Hello gamers and web3 game developers!

My name is Nick Metzler. I’m the tokenomics and governance designer for Framework Ventures [edit: no longer with Framework] and an award-winning, lifelong game designer. I’ve previously designed board games like Jumanji and Hail Hydra that are played around the world, designed challenges for CBS’s show Survivor, and most recently (before Framework) outlined the initial tokenomics for a 100% on-chain game.

In my spare time, I play games. Every type of game you can think of. Sports, escape rooms, video games, card games, casual app games, backyard survivor experiences, party games, crunchy 4-hour strategy board games, VR games, and more. All I do is games. All the time. Safe to say I’m addicted. As a result, I have a unique perspective of seeing common links between many different types of games, including emerging mediums like blockchain games.

If you haven’t been living in the proverbial web3 rabbit hole for the past year, here’s a primer on blockchain games: Axie Infinity, one of the first crypto games, pioneered the concept of playing a video game and earning from it, like a pseudo job. Axie and similar games attracted lots of attention globally (but especially in the Philippines), which drove a speculative bubble even though their game was arguably repetitive and mind-numbingly boring.

Due to Axie’s game mechanics around token issuance and Axie asset creation, their supply drastically outpaced their demand, kicking off a death spiral that diluted all the prices in their ecosystem. Critics quipped that players would not reinvest their earnings because the game was not fun, sparking the narrative that ‘fun games would solve gamefi’ because a fun enough game will incentivize players to reinvest instead of selling.

I’m here today, as an expert in fun and games, to say that making a game fun may partially improve the sustainability of blockchain game mechanics, but it will by no means solve the majority of their existing issues outright. In my humble opinion, builders should instead still be focusing on tackling economic problems since a fun game with a badly designed economy will crash, but a boring game with a well-designed economy can be iterated on.

The true answer is to make a fun game that is also economically sustainable.

We already know how to make fun video games. Simply shoving a token up the backside of a fun web2 game won’t solve the issues in blockchain games because the type of fun is different. Just like the motivations for playing chess, football, and an RPG are different, a blockchain game’s motivation for playing is different from a web2 video game.

The motivation for playing and the definition of winning, which create the feeling that we call ‘fun’, is not the same as a typical web2 game. Web3 games are inherently financialized from the start.

What is fun?

To save you a few decades of immersion, here’s a short but meaty concept of fun:

Fun is an individual, subjective choice. It’s a mindset.

If you believe something will be fun, it will be. If you believe something is going to suck or be boring, it’s much more likely to be. No one can be forced to have fun, and everyone’s definition of fun is different depending on their own life experiences.

Despite the variety in individual expressions of fun, a largely universal form of fun in games is the idea that you can win the game.

If you’re aware that you won’t win, the game is (typically) less fun — unless you’re a maniacal saboteur. The more semantic definition of fun is the feeling of having the ability to have meaningful agency to assist in defining the outcome of the game (usually to win).

Currently, the idea of winning (and fun) in a P2E game is synonymous with exiting with a profit. Obviously, everyone cannot expect to exit with profit because that’s not sustainable, which is why the industry narrative around blockchain gaming has pivoted from “play to earn” to “play AND earn”, reshifting the focus back towards more conventional expectations of fun, with the earning element serving as a secondary bonus for playing well. This doesn’t get us out of the weeds yet though, the motivation for profit or playing for value is still present.

As a general rule, if the task to earn is low effort and profitable for players, the task will be done en masse and a market rate will appear for that skill, funded by payers and speculators. That market rate of rewards can be expressed in both internet value (ETH) or global reserve currency value (USDC). As a result, blockchain games are inherently financialized. Is it a feature? Is it a bug? Or is it a fact?

We could make a fun game without all of the motivation for profit if we wanted. That’s a web2 game. It has ‘web2 fun’.

Web3 game assets are inherently financialized due to their transferability, property rights, and their undeniable impact on a player’s psychology. This changes the definition of fun, which in this article, will be called ‘web3 fun’.

The prices/value can be hidden, muted, or obfuscated so the player’s focus is on the game’s ‘web2 fun’, but those profit-driven motivations will be present all the same. The more a player can predictably earn from a web3 game in comparison to the other web3 games will help establish the level of focus on earning, no matter how ‘web2 fun’ the game itself is.

In short, what will make ‘web3 fun’ is a blending of the fun found in web2 games with new types of fun found in web3 mechanics that wouldn’t be possible without running on a blockchain. These mechanics, which could be their own article, range from incentivized composability, risk mitigation, skill-based risk-taking, data analytics in gaming, governance as the game, consensus-based decision-making with permanent and instant consequences, automatable actions, programmable bot players, and self-executing code with smart contracts. There are probably many others as well, but we collectively haven’t ideated them yet.

