The Relationship Between Blockchain Games and the Tokenomic (Token Economic) Model

One of the main differences between current blockchain games and traditional games lies in the incorporation of a profit-oriented tokenomic model in blockchain games, turning playing into a potentially profitable activity. This tokenomic model can be seen as the core of blockchain games, governing the in-game currency system, including the generation, distribution, utilization, and value of tokens. The design of the tokenomic model significantly influences the success of the game, and player engagement, and serves as a cornerstone for transactions and interactions within the game.

The introduction of the tokenomic model aims not only to enable players to profit from playing games but also serves as a funding channel distinct from traditional games. Development teams first acquire funds from the market by selling project tokens or NFTs before initiating project development. This approach, compared to the traditional game industry, is a lower-cost and faster way to obtain funds, attracting many independent game studios. Holding tokens also represents a form of governance and expression of power, aligning with the key principles of decentralization and community sharing in the blockchain space.

Therefore, carefully evaluating whether a blockchain game has a well-designed tokenomic model that aligns with the project mechanism is crucial. A flawed tokenomic model design may lead the project into a situation resembling a Ponzi scheme, entering a death spiral, or causing players to be unwilling to participate in the long term. In such cases, new players may also be reluctant to join the project, leading to liquidity problems. To assess a tokenomic model, it is necessary to have a deep understanding of its basic elements and key influencing scenarios. In the following sections, this article will provide a more detailed introduction, including token distribution, inflation mechanisms, and more.

Basic Elements of a Blockchain Game’s Tokenomic Model

Token Distribution

Token distribution in blockchain games is a crucial reference indicator that determines the ownership structure and distribution method of tokens within the game. A common tokenomic model allocates tokens to various entities, including the development team, investors, ecosystem funds, game rewards, treasury, and public sales. Different distribution ratios and game mechanisms can lead to various outcomes. Proper token distribution can help drive the development and maintenance of the game by allocating a portion of the tokens to the development team and investors, providing financial support for project development, operation, and promotion.

Token distribution also serves to foster community participation and building. Allocating a portion of tokens to players and community members as an ecosystem fund allows project teams to use the fund to encourage user participation in game development and promotion. Activities such as participating in game testing, providing feedback, creating relevant discussions and content, or engaging in community promotion can be incentivized through the ecosystem fund. This helps establish a highly active and engaged community, increasing the attractiveness, influence, and cohesion of the game project.

Token distribution also aims to achieve fair and decentralized resource allocation. By conducting a public sale of tokens, funds are raised, and tokens are dispersed to various holders, preventing concentration in the hands of a few individuals. This enhances the decentralization of the game and reduces the impact of a single entity on the game. An effective and reasonable token distribution ensures that the project team receives financial support, stimulates community participation, and achieves fair and decentralized resource allocation, thereby creating a sustainable, fair, and successful project.

Supply, Utility and Inflation Mechanism

After the token sale, the tokenomic model involves two crucial aspects: token supply and utility, giving rise to the roles of suppliers and demanders. Token supply refers to the total quantity of in-game tokens, encompassing their allocation, distribution, linear adjustments, burning mechanisms, and more. Token utility encompasses the functions and application forms of tokens within the game. Different game mechanisms may result in various token utilities. Additionally, as projects evolve, various tokenomic model designs emerge in the market, including single-token models, dual-token models, and multi-token models. These designs dictate how tokens are used and their role in the ecosystem.

The design of token utility typically revolves around fulfilling specific needs and functions within the game. This includes purchasing in-game items, upgrading characters or equipment, paying transaction fees, participating in game governance voting, and obtaining community rewards. Therefore, project teams need to have the ability to appropriately control the token supply. The fluctuations in token supply and speed can significantly impact the stability and long-term development of the game.

The inflation mechanism is designed to control the token supply and is derived with the purpose of encouraging player participation in the game, thereby driving the development and prosperity of the game through effective reward systems. However, the design of the inflation mechanism needs to carefully consider potential risks and issues. For example, limiting the total supply of tokens in conjunction with a token-burning mechanism aims to achieve token inflation or contraction, maintaining the stability of the token’s value. If the token supply contracts too rapidly, the cost for new players may significantly increase, indirectly leading to a decrease in market liquidity. On the contrary, if inflation occurs too rapidly, the token’s value will rapidly decline, weakening player purchasing power and incentive to profit. The items and possessions owned by players may lose value, potentially leading to player attrition.

