preface

Xangle is a cryptoasset data research and analysis company dedicated to exploring the evolution of the token economy model (NFT-based model, single token economy, dual token economy, and game platform token economy) in the Web3 gaming environment, focusing on the challenges and developed solutions for building a sustainable gaming economy.

The article focuses on the differences between closed economies in Web2 games and open economies in Web3 games, and explains how this is achieved with examples. The article also highlights users’ ownership of assets, the difficulty of controlling the outflow of money, and the need to relinquish control over the gaming economy.

Furthermore, the article also thoroughly explores the complexity of building a sustainable gaming economy in the Web3 industry, and finally suggests gradually transitioning to an open economy and empowering governance tokens and platform tokens as potential solutions to the ongoing challenges faced by closed economies.

Introducing Web2 to Web3: Shifting from a Closed Economy to an Open Economy

While fun is important in game development, designing a sustainable game economy is just as important. Fun games attract players, and a well-designed game economy can prevent players from losing out. “Ragnarok Online” (Ragnarok Online) suffered a loss of players after hyperinflation in its game currency, Zeny, depressed the value of the currency. On the other hand, “MapleStory” (MapleStory), “EVE Online” (EVE Online), and “World of Warcraft” (World of Warcraft) have enjoyed a stable gaming economy for decades. Game companies draw on these experiences and gather expertise to build a stable gaming economy.

However, the Web3 gaming environment is significantly different from Web2, which means that the economic framework built for Web2 games may not apply to Web3 games. In the Web3 environment, a new type of stakeholder has emerged. Previously strictly controlled, in-game assets and goods now flow outward. In this post, we’ll first look at the challenges of building a closed Web2 economy and an open Web3 economy. Thereafter, we’ll continue to discuss how the Web3 token economy model evolves to meet such challenges. Finally, we’ll try to predict the future of the Web3 token economy and make some suggestions.

From Web2 to Web3: The challenges of building an open economy

Source: Xangle

Above, we have simply described the differences between a closed economy and an open economy. What you need to consider when building a gaming economy is that Web3 is unique because game companies have yet to incorporate it into the Web2 economy.

First, gaming companies are required to ensure user ownership in the Web3 gaming space. In a closed economy, game companies own game assets, and users “borrow” game assets. In an open economy, users are guaranteed full ownership of assets. This allows users to monetize assets, create supporting content, and more.

Second, unlike closed economies, it is difficult for game companies in open economies to control currency outflows. In Web2 gaming, good management of the supply and demand of money in the game prevents inflation and depreciation. In the Web3 game, investors are a new parameter that has emerged, opening up the possibility that the currency is different from the way it was originally designed in the Web2 context. Therefore, game companies need to incorporate investors’ potential currency outflows into the design of the Web3 gaming economy and develop preventive measures.

Finally, game companies will have to relinquish control of the gaming economy. In Web2 gaming, game companies strongly control the game economy, act as central banks, and supply and balance game items and products. Although game companies in the open economy are still responsible for developing games and initially designing the game economy, subsequent economic decisions are subject to democratic governance processes.

In the next section, we’ll explore how the gaming token economy model has evolved to meet these challenges.

Evolution of the game token economy model

Source: Xangle

NFT-based tokenomics focuses on securing ownership of items

Source: Cryptokitties — Cryptokitties: First Blockchain Game and NFT-Based Model

First, the NFT-based model was the go-to strategy for the start-up phase of blockchain games such as “Cryptokitties” (Cryptokitties) in 2017. In 2017, Ethereum’s dApps ecosystem was not yet vibrant, and the concept of NFT was just emerging. Giving users ownership of items is more important than gameplay or game economics. With the arrival of the “Cryptokitties” (Cryptokitties) game in 2017, games that began incorporating NFTs into games also appeared, including “Sorare,” a sports game that turns player cards into NFTs.

The NFT-based model mechanism is not complicated. Its structure is simple because FT (fungible tokens) is not involved, and the main economic activity revolves around NFTs. The rest of user activity, such as breeding and item trading, relies on mainnet currencies such as ETH. This is because the concept of distributing native FTs in games did not exist at all at the time, and the project side had no choice but to use the existing main network currency as game currency.