In my opinion, the short-term answer to making a fair and fun web3 game is to make the gameplay-induced value accrual generally slow, variable for high-value drops, requiring low initial buy-in from players, is prosocial, and is exciting in nature. For a more predictable stream of value such as a job, the player in question would need to materially impact the network effects of the game either through UGC (user-generated content), referrals, governance, partnerships, or other business-level contributions… just like a job. These parameters cause the expected value of playing to no longer appeal to profit seekers while keeping rare assets scarce and prices high (for secondary market revenue) and tie the majority of value transfer to the growth of the network.

Despite my above vision for a working web3 game, the financialized fact of market-ready blockchain assets do result in a few key problems with all web3 games (including the above suggestion), all of which pertain to sustainable economics as the throughline.

1. Inflationary token emissions devalue token holders and the ecosystem in general (not fun to lose value slowly).
2. Players are extracting value from the game by selling for profit instead of ‘reinvesting’ into the game… because when an easy, low-effort skill is profitable, it will be done repeatedly until the money runs out (not fun when profits dwindle).
3. The game assets are prone to reflexive speculation both to the upside and the downside due to an instantly global market, exposing hodlers to the real risk of losing everything (not fun to lose value quickly, but very fun when they appreciate).

In short, there is token/asset debasement risk, speculation downside risk, and player/guild/bot extraction risk. Since all 3 of these problems are economic in nature and all 3 impact web3 fun, it follows that sustainable economics must be the focal point of our problem-solving efforts rather than focusing on the ‘web2 fun’ and expecting it to be sustainable as a result. Once we solve these issues, we can graduate to more complicated mechanisms for true web3 games that stand the test of time.

Token/Asset Debasement Fix

To understand the core issue of this problem, we need to identify what incentives exist to cause this effect. Faucets in a game economy traditionally introduce in-game value to players and sink acts as the out-flow of that same in-game value. In web3 however, these faucets deliver out-of-game value and beg players to return said value after handing it out for ‘free’. This problem persists across fungible tokens and non-fungible tokens (assets) so the solutions are likely linked.

On the surface, the problem is obvious: the circulating supply of tokens continually increases as the P2E game issues new tokens to players for completing tasks (faucets). Many of these players, historically, sell their tokens almost immediately, inflating supply and lowering the price. This behavior is present with both fungible and non-fungible tokens. Eventually, this repeated player behavior decreases confidence in the project unless buy pressure outstrips inflation and player-driven sell pressure.

To counteract this force, many projects supported staking mechanisms in an attempt to restrict circulating supply in AMMs, indirectly raising the price by holding (ie, not selling). To incentivize staking, the token issuance went to the stakers. In effect, anyone who wasn’t staking was having their bags debased while stakers remained at a constant level.

Other projects have experimented with unlocking all of their tokens at the same time and then burning tokens over time to try and cause the price to go up. However, this strategy skips over the main purpose of unlocking and distributing tokens over time: The decentralization of token holders. In theory, the more people who concurrently are holding the token, the more resistant it is to economic shocks from individuals selling. Additionally, it may provide a veneer of safety if government regulations arrive.

Knowing the above, we can conclude that the core of the token debasement issue rests on token issuance and distribution methods — when and how does a project appropriately distribute tokens to contributors who will add value to the protocol, game, or network?

So how do you convince the players to continue to hold the distributed tokens within the ecosystem instead of swapping it for liquid assets once they’ve been distributed?

The answer is “making a great game/product that people want/need to use, and must hold/spend the token in order to use”. The token(s) need to be essential to experiencing the product, either through spending the tokens or holding them. When demand increases and more people find use in the product, the token price will rise.

Here are some thought starters for solutions:

• Make ‘web2 fun’ games because players will have to hold and use it if they want the utility; the ability to play the fun game in question. This one is obvious and fits perfectly with the narrative that fun games will solve this space.
• Instead of unlocking tokens entirely through a vesting schedule, unlock batches when new accounts enter the ecosystem. Have the tokens unlocked already, but in a ‘new player’ pool governed by a smart contract. Putting this into a game mechanism, distribute tokens when a battle pass is bought. Since a player spent money on a battle pass, they’re unlikely to dump the tokens and instead will use them.
• Have the treasury own all the tokens outright. Then use a vesting schedule within the treasury, this way circulating supply on sites like Coinmarketcap is already at max supply, which will avoid price debasement when new tokens are vested. This is a bit of a shell game, but it avoids the perception of losing value over time. Put inflationary rewards in an ‘unlocked’ pool governed by a smart contract, as noted in the previous bullet point.
• Include staking of fungible tokens into vaulted NFTs as part of game mechanics to increase the odds of high-value NFT drops.
• This one takes a bit of explaining. What if some weapons or armor could allow the staking of the fungible token to increase its stats for earning? The earning doesn’t need to be direct, instead, it could generate additional in-game crafting materials, or increase the odds of getting rare loot drops within the game (which could also be NFTs).
• Allow staking in certain locations within the game to cause additional game effects such as harder enemies or the chance to find rare easter eggs.
• Distribute locked tokens to high-value players of other games via limited-time escrow smart contracts that are only activated by completing game actions. This is air drops without instant sell-ability and allows for lucrative partnerships with NFT communities.
• Governance can be imbued into NFTs whenever the player completes certain levels or even the game. Alternatively, NFTs can be burned to grant additional governance.

In short, the solution is: buy, hold/stake, spend, and burn pressure needs to exceed sell, inflation/issuance, and mint pressure. The current method to reach the solution is to continually grow your user base, relying entirely on more players to sustain your asset prices, but as we’ve seen, this is unsustainable.

Instead, integrate some or all of the above mechanics to avoid token debasement and handle token issuance in a more effective way. As stated earlier, a large portion of this problem rests in strategic token distribution as well; the method of getting the tokens into the hands of the most beneficial people for the game’s growth. We’ll come back to this in the next section.

Play a game, get paid! This was the siren song of the first wave of web3 games.

…but people played games for free already.

Scratch that, people paid to play games.

Of course, it follows that people would play games if they got paid.

And then those people will leave after being paid when there’s no more profit to be made (because they’ll find other ways to profit, like other games or… jobs.)

These players profit by earning value in the form of game tokens. It’s the game developer’s hope that these tokens are recycled inside the game economy which powers the game experience. However, we’ve seen the somewhat obvious reality that players instead sell the liquid tokens for more stable assets, and profit, and extract that value from the game ecosystem to pay their bills. The act of selling the tokens instead of using the tokens within the economy lowers the price of all the game’s tokens on the open market, creating a cycle of lower and lower prices.

The first wave of web3 game economies was set up in such a way that anyone could produce a profit by performing a low-skill activity. The profit was coming from demand on the opposite side of the sale, such as new entrants or speculators betting on future appreciation. When that demand runs out, the death spiral begins.

Whenever a low-skill activity is profitable, it will be repeated until it reaches the market rate. If the skill doesn’t have any real demand, then the market rate will approach 0.

Never underestimate the power of humans to find an optimal way to earn. No matter how obfuscated the game design is, someone will discover and exploit the path if it’s profitable. This is put on steroids with bots; they are simply an extension of human desire codified in a repeatable process.

Banning bots isn’t a solution either. There will always be a way for bots to exploit value from an ecosystem. Even if a game can remove most bots, it’s not difficult for a team of humans to harvest an ecosystem to find the most optimal earning method. Those teams are some of the first guilds, organized around earning as much as possible from the game.

It’s important to note that guilds aren’t inherently bad. They’re simply a natural result of extractable economics, and their role will change with different economic models. The problem is in the economic design.

To solve this problem of economic design, first, decide what should be rewarded with value. Then design that economy through thoughtful faucet placement to deliver value when those actions are taken. Sources of value could be:

• Contributing IP to the game
• Raising awareness of the game
• Adding content to the game
• Forming partnerships with other games
• And much much much more, the sky’s the limit here, though it’s important to understand that players will gravitate towards actions that reward them in the most efficient way possible
• Perhaps these faucets are controlled by corporations, DAOs or governance, instead of game mechanics or code
• Learning from GameFi & Crypto Blogs

Sinks must be placed where that value is realized. Value can be based in entertainment, finance, utility, power, game growth, real-world goods, services, and more. Sinks should be transforming game asset value into non-game asset value (like enjoyment, governance, or social proof).

Game designers should be careful to avoid the trap of incentivizing sinks with purely economic value. This was/is present in the current wave of web3 games. Axie Infinity, as an example, allowed their main assets to generate additional assets which caused a flood of those same assets. Naturally, the price of those assets declined due to oversupply, also known as NFT debasement, which dragged down the prices and equity of the entire game.

If a game consistently expels its own value for nothing in return, the game won’t be around for long. A low-skill repeatable activity is not of value to the game because there aren’t any recipients of the value on the opposite side of the equation.