Improper design of the inflation mechanism, aside from causing inflation or contraction issues, may lead to uneven token distribution, where a minority of players holding a significant amount of tokens could tilt the game’s risk too heavily in one direction. Therefore, the design of the inflation mechanism needs to thoroughly consider the characteristics of the game and the needs of players to ensure the stability of the token’s value and promote the long-term development of the game. This might involve adjusting the quantity and frequency of rewards and introducing mechanisms to consume tokens, aiming to achieve a balance between supply and demand.

The inflation design process also needs to consider the impact on the demand side. If the inflation is too high, it may provide better incentives for network nodes, stakers, and other relevant stakeholders, but it can lead to a continuous reduction in value for holders. Moreover, it’s essential to design the lock-up periods before implementing the inflation mechanism. A well-planned lock-up period for stakeholders is beneficial in incentivizing all parties. For example, some projects, during airdrop distribution, might release only 50% or less of the total tokens initially, encouraging participants to continue engaging in the game to receive further airdrops. For crucial token allocation parties like investors and the development team, adopting a long-term token unlocking solution can reduce the initial circulating supply. This promotes token circulation and value acquisition when the initial demand for tokens is lower.

Introduction to Common Tokenomic Models

Single-Token Model

The application of a single-token model in blockchain games is relatively simple and intuitive, allowing many early-stage games to launch quickly. However, for a game to achieve long-term sustainable development, the limitations of a single-token circulation mechanism gradually become apparent. Firstly, the definition of a single-token model is that all in-game activities and transactions primarily use a single type of token as the transaction medium and value calculation unit within the ecosystem. For example, in the early days of the Axie Infinity game, there was only one $AXS token used for various activities such as battling other players, breeding new Axies, staking, governance voting, and more. The single-token model leans towards uniformity and simplicity.

The single-token model also has some drawbacks. When the same token needs to extend to many use cases, the price of the token becomes relatively unstable due to too many fluctuating factors. A single token has to endure market selling pressure and buying pressure on its own. Additionally, when governance voting conflicts with the game token economy, it is challenging to optimize the design and adjustments for specific game mechanisms with a single token, leading to potential conflicts of interest. For example, currency inflation may benefit voters’ interests but harm players’ gaming experiences.

One significant dilemma is that the single-token model relies on new players joining in a cycle of attracting new players with the promise of gains, which may lead to a death spiral. This is because the single-token mechanism tends to simplify the gameplay, reducing the attractiveness of the core game. Players primarily earn tokens through repetitive operations, lacking complex strategies or rich gaming experiences like role-playing. This is detrimental to fostering long-term user engagement. As the game develops, attracting new users becomes increasingly challenging.

Many games experience rapid growth in the early stages, but the growth rate quickly slows down. Retaining existing players and continuously attracting new players becomes a critical challenge for projects. Many projects face rapid decline at this point, causing the last wave of players to bear substantial losses in benefits.

Regardless of how well the issuance speed is controlled, the single-token supply is challenging to sustain. Over time, the token economy needs new incentives to undergo a reset; otherwise, it faces the dilemma of inflation caused by continuous issuance. Therefore, while the single-token model facilitates a quick start for blockchain games, achieving long-term operation poses higher difficulties. As a result, the dual-token model emerges under the project’s iteration.

Dual-Token Model

The dual-token model in blockchain games is more complex than the single-token model and typically involves two types of tokens: governance tokens (parent token) and in-game transaction tokens (child token). For example, in the Move to Earn blockchain game STEPN, there is $GMT used for governance decision voting and $GST used for in-game transactions. Through the dual-token model, the mechanisms and demands within the game are separated from ownership and voting power. The two tokens allow for planning and balancing based on the design goals of the game. Using different tokens for different purposes can alleviate the pressure on a single token, making the distribution of income and governance power in the game more clearly defined. The parent token serves as the governance token, with a relatively stable price, while the child token acts as the medium for in-game transactions and earnings, bearing the brunt of market fluctuations.

However, inconsistent design in dual-token games can lead to struggles in token economic imbalance. Managing two types of tokens also increases the complexity for players. Improvement methods include algorithms that hook onto well-designed game mechanisms to stabilize the exchange rate between parent and child tokens. Besides, the dual-token model still carries some risks that need attention, such as the alignment of parent and child token values, support for the value of child tokens, player participation, currency inflation, and coordination between governance and game earnings.