The advantage of the NFT-based model is that it relieves the pain points of designing and managing the gaming economy. It not only saves game companies resources to build a game economy, but also allows them to control in-game currency, while users also gain ownership of items. Also from the user’s perspective, the inclusion of mainnet currency in the model streamlines the NFT transaction and upgrade process.

However, the model also has obvious limitations. First, it doesn’t fully guarantee users’ ownership of the game’s currency. The only things users can own are items, or NFTs, while ownership of game currency remains in the hands of game companies. Second, the model is highly exposed to external variables, particularly the price of mainnet tokens. Due to the lack of native FT and the economy built around it, it is vulnerable to external factors, such as price fluctuations in mainnet currencies such as ETH. Additionally, its business model is similar to selling collectibles, such as PFP, which makes it difficult for game companies to generate a stable revenue stream.

Source: Sorare and Gods Unchained — NFT series

The emergence of NFT-based gaming token economies preceded the creation of individual game companies’ own token economies. This model pioneered the collectibles market and has since spawned numerous PFP and collectible projects and collective-based card games, the most famous of which are “Sorare” and “Gods Unchained.”

NFT-based game economy design remains a viable option for Web2 games that are reluctant to introduce gaming tokens. For example, Gran Saga developer Npixel launched the metaverse platform METAPIXEL on Aptos and is currently developing a number of games. The company said it has no plans to release tokens yet. Although the company didn’t provide any specific reasons, the choice of this model reflects its cautious approach to Web3 gaming, probably because there are currently no solutions to the problems of opening up the economy.

Single token economy: guarantees users’ ownership of game currency

Source: Xangle

Despite the limitations of building a game economy, the “CryptoKitties” NFT-based game economy has attracted a great deal of attention in the Ethereum ecosystem. In fact, the success of CryptoCat shows the potential of blockchain games. A range of games have followed suit, including “Axie Infinity” (previously a single token economy, created with $AXS tokens), “Decentraland” ($MANA), and “Sandbox” ($SAND).

Source: Xangle

As can be clearly seen from the name of the model, tokenomics revolves around a token that can be used both as a utility token and as a governance token. Users earn tokens in games or buy tokens on exchanges to participate in economic activities, such as buying and upgrading game items (NFTs). At the same time, token holders participate in decisions within and outside of the game.

The simple structure is the main advantage of this token economy model. It streamlines game development and maintenance for game developers, gives users a better grasp of the game’s economy and currency, and thus provides a better gaming experience. Despite these benefits, however, this model has not succeeded in avoiding the compromises of parameters inherent in an open economy, including asset outflows. In Web3 games, investors are free to move their tokens out of the game. Thus, when the game is popular or the market is bullish, the price of the token rises, and when the game falls out of favor or the investment environment deteriorates, the value of the coin plummets. These external factors cause users to lose money and leave the ecosystem.

Despite this model’s limitations, many popular games stick to it. Casual games, in particular, tend to choose this model due to their relatively short life cycles and the importance of accessibility for such games. For example, in hyper-casual games like “Arc8,” investor participation continues to cause fluctuations in token prices. However, “Arc8” still maintains more than 10,000 daily active users (DAU), mainly due to its continued focus on simple gameplay rather than complex revenue structures. “Alien Worlds” (Alien Worlds) is another great example. It has a destruction mechanism in the game called a “sink,” and shows how the game’s life cycle can be extended even with investor participation.

Dual Token Economic Model: Minimizing Asset Outflows

The dual-token economic model was created to address the main limitation of the single-token economy, which is the outflow of assets. In the single token economy model, asset outflows are rampant, turning tokens into an investment tool for investors or play-to-earn (P2E) players. To address this issue, “Axie Infinity” launched the $SLP-$AXS dual token economy.

Prior to the launch of $SLP, “Axie Infinity” used a single token economy. As its popularity increased, $AXS began to face rising selling pressure, and the token was used for governance and staking rewards. To mitigate this problem, in August 2020, Axie Infinity adopted the first dual-token economic model and launched the game token $SLP. After observing the success of “Axie Infinity” in 2021, many other games followed suit, and the dual-token economy flourished in Web3 games.

