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Play-to-Earn Economies: What’s wrong with them?

Games & Play-to-Earn

Play-to-Earn Economies: What’s wrong with them?

Unless you’ve been living under a rock, you’ve probably heard about Play-to-Earn(P2E) games. Lately, the genre has accumulated bad reputation for its economic models. What’s wrong with play-to-earn?

Play-to-earn games have garnered so much hype over the years. Influencers, investors, or simply your next-door neighbor Joe has most definitely been part of the user growth GameFi has accumulated since its booming inception. The idea behind P2E is that you can monetize the time you spend playing video games, earning you passive income with the rewards gained through playing the game.

Influencers hyping play-to-earn

In fact, this genre has been so popular that it has even overtaken the DeFi & NFT markets in terms of Unique Active Wallets(UAW) growth! That’s a lot of people interacting with blockchain games. It has even been commonly touted as revolutionary, overtaking the traditional gaming industry with its potential to earn passive income wrapped around gaming mechanisms.

Image source: Dappradar

However, amongst the hype, we cannot avoid the bad reputation P2E has garnered as time went on. Ever since DeFi summer in 2020 which saw token prices skyrocket across the board, game tokens came crashing down after its initial hype phase. 

Top P2E games like Axie Infinity crashed by about 92% from their all-time high. Leaving investors at an extreme loss and “scholars” who depend on the game for annual income in a tragic state. This has led critics to question the “tokenomics” behind P2E games of whether they are unsustainable or not.

Is this something beyond the control of game developers? Or is it something inherent in play-to-earn economies?

Let’s dive in.

Play-to-Earn’s entire business model is that players accumulate in-game assets like skins/cards NFTs or in-game tokens in which users can exchange these assets and sell for cryptocurrency or real money. The way this is achieved varies between the type of game or genre(FPS, MOBA, MMORPG). For example, Axie Infinity’s gameplay consists of an array of gameplay that you can do to earn tokens. Primarily, you can use your NFT in-game creatures called “Axies” to fight against other players. 

If you win, you will be rewarded with in-game currency called SLP(Smooth Love Potion) which can be used to breed “Axies” that users can sell on the marketplace.

Image source: Axie Infinity

However, as of now P2E economies are unsustainable and could need improvement. Most P2E games experience the usual tragic price trend. First, is an initial hype phase where people are FOMO(Fear Of Missing Out)ing in. The second is the honeymoon period when everyone is ecstatic and the third is when they experience a gradual or sudden decline in value and users.

Source: Coingecko

Both Axie and Cryptoblades experienced a crash in their token price. This led to its users protesting against the developers or players simply leaving the game. In truth, many things happened that led to the spiraling down of its economy. Unsustainability can mean many things.

But just like real-life economies, GameFi economies are also dictated by supply & demand. When things go wrong(like with Cryptomines) it’s a mishandling of either or both of these factors, thus leading to inflation.

Using Axie again as an example. I think it boils down to 2 main things:

  • For the Supply factor, it’s a mishandling of $AXS & SLP emissions.
  • For the demand factor, it’s that play to earn mainly attracts investors, not gamers.

Let’s start with the supply factor.

1.) Crashing $AXS & SLP prices — supply factor

Source: Coingecko

If you compare Axie token price behavior to cryptocurrencies like Bitcoin & Ethereum you can see that, unlike AXS, Bitcoin has a healthy long-term appreciation. Because of its underlying solid economic foundation, its price generally trends upward. This is because cryptocurrencies like Bitcoin & Ethereum properly control their token emissions so that supply doesn’t overly exceed demand, leading to catastrophic prices.

Source: Investopedia

Bitcoin’s price doesn’t go haywire because the supply emissions are controlled. These are commonly called a token’s burning mechanism. For Bitcoin, the Bitcoin halving occurs every four years when the rewards for mining are halved. This controls the supply of the token, maintaining the scarce value of Bitcoin. For GameFi, burning mechanisms can be done through battle passes, leveling up NFT characters, or just straight up burning it.

Axie Infinity introduced its SLP as part of its dual-token economy as its version of a burning mechanism. Before it was introduced, players simply input USD to receive AXS. Axie successfully ran on the single token system for a year because of the huge growth and funds supporting the market. If things continued like this, a death spiral would have earlier begun.

The way the dual-token model rolls is that $AXS is mainly used for governance & staking while SLP serves as its in-game token used for utility like breeding Axies. Players need SLP to breed “Axies” that they can either sell or let their scholars use. The way SLP is generated is through the battles players do, pitting their “Axies” against each other.

So the more users play(battle), the more SLP is created. The problem arises when SLP is only burned when players need to breed, so a lot more SLP is created than destroyed causing a surplus.

$SLP ATH source: Coingecko

2.)  P2E attracts investors, not gamers — demand factor.

We all know that when a project loses its users, it is basically as good as dead. When prices crashed, not only were users leaving, but developers were scrambling to restore prices back signifying that without absurd token prices, unsustainable games might die out.

The play-to-earn model attracts investors instead of gamers. The crypto market is inherently volatile, so prices will go up and down abruptly. Users looking to make a quick buck would be focused on profit factors and will bail the project at the first notice of any FUD(Fear, Uncertainty, Doubt). Projects with solid fun gameplay will attract gamers that play because they find it fun so when the next crypto winter arrives, gamers will stay because they are unfazed by price volatility.

Source: Coingecko

Cryptomines was an up-and-coming space NFT game that lets users mine on planets for in-game tokens. Everything was fine until the space experienced an encompassing FUD(Fear, Uncertainty, Doubt) throughout the community that caused the crashing of its token. The narrative at this point has become a jumble of rumors, but it started off with a general distrust of how many tokens were owned by the developers. Investors bailed out of Cryptomines in fear of losing profit, leaving the game in a precarious position.

In Axie Infinity, “Scholars” are users who cannot afford the steep cost to buy “Axies”. They primarily play the game to earn a living wage. Some even quit their day-time job to pursue full-time because they earn more than the minimum wage in their home country. These users continually cash out while the game relies on newer players to invest to bring value to the economy. 

When Axie experienced its sudden crash, “scholars” left the game as soon as they did not earn to justify a living wage. This resulted in a lot of users leaving at around the same time. From the start, users were incentivized to extract as much value while not sustaining value back to the economy.  In GameFi, long-term sustainability is not achieved through investors but by loyal gamers who provide genuine value to the economy.

It’s clear that we have a lot of work to do if we want GameFi to succeed. Developers should likely abandon the old model of P2E games and opt for an “anti-extractive model”.  

This means that we have to make games that are fundamentally fun instead of a model that relies on investors seeking profits. Certain builders are already pushing this idea through a movement of making “Play-and-Earn” games as opposed Play-to-Earn. It’s where builders will focus on gameplay mechanics and enjoyment.

Improvements in token emissions should be implemented as a safeguard against inflation as well. There are great ideas such as including a non-blockchain-based in-game currency that could protect against exploits on token emissions. This would also let developers tweak conversion rates without damaging users’ earnings.

The recent crypto winter proved that GameFi has the potential to be more than a cash grab. Amidst the Pandemic & DeFi ecosystem crashes like the Terra debacle, blockchain gamers will stay with Web 3.0 games that prioritizes gameplay and mechanics that are enjoyable. 

I believe that GameFi has surpassed this, given its potential.

I am excited to see what builders of the space can come up with.

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Kim Cardanoshian

Journalist. I am interested in Games, GameFi, Play-to-Earn, Money and Entertainment

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