Paying only highly skilled players also comes with its own sets of problems. What value are these players providing to the game? If they’re influencers with an audience, sure they’re providing awareness value. While rewarding highly skilled players may be less extractive than paying anyone and everyone, it still is inherently extractive with little value sent back to the game in return, unless of course, all the players spend all those winnings in the game all the time.

Sure, payouts for skill incentivizes players to improve their strengths in the game, but if you’re not skilled as a player, you won’t pay or play very long. As a result, I personally don’t expect the ‘competitive payout’ tend to stick around for long unless they’re funded almost entirely by PvP betting. This way, games aren’t expelling their own treasury’s funds for payouts — instead, the payouts are provided by the players and the game can take a cut.

Perhaps the answer is simpler than we all realize. If the rate of value accrual is extremely slow, and rare NFTs are truly scarce because the materials/skills needed to make/find them are time-consuming or expensive, NFTs won’t inflate as quickly and prices will remain more stable. Players won’t be able to fly through the profit flywheel because what you’re earning is minimal. The focus will re-shift into the fun of the game and players may get lucky once in a while with a legendary high-value loot drop. Game developers can still profit from taxes on high-value transactions while the core game loop is played with low-value materials in the economy.

If the answer above does not suffice, here are a few more guidelines that can be used to manage value extraction:

• Incentivize value accrual effectively to spur network effects
• Incentivize play styles that grow the game’s content
• Reward governors that help grow the ecosystem’s value
• Reward for more than just mindshare. Attention wanes fast. (s/o liquidity mining)

What causes speculation and why is it a problem?

The cause is simple: high demand for a limited supply of goods, combined with open markets and the possibility of price appreciation. On the way up, speculation is great. Everyone loves to see numbers go up, including the game developers which typically have a percentage of the upside on every secondary sale of NFTs. Due to the availability of data on the blockchain, enterprising speculators can (and do) utilize bots and algorithms to jump on opportunities when they start trending.

The same forces that drive speculation to the upside also drive reflexivity to the downside. For mass-market, casual gamers, that’s the scary part — all you’re trying to do is play a fun game and the next thing you know, you’re down $300 because you held onto an old asset for a month while playing a different game you found fun.

So this is a tricky problem. Game developers want speculation when it goes up, but it becomes a problem on the way down.

There are 3 directions that I’ve explored while approaching this problem.

1. The first avenue is to eliminate speculation entirely in some way or another. Eliminating it entirely would lead us right back to where we are right now with web2 games. Both types of games will exist in the future, so blockchain games should instead capitalize on the difference to prove they are worth existing.

That said, trying to eliminate speculation from a blockchain game would be a bit… ridiculous. Theoretically, designers could use non-transferable NFTs or non-blockchain assets, but the wallets/accounts could be sold on the market instead. It would make the selling process much less liquid which could tamper down the speculation bubbles, but it wouldn’t remove speculation entirely.

Non-transferable NFTs are essentially what centralized game companies hand out now with cosmetics that can’t be transferred or sold. Ideally, non-transferrable NFTs are utilized for in-game reputation, game DAO governance, and social proof in the wider web3 world rather than sliding back into a one-way economy that exists in video games today.

2. The second avenue is to limit the upside or downside with some economic levers like guaranteed buybacks or guaranteed minting. Guaranteed buybacks of tokens or NFT assets may empty the treasury sooner, hastening the demise of the game. Guaranteed minting of tokens or NFTs causes stability for a while, but then causes token debasement when demand dies down unless there’s an equal burn.

How can the game guarantee a reduction in circulating tokens without buying it back with treasury funds? Ideally, a game or business can capture all the upside of speculative activity instead of just throwing it into the burn furnace on the opposite end. Perhaps when players interact with a sink that sends native tokens to the treasury, impose a variable burn rate that tracks demand for the token. The lower the demand, the higher the burn rate at the sinks themselves. This would avoid expelling valuable assets from the treasury and would effectively reduce supply in the market with natural in-game actions.

• Alternatively, the volatility of speculation may be tampered down through a lower rate or earning, thus lowering the speculative excitement kicked off by the opportunity to make a quick buck through in-game actions (see: breeding Axies). While this doesn’t eliminate speculation entirely, it may dilute the catalysts.

3. The third avenue is to incentivize or disincentivize speculation on subsets of the NFTs in the game through the format of what NFTs are offered. Theoretically, this could prevent contagion from a falling floor price crashing the whole game. Choose a small subset of the NFTs to be valuable through extreme scarcity. The rest of the ecosystem’s NFTs could be much lower value and make up the bulk of the game/economy. The lower value NFTs could be plentiful, effectively lowering the perceived value of each individual one due to their availability. By relegating the speculative NFTs to a corner of the economy, it might not cause a contagion to the rest.