Source: Xangle

The dual-token economic model makes use of two types of tokens, namely utility tokens and governance tokens. Utility tokens are game tokens that can be obtained in games and are mainly used to trade items. Governance tokens, on the other hand, are tokens that grant voting rights to governance. Projects tend to give governance tokens various other utility functions, such as breeding, NFT sweepstakes, and payments, to reduce their securities nature and selling pressure. Projects like Crabada operate on three tokens, but it appears to be a variant of the dual-token economy because the game uses two game tokens and one governance token.

Utility tokens are mainly offered within games, so there is no pre-set supply and can inflate, while governance tokens usually have a fixed supply.

The dual token economy aims to minimize the impact of token price fluctuations on the activity of the game economy. The advantage of the dual-token economy is that it separates supply and demand between game users and investors, preventing the outflow of game assets. Galaxy Digital Research once called this strategy “currency estrangement.” Coin spacing allows game users to enjoy games without being seriously affected by price fluctuations caused by investors, and investors can also benefit from investing in games.

Source: Xangle —

But it also has limitations. If utility tokens and governance tokens are listed at the same time, the risk that external factors in the single-token economy may disrupt the gaming economy will come into play again. Perhaps the development of “Axie Infinity” and “STEPN” best illustrates this. Taking “Axie Infinity” as an example, $AXS and $SLP were both listed on the Centralized Exchange (CEX), but after the number of new users began to decline, the game faced a sharp increase in capital outflows. Ultimately, this caused the game economy of “Axie Infinity” to collapse. Similarly, STEPN launched $GMT and $GST, but when growth stagnated, the gaming economy quickly collapsed.

The significance of the dual-token economic model is that it pioneered a structure that separates governance from gaming tokens, while also drastically reducing the outflow of game assets through monetary distancing. Although in game cases such as “Axie Infinity” and “STEPN,” the simultaneous listing of game tokens and governance tokens has indeed led to the collapse of the gaming economy, it is worth noting that it provides game companies with a single tokenomics alternative. As a result, even early-released games have accepted the idea of a dual-token economy.

League of Kingdoms (League of Kingdoms) Game Case Study: Giving Governance Tokens New Practical Features

A notable aspect of “League of Kingdoms” is that it attempts to resolve the lack of utility of existing governance tokens. It provides a way for governing tokens to participate in the gaming economy.

Source: Coindesk Korea — League of Kingdoms Profile

“League of Kingdoms” is a Web3 MMO 4X strategy game launched by Nod Games in 2021. Users participate in the game by building their own kingdoms, forming alliances with other kingdoms, producing armies, and invading other kingdoms to expand their territory. This is similar to popular Web2 games such as “Rise of Kingdoms” (Rise of Kingdoms) and “Clash of Clans” (Clash of Clans).

When launched in 2021, “League of Kingdoms” adopted a single token economy and implemented a single token called $LOKA. However, after seeing the success of “Axie Infinity” and “STEPN,” the company realized that the limited release of $LOKA was not enough to reward users. It then announced the launch of $DST, although plans were delayed due to the downturn in “Axie Infinity” and “STEPN.” The project then focused on improving the utility of $DST and $LOKA, and finally launched $DST in April 2023.

$DST can not only upgrade Drago (NFT), but also provide various practical features such as VIP stores and Drago upgrades. It expands the utility of Drago, allowing users to destroy Drago to obtain Dragon Souls, which in turn can be used to upgrade Drago. The Drago$loka token used for training enhances the utility of the game, which is achieved by providing a 30% discount for paying $LOKA to buy game products.

Source: “League of Kingdoms” — LOKA Staking (Ranking)

One of the prominent features of League of Kingdoms games when staking $LOKA. The staking system allows $LOKA holders to lock in their tokens, providing their continent (server) with additional resources, monster respawns, troop boosts, and other benefits. Continents that lock in more $LOKA also get more rewards. This is similar to curvy bribery.