Challenges in Tokenomic Models

After several years of development in blockchain games and iterations of token economic models, some challenges and risks have become apparent. Among them, the most fundamental issues include the difficulty in maintaining value stability, low long-term sustainability, and problems related to cheating and security. These challenges arise primarily from the high intensity of the connection between blockchain games and profitability, leading to the emergence of a series of new challenges that were less prevalent in traditional games that emphasized gaming experience over profit.

Value Stability

Maintaining a steady token value is a big challenge for GameFi projects. The value’s stability is like a health check for the whole project. Because tokens usually get traded on exchanges, their prices are at the mercy of market changes, speculation, and even manipulation. These price ups and downs can seriously impact people’s trust in the game, making it necessary for project teams to act like a central bank to keep token prices stable.

But there’s a catch. Many teams don’t have enough experience to effectively control token prices. They struggle to make smart decisions about supporting liquidity to calm down the market ups and downs. As a result, tokens often swing wildly in price, leading to a trend of quick, speculative trades in the market. People tend to wait for the right moment to jump into and out of the market instead of committing for the long term. This waiting game speeds up the downfall of the game project. \

Low Long-Term Sustainability

Another common challenge is the issue of low long-term sustainability. Due to the profit-driven nature of blockchain games, they often feature a substantial amount of token rewards and profit opportunities. The model’s design needs to continually adapt to the demands of new users. While these rewards and opportunities can attract a large player base in the initial stages of the game, as the rewards diminish and speculative profit opportunities disappear, players tend to gradually leave. If the game content lacks sufficient appeal, player activity and engagement decrease, leading to a reduction in token demand. This, in turn, causes a decline in token prices, pushing the project into a downward spiral. To ensure the long-term sustainability of the game, project teams need to design reasonable reward mechanisms and game content, along with effective retention mechanisms. These measures are crucial to maintaining continuous player interest and encouraging the ongoing participation of both new and existing players.

Cheating and Security

Many projects have faced their demise due to poor security controls in token contracts. Since blockchain games often involve token transactions with real value, attacks on contracts, wallets, and various fraudulent activities are inevitable. Both project teams and players are exposed to similar risks. The nature of blockchain itself, with its high technical barrier, and the logic of trading behaviors being different from traditional industries, contribute to the challenges. Additionally, within the context of high anonymity and decentralization, once an attack occurs, the loss of property and valuable items becomes challenging to trace. This poses nearly irreversible damage to the project, significantly impacting players’ confidence in the game. On one hand, projects attempt to educate players on the concept of asset protection, but most do not offer comprehensive compensation measures after players fall victim to attacks.

Does a Perfect Tokenomic Model Exist?

Goals of a Perfect Tokenomic Model

Before delving into the discussion, it’s essential to define what constitutes a perfect tokenomic model. A perfect tokenomic model should be able to achieve the following goals:

Firstly, it should ensure the stability of the token’s value, preventing drastic fluctuations in token prices. The token issuance rate should not be too rapid to avoid inflation. Simultaneously, the token needs clear in-game applications to drive its demand, such as purchasing in-game items. The setting of mining mechanisms is crucial, providing incentives for players to earn tokens while maintaining control over the concentration of computing power. Additionally, careful consideration of the total token supply, circulation, and the rational configuration of various parameters in the economic model is necessary to maintain stable token value.

Secondly, it should stimulate player participation by employing reasonable token distribution and reward mechanisms, continuously attracting and motivating both new and existing players, ensuring the potential for long-term development. Finally, it should possess sufficient security measures to ensure the token’s contract undergoes third-party audits and address any vulnerabilities that could be exploited in the contract.

Dilemmas

Relying solely on the design of the tokenomic model is not sufficient; the quality and enjoyability of the game itself are crucial. If the game lacks appeal, quality, and long-term playability, it becomes challenging to sustain player engagement, even with a perfectly designed tokenomic model. Therefore, game development teams must invest effort in designing compelling game mechanics, ensuring the game is enjoyable and has long-term playability. This can be achieved through continuous content updates, community building, and organizing events to attract players. Only when both the game itself and the tokenomic model are exceptionally well-designed can a perfect tokenomic system be established, allowing for long-term sustainable operation.

Achieving these goals in real-world scenarios is not easy. Each game has unique characteristics and player communities, requiring the tailored design of the tokenomic model based on the specific situation of the game. Market conditions and technological developments also impact the effectiveness of the tokenomic model. Therefore, a robust tokenomic model should strive to approach the ideal while possessing the ability for dynamic adjustments, complemented by various token management strategies, such as employing different liquidity providers, token subsidies, and marketing activities.

