there is an official store selling items at the average expected price, as long as the frequency and total amount of output are controlled, it can prevent monopolization and stabilize the economic system while increasing revenue. Such attempts existed when “New World of Westward Journey” was born, with the simplest examples being 100 yuan per bun, 3000 yuan for 40 stamina at the bookstore, and 500 yuan per flight talisman. These anchors provided an official pricing for most resources, including stamina/vitality, thus avoiding the risk of operational monopolization.

The ultimate form of the anchor point might be “New World of Westward Journey Pocket Edition.” In the pocket edition, most intermediate products in the production process can be obtained by consuming point cards, and we can see that these products have a very stable official pricing. Such a system has become an important cornerstone for the stable economic ecology of “Fantasy Westward Journey.”

Reserve Fund Mechanism:

Ultimately, “Fantasy Westward Journey” is still a development game. When all surplus labor value can enter market circulation, it goes against the nature of the game and also risks being taken away by studios for excessive profits. Thus, the reserve fund mechanism emerged, depositing part of the players’ labor value into character attribute development. Only when the players’ game output is converted into reserve funds does the developer’s income become secure.

Even though the game derives part of its income from transaction taxes, it still controls circulation frequency overall. Various types of time locks and high-value item transaction restrictions serve not only to protect players’ property but also to control circulation frequency. The Three Realms Merit system is the culmination of this thought process, creating a good foundation for the prosperity of “New World of Westward Journey” in recent years.

“Fantasy Westward Journey” has many “professional/semi-professional players” who can earn some income through the game, which becomes their main motivation for playing. For developers, distinguishing between acceptable normal players and large-scale toxic studio players is firstly difficult, and it is even more impractical to seal off all cash outlets unilaterally. Hence, the Three Realms Merit system was introduced.

The design philosophy of this system is to introduce a new resource into the resource circulation process during players’ gaming and encourage normal players’ daily gaming activities while limiting abnormal gaming behaviors of studios. Simply put, in the player’s “buy point card — play game — produce items — exchange for cash” chain, actions closer to the right consume Three Realms Merit, while those closer to the left earn Three Realms Merit. Encouraging normal player daily gameplay, such as reserve fund ghost catching and sect missions, also involves a limited daily allocation of Three Realms Merit.

In summary:

although the economic system is not the entirety of a game, “Fantasy Westward Journey” has designed a near-perfect answer sheet combining game content. How to cleverly design mechanisms to maintain account vitality, ensure transaction order, regulate supply and demand balance, and ensure that every participating role in the game world (including the project side itself) can get what they need is worth learning. Having discussed the representative of traditional games, let’s now look at the current state of blockchain games.

AAA Blockchain Games

Looking at the existing AAA-level blockchain games, Big Time is a game that is continuously improving and moving towards a sustainable economic ecology, although everything seemed very rough in the early versions of the game. But as mentioned earlier, “Even a highly playable blockchain game can die due to economic collapse, but a game with average playability can continuously iterate with an excellent economic ecology.” Big Time has revitalized the entire economic model through strict centralized control. Although it has not yet implemented the skin economics sink, the game’s current profit model is already very similar to traditional games. Big Time’s current revenue methods include three points: transaction fees, almost monthly blind box sales, and the sale of consumable items (crystals). Adjustments in various data aspects have kept the output token inflation low, achieving a delicate balance between the project side and gold farming players. With the game’s revenue assured, the project side can continuously optimize adjustments and add new content to improve playability, introducing more players with different roles. Perhaps this traditional online game-like approach will be the correct path for Web2.5 games.

Fully On-Chain Games

In previous articles, we explored the significance of the development of fully on-chain games from a technical perspective. Today, let’s consider what economic models might suit fully on-chain games. Currently, most fully on-chain games lack tokens or in-game token production, primarily due to two reasons. First, fully on-chain games are still in their early stages of development, and it’s not yet clear what types of games are most suitable for this format. Second, due to their fully on-chain nature, it’s challenging for centralized control to intervene, and any flaws in the economic model could lead to the instant collapse of the game beyond repair.

So, can fully on-chain games not drive long-term development through an economic ecosystem? Actually, that’s not necessarily the case. Although I don’t have a definitive answer, I personally believe that fully on-chain games could experiment with an NFT-led economic model. For example, the ANOME protocol uses a gold-standard pledge to mint NFTs, decoupling the game from DeFi through a Stake to Mint NFT format. This allows project developers to secure funding and generate continuous income through DeFi, while players can obtain NFTs for free and receive dividends, potentially creating a new economic model.

Conclusion

Personally, as a deep console game player, I’ve always believed that blockchain transformation of games or similar light application empowerment by technologies like Friend Tech is the best way forward for blockchain games. When I first heard about the concept of AAA blockchain games, my instinctive reaction was quite resistant. Players familiar with AAA games understand that the production costs (600 million to 4.2 billion) and development cycles (3–5 years) of top-tier AAA games are so exaggerated that a single failure could bring a leading game company to the brink of bankruptcy. Implementing such projects in a bottom-up industry seemed almost fanciful to me at the time. However, the resilience of Big Time and Illuvium during the bear market and their recent turnaround have made me reconsider this approach. Perhaps AAA blockchain games can find some balance in their economic models to survive and evolve, eventually producing games that can open the door to Web2. As for fully on-chain games, they are currently as doubted as AAA blockchain games were in the past. But as the saying goes, “Those who never win rarely fail, and those who never climb rarely fall.” Skepticism and failure are common for any new paradigm before its emergence.

About YBB

YBB is a web3 fund dedicating itself to identify Web3-defining projects with a vision to create a better online habitat for all internet residents. Founded by a group of blockchain believers who have been actively participated in this industry since 2013, YBB is always willing to help early-stage projects to evolve from 0 to 1.We value innovation, self-driven passion, and user-oriented products while recognizing the potential of cryptos and blockchain applications.

Website | Twi: @YBBCapital

Explain the literature:

1.【游戏数值设计】经济与数值设计：https://zhuanlan.zhihu.com/p/513814730

2.GameFi 链游经济模型的未来之路：https://www.aixinzhijie.com/article/6792848

3.Designing an Open Game Economy (Part 1)：https://mirror.xyz/lordheimdall.eth/XFQsJQO917qO1AEpHKHLODpP5ftNSAtQwzJrhCgXWYo

4.区块链经济模型设计中基础经济学理论使用的思路探索：https://mirror.xyz/0xbuidlerdao.eth/AmXhGowhPk8K1yTcLy5hLJGzPYvAwgDtieoycfqI7tk

5.不“真实”的《梦幻西游》宏观经济学：https://zhuanlan.zhihu.com/p/588204383

6.梦幻西游的“天花板”经济模型：https://zhuanlan.zhihu.com/p/589546502

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