“League of Kingdoms” set a new precedent, introduced a dual-token economic model, and enhanced the function of governing the token $LOKA. It expanded the use of $LOKA while increasing the token’s impact on the gaming economy. The main impact of this approach is the introduction of new features in governance tokens.

Platform-Ingame Tokenomics: The Dawn of Multi-IP Onboarding Creator Creators &

Platform-Gaming Tokenomics: Getting Started with Multiple IPs and the Beginning of a Creator Ecosystem

The platform-game token economy first appeared in 2017 to meet the needs of Web3 native projects to build a creator ecosystem. The original purpose of the model was to establish a game distribution platform. Platforms such as Enjin, Gala, and ImmutableX are starting to use platform tokens to build an ecosystem of game content creators. Over time, some of these platforms have even built their own mainnets.

It wasn’t until 2022, when a large number of Web2 participants launched Web3 projects, that this model began to gain attention. In 2021, WeMade’s “Mir 4” game rose rapidly, triggering a wave of Korean Web2 game companies entering Web3 games. Gaming giants Netmarble, Com2uS, and Neowiz have introduced the platform-gaming token economy to take advantage of their best-in-class IP lineup.

Source: Xangle — Exhaust Tokenomics Model

The platform-gaming token economy provides a way to link one platform token to the gaming tokens of multiple games. Although dual token economics is characterized by a 1:1 correspondence between governance tokens and utility tokens, this model is characterized by a 1:N correspondence. In this model, the platform token acts both as a reserve currency and as the upper level token that manages all game tokens.

Source: Xangle

The platform-gaming token economy is divided into two types according to the purpose of the platform token. In the first type of platform economy, platform tokens act as publisher tokens and are mainly used to cash out and buy NFTs or game items through gaming token exchanges. Web3 native tokens such as GALA, TreasureDAO, and ISKRA, and platform tokens for gaming companies such as MarbleX and Neowiz are some of the deadliest publisher tokens.

In the second type of platform gaming economy, the gaming platform becomes the main network, and platform tokens act as publisher tokens and provide additional functions to protect network security. ImmutableX, WEMIX, and XPLA are such mainnet tokens and platform tokens that have been converted to mainnet tokens. This model strengthens the value chain of Web2 gaming companies because in addition to games, publishers, and platforms, mainnet platforms can also manage infrastructure (in the past, this infrastructure was managed by publisher platforms).

Users earn game tokens by playing games and can convert them into platform tokens and sell them on exchanges for cash. Instead, users who want to buy game items can buy platform tokens from exchanges and convert them to game tokens within the platform. In this way, the platform-game token economy model helps build and run the game economy through the organic interaction between platform tokens and in-game tokens.

Source: Xangle

The platform game economy model has three major advantages. First, the platform-gaming token economy benchmarked the currency distancing strategy of the dual-token economy model. For example, MarbleX requires users to exchange game tokens for bridge tokens called MBXL and then convert them back to MBX to cash out game tokens. This makes it more difficult for capital to flow out, allowing most game tokens to stay in the game.

Source: Xangle

Second, Web2 game companies can use multiple IPs to pool the value of each type of game onto the platform token. In-game tokens, on the other hand, are exchanged for platform tokens according to a set exchange rate, thus ensuring the stability of the game economy. Wemix’s “Mir 4” is a great example of this type of game. Although the price of the platform token WEMIX fluctuates greatly, the game tokens DRACO and HYDRA are exchanged for WEMIX at a fixed exchange rate to minimize the impact of WEMIX price fluctuations on the game economy. As a result, “Mir 4” has maintained a stable game economy with 240,000 concurrent users in the nearly one year since its launch.

Finally, the model can create an ecosystem of creators, which is the core of Web3 games. Web3 games pursue community-driven projects from the bottom up rather than top-down development by centralized developers. This model is conducive to establishing ecological funds through platform tokens to achieve bottom-up development of game projects. Web3 native projects such as IMX and GALA are putting this into practice, launching $250 million and $1 billion ecological funds, respectively, to train game developers and attract game projects.