Play-to-Earn (P2E) Token Distribution

In today’s Play-to-Earn (P2E) games, tokens are typically rewards obtained by players through in-game activities. These rewards include both the game’s native tokens and NFTs (Non-Fungible Tokens), such as characters, equipment, weapons, land, and more. In this model, token liquidity is crucial, as players primarily earn profits by acquiring tokens and converting them into fiat or other cryptocurrencies. If the token supply is too high, there must be a corresponding demand to absorb these tokens. Therefore, the tokenomic model should stimulate buyers to purchase and hold tokens. This can be achieved by implementing mandatory consumption mechanisms within the game, requiring players to spend tokens or NFTs to continue playing.

Additionally, project teams need the ability to balance the native token’s exchange rate with other cryptocurrencies. If players continuously sell native tokens to acquire other assets, the token’s value will decline in the long term. The project’s strategy should focus on attracting new rounds of funding in alternative ways or creating appealing in-game content to encourage continuous token purchases. Creating practical demand for the token is crucial to maintaining high trading volumes and liquidity while attracting more players. If the focus is solely on price volatility, players may be discouraged by the fluctuation of in-game assets, hindering new player entry.

Token distribution should consider the needs of all stakeholders, including the development team, investors, players, and the ecosystem. Typically, a portion of the tokens is allocated to the team to reward their ongoing game development. Allocating too much or too little to the team is not ideal, as the token’s use within the game is closely related to the distribution ratio mentioned earlier. If the project allocates too few tokens to itself, it may face a lack of operational funds. However, allocating too many tokens to the project may compress the proportion given to the game ecosystem, making it difficult for users to gain sufficient returns through the game when the player base expands.

It’s essential to note that players can usually earn token rewards by participating in game activities, while developers can obtain tokens through game development and maintenance. Based on the average calculation over the past two years, a team holding around 10% of the tokens is a relatively reasonable range. Allocating at least 40% to the reward and ecosystem stimulation fund is needed to provide sufficient incentive shares. Ideal token distribution should strive for fairness and reasonability to ensure that all stakeholders receive appropriate rewards for their participation and contributions.

Security

Security is also a crucial aspect to consider. The well-known blockchain game Illuvium, in the past, suffered an attack due to vulnerabilities in its staking contract. Hackers gained a substantial amount of SILV tokens and continuously dumped them on the market. After the incident, the value of SILV plummeted by 99.5%, leading to an instant loss of confidence in the Illuvium project within the market. Although the project’s team later upgraded the contract, patched the vulnerabilities, and offered compensation plans for SILV victims, many users still harbor concerns about Illuvium. This incident highlights the paramount importance of the security of a project’s token contract. Through reports from third-party auditing platforms, users can assess the technical security of the tokenomic model, prevent potential security vulnerabilities, and increase market trust in the project. Project teams should continuously monitor and update their contracts to guard against potential threats. Encouraging users to report errors in the contract by providing rewards from an ecosystem fund is a practice to consider. This fosters active community participation and helps discover potential vulnerabilities that the team might not see. Additionally, planning an emergency response fund is crucial to promptly compensate victims and restore market confidence in the event of an attack.

Looking at the history of blockchain game development, the stability of token value, participation, and long-term sustainability are the three most critical goals in the token economic model. However, there may be technical trade-offs and contradictions among these goals. Responding to Vitalik Buterin’s proposed blockchain trilemma, aiming for extremely high value stability and security might sacrifice player participation and long-term sustainability. On the other hand, prioritizing high player freedom and participation may impact the difficulty of stabilizing the token. Therefore, it can be said that there is currently no perfect solution to design an ideal token economic model. Project teams can only improve and compensate through later strategies and operations after making necessary trade-offs.

Conclusion

In the end, one tokenomic model is not set in stone, and the ideal model should be able to adjust and optimize based on the needs of different games, market conditions, and technological developments. This implies that project teams need to maintain a high level of flexibility and be prepared with multiple risk mitigation measures. The success of a tokenomic model depends on its ability to adapt to changes, meet diverse demands, and ensure the value and security of the token. This evolving approach will contribute to achieving long-term success in the current “Play-to-Earn” game concept. Players themselves should conduct thorough assessments and research before investing, continuously monitor the development and changes of projects, and flexibly adjust their strategies to minimize risks.