Because NFTs are inextricably linked to finance, we may never be rid of speculation in blockchain games. Perhaps this isn’t a problem if everyone knows it from the start.

However, in most cases, this financialization absolutely increases the risk of holding game assets instead of selling them after every instance of playing the game. Unfortunately, this is negative for game stability and economic growth.

Speculation also creates weird incentives. If a game’s assets become overvalued, the players who enjoy playing the game now must choose to sell the assets for a profit or to keep the assets to continue playing the game. It’s very odd. I’m positive we’ll see attempts to solve the speculation problem but I’m not sure if it’ll ever be vanquished.

The thorniest part of this problem is rooted in the incentives to keep speculation in the equation. The network effects of the game’s ecosystem and the players in the game benefit from speculation to the upside. Speculation is only bad on the downswing because it has the very real risk of sending a community or game to 0.

Going further, speculation is not unique to blockchain games. It will persist in every industry featuring NFTs and open markets. Since it’s theoretically impossible to eliminate speculation, my suggestion would be a wallet plugin that rates the riskiness of an ecosystem by taking into account how long the smart contracts and game have been on the market, price volatility, supply, reputation, and more to deliver warnings to consumers. This way, consumers can tailor their preferences to their personal risk profile while keeping markets completely open.

From an economic and game mechanics angle, lowering the rate at which players can earn should decrease the speculative opportunity as compared to other web3 games. Perhaps some games will exist solely as speculative vehicles that attract flippers while robust games that are focused on the long term will not appeal to speculators due to their lower potential for profit. While this doesn’t outright solve the problem, because speculation can’t be stopped, it does leverage game theory and opportunity costs to mitigate the negative effects.

Bearish and Bullish

Games are already a risky endeavor. Many fun games fail and are unprofitable. Web3 gaming does not solve this, and they add additional financial risk on top by allocating extractable value to the players. This will spell the demise of many web3 games. Web3 games can be put 6 feet under by reflexive speculation to the downside, despite a super-web2-fun loop with great graphics, killer marketing, and top-notch execution. Open economies are a pesky problem.

Speculation and high asset prices enable games to reach stratospheric heights, which can then be allocated back to the players in the form of payouts. But money doesn’t appear from thin air — it’s always coming from somewhere. The more a game pays out, the more the game has to take in, either through purchases or through royalty rates from speculation in secondary markets.

Despite my hesitation with these 3 wicked problems in web3 games, I’m still bullish. I believe there’s something amazing happening in this space.

• Co-risking and co-ownership within peer-to-peer markets cause niche creativity to bloom.
• Composability and open-source code make development faster and more secure.
• Interoperability makes value travel further and opens up avenues for specialization and pervasive IP.
• Speculative opportunities attract mindshare and produce winning narratives.

Tokens are an incredible tool to get past the cold-start problem in network effects. Getting the network effect is valuable in itself, so paying value to make it there is worthwhile. Somewhere along the web3 yield farming cycle, we forgot why we were paying out the value in the first place.

• Boring games that have leaky economies will be botted to hell or mined by guilds.
• Boring games that can tackle economic problems will have a chance at longevity but not glory, hanging on for years, desperate for developers.
• Fun games that do not have a robust, sustainable economy will burn bright and die in a speculative dumpster fire.
• Fun games that have solved economic problems will live long and prosper, building strong communities and recognizable IP that permeates the culture.

The solution is not simply to make fun games alone. It’s making fun games with a sustainable economy that can grow over time to become a place for enjoyment for many and the prospect of monetary gain for a few — those who contribute to the network effects of the game.

We haven’t solved these problems yet but that’s what’s exciting about web3. Hopefully, this article sparked some thoughts of your own in this nascent space. Games are currently leading the charge in web3 sustainability, but the solutions we find here will bleed out into nearly every industry in the world — it’s worth it to keep grinding.

About Author

This article belongs to and was written by Nick Metzler and originally was published on his blog. Nick is a game designer turned tokenomics and governance designer, making AAA P2E economies fun and sustainable.

We discovered Nick’s article while doing our research and decided to share it with the Kayros community as with his piece he brings true value to the game developers and studios working on the next generation of gaming.

About Kayros

At Kayros, we’re building a web3 game store for the ultimate GameFi experience. We bring GameFi to the masses by providing easy play-to-earn games discovery, a one-stop shop for all in-game assets, seamless payments by credit card, Gamefi wallet and exchange, NFT rental marketplace, and much more.

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