Of course, the model also has limitations. The first limitation is that running multiple games on one platform causes transaction delays. As a result, Web2 gaming companies chose to run each game on their own private chain. This approach is known as Web2.5 and is likely to destroy the fundamentals of user ownership Web3 has been criticized for its value.

Another limitation is that the value of the platform’s tokens is closely tied to the game’s popularity. If the value of platform tokens is mainly determined by popular games, then compared to the number of users, the value of game tokens for less popular games may be overvalued, or they may also be exchanged at an excessively high exchange rate, thereby harming the game economy. Essentially, the reliance of popular games on the value of the platform’s tokens may shrink the economy of less popular games.

Currently, this model is used as a standard in Web2 games, particularly by Korean game companies. Given that mature gaming companies have a broad IP portfolio, newcomers will also find themselves leaning towards the platform-gaming token economy model, which allows them to take advantage of all IPs.

Wemix Case Study: Leading Web2 Gaming Company to Platform Transition

Source: Xangle

Wemix is a gaming platform developed by Wemade, a major Korean game company. It initially ran on the Klaytn sidechain, but later upgraded to Wemix 3.0 and launched its own main network.

The structure of Wemix is described below. First, Wemix operates its own mainnet, and its base currency, $WEMIX, exists in this mainnet. Within the main network, platforms such as WEMIX.FI (DeFi) and NILE (DAO•Guild) have created demand for $WEMIX. On top of that is a sidechain called Play Chain, where each game is connected in the form of a private chain.

Players earn off-chain assets by playing Wemade’s various IP games such as “Mir4” and “Mir M”. Off-chain assets are used to exchange game tokens, which are then used to exchange pTokens on Play Chain. These pTokens ($PWEMix, $PWEMiX$) can be pooled, exchanged, and then transferred to the WeMix mainnet in exchange for cash.

Source: Xangle

Judging from the game tokenomics of Wemix’s two most popular games, “Mir 4” and “Mir M,” “Mir 4” issued a daily DRACO cap of $1 million to prevent excessive outflow of its off-chain core asset, darksteel. This measure helps prevent a rampant exodus of gaming products. DRACO is exchanged for $PwEMix according to a unique exchange formula called DERBY, while $DRACO’s investment token $HYDRA is exchanged for 20+ $DRACO and the off-chain asset Septaria. 𝛼 $HYDRA is used to implement governance and DeFi on “Mir4.”

The game “Mir M” shows more advanced tokenomics than “Mir 4.” In “Mir M,” there is a game token called $DRONE, similar to $DRACO. Players can redeem 1 million dollars of Darksteel Chest (Darksteel Chest) every day. They can also stake $DRONE and $HYDRA to participate in DIVINE staking and thus earn $DOGMA tokens. $DOGMA is the governance token for the “Mir M” game, giving players the right to vote. With voting rights, players can spawn boss monsters on their own servers, organize battles to occupy the valley, and participate in the Sabuk Castle Siege (Sabuk Castle Siege).

Source: Xangle

Although the token economy of “Mir M” is more complex than “Mir 4,” the number of concurrent users of “Mir 4” is about five times that of “Mir M.” What makes them different is the quality and level of refinement of their games. After the huge success of “Mir 4,” it was believed that the hasty release of “Mir M” caused its fun and overall quality to be lower than “Mir 4.”

MarbleX Case Study: From Platform-Game Token Economics to Platform-Platform-Game Token Economics

Source: Xangle

Another major Korean game company, Netmarble’s MBX, is a platform token issued on Klaytn’s main website. The upper level token $MBX can be exchanged for a bridge token called $MBXL, which can then be exchanged for game tokens (MBX MBXL MBXL < > <>game tokens). To some extent, the structure seems similar to Wemix, except that MarbleX doesn’t use MBX as the mainnet token.

Netmarble’s games are developed by various Netmarble development units. For example, Netmarble Neo and Netmarble N2 developed “Second Country,” “A3: Still Alive,” and “Meta World” games. Each of their games has its own gaming token economy, and MBX is the higher-level token in all of these games.

Recently, MarbleX announced the ITU Union Tokenomics (ITU Union Tokenomics), which marks a major token economy reform in July. The ITU Alliance token economy is a design that links each off-chain currency within the game to the value of $ITU. There is a subsidiary platform with $ITU as the base currency under the MarbleX platform, and there are also sub-units such as “A3: Steel Alive” and “Meta World” under the ITU platform. Specific details of MarbleX’s platform-platform-gaming token economy will be announced at the upcoming “Xangle Blockchain Conference: 2023 Adoption” in July.

The future of Web3 game tokenomics

Source: Xangle

Above we have discussed the challenges of building a Web3 gaming economy and the evolution of the Web3 gaming token economy to address these issues. In this final section, we’ll explore the potential applications of the token economy model and the obstacles and solutions to building a token economy.

Different types, different tokenomics

Seems like the superiority of the token economy model isn’t worth discussing. All of these are viable options for gaming companies. Over time, the choice will increasingly depend on the type and nature of the game, as well as the number of IPs. For Web2 gaming companies and game projects that don’t like the idea of issuing FTs but are open to issuing NFTs, the NFT-based model is an effective option. Npixel’s Web3 gaming ecosystem project, METAPIXEL, is a recent case of this type, with plans for which there are no tokens. Centralized exchange card games (CCGs) that do not consider issuing tokens may also adopt this model.

The single-token economy also appears to be a valid model for casual games with relatively short lifecycles. While external factors may interfere with the gaming economy, simplifying the token economy (as evidenced by various casual games in the Polygon gaming ecosystem) may be more effective in lowering the entry barrier for users.

However, over the next year, we expect that most 3A games using flagship IPs will prefer a dual-token economy model, while most game companies with a broad IP lineup will favor the in-platform token economy model. Specifically, games that require complex game economy designs (such as MMORPGs) are most likely to benefit from a clear separation between game tokens and governance tokens.

Addressing Persistent Challenges: Gradual Transition to an Open Economy and Empowered Governance

While the gaming token economy continues to evolve, some challenges persist. One of the challenges is how to handle the outflow of assets. In the Web3 native case, games such as “Axie Infinity” and “STEPN” tried to manage the outflow of in-game tokens through a dual-token economic model, but when game growth stagnated, the game economy collapsed. Web2 gaming companies are now adopting the Web2.5 model to control the listing of game tokens, but one limitation is that it cannot fully guarantee users’ ownership of assets.

Furthermore, the role of governance tokens needs to be further clarified. Governance tokens are mainly used for investments or utilities, such as NFT raffles or nurturing, and only a few are used for the inherent purpose of governing and controlling the gaming economy. Notably, the platform tokens of Web2 game companies such as Wemix and Netmarble are mainly used to exchange in-game tokens.

So, what can solve these problems? Two viable options are presented below.

Gradual shift to an open economy

First, it is best for the gaming economy to start with a closed economy and gradually transition to an open economy. Similar to what Disciplinary’s Do Dive suggests in its recent article, it’s better to start with the gaming economy as a Web2 closed economy rather than as an open economy from the beginning. When the economy reaches a larger scale, it will be the best time to introduce gaming tokens, governance tokens, and NFTs. Once tokens are integrated into the economy, currency alienation can be used to minimize the outflow of gaming tokens.

In this way, the game can ensure that the initial allocation of tokens is transmitted to real game users and is not affected by early speculative demand. This will minimize the possibility that speculative demand will damage the gaming economy, even if the game later shifts to an open economy.

Enhancing the role of governance tokens and platform tokens in transforming the gaming economy

We also discovered that League of Kingdoms’s $LOKA staking feature may suggest a solution to governing the utility of tokens. As mentioned, $LOKA is a governance token, but through staking, it allows users to participate directly in the gaming economy, particularly resources like renewable resources, which are at the core of the gaming economy.

This approach may come with issues associated with increased investor influence. However, a receiver mechanism approach that incorporates governance/platform tokens into the design is expected to provide a clearer guide to the utility of governance/platform tokens. Furthermore, it is likely to weaken the impact of investors as it gradually transitions to an open economy.

Xangle

Xangle is a cryptographic data research platform and on-chain/off-chain data provider.

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