By Bittracy@gaoy98093289 ,Investment Manager of AC Capital
In Q2 2021, GameFi's takeover of DeFi has become a target for investors to chase. "Play to Earn" economic model designed by Axie Infinity has explored a feasible solution for chain games. Developers began to imitate the dual currency mechanism to encourage players to participate in gold activities. Until now, Play to Earn is still the most effective token mechanism for chain games. The article aims to conduct research on the current GameFi and provide insights into the current ecological development of chain games so as to answer questions as follow:
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The ecological location of the game
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The best way to guild token flow
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How GameFi should be optimized
Misunderstandings in 2020
As early as the beginning of 2020, many analysts and investment managers probe into the feasibility of GameFi. At that time, Tracy was still a junoir analyst, remaining steadfast in the belief that the running speed of the decentralized network could never support a complete game experience even if there was a "Play to Earn" reward mechanism. Accompanied by the dilution of reward tokens, game participation is bound to drop rapidly. From now on, views at that time are biased. First of all, I didn't expect that the combination of NFT and Game could deduce completely different logic. Moreover, in the dual-token mode, developers can grasp the cycle of cash back. In addition, game asset confirmation and transaction leasing can be realized in the public chain, and the game experience can be completely solved by the centralized network. Linear extrapolation, lack of open-mindedness will make us miss opportunities, which are not desirable in the decentralized industry.
2021 GameFi Breakout
After the new crown epidemic in 2020, the cryptocurrency market has ushered in an outbreak, and the Q2 "DeFi Summer" in 2020 has come as promised. The token-to-pool transaction method meets transaction needs of users in the decentralized world, and the AMA transaction curve offers the possibility to price long-tail assets. This has brought about the maturity of the on-chain financial system, and participants' needs for liquidity are constantly being met at this stage. Then lending, aggregators, oracles, derivatives came. After DeFi and Bitcoin are fully priced by the market, GameFi and NFT became the focus of the market in 2021. Industry innovators have set their sights on the NFT and Game sectors. Axie Infinity, a chain game that started in Southeast Asia, adopts the "Play to Earn" game mechanism which combines game characters with non-homogeneity. The combination of tokens and certificates gives game players considerable earning power and change the valuation logic of NFTs. More importantly, GameFi provides participants with the opportunity to "make money" within a short payback period, attracting a large number of users. According to datas displayed by Token Terminal, Axie Inifinity's daily revenue rose from $400K/Day in Q2 to $800W/Day in Q4, which is an increase of 20 times. Axie Infintiy's game character became the most-traded NFT on Opensea.
The biggest difference between decentralized games and traditional games is that game assets belong to users, governance rights belong to DAO, and revenue is shared with users. The new model means that users' rights are highly tied to the game. When a large number of users gather together, Guilds arise. In the Play to Earn game ecosystem, Guilds act as game market makers. Frankly speaking, guild is the source of liquidity for chain games. Thanks to Guilds, the game has stable users, active NFT transactions, and initial demand for token transactions. What's more, guilds as a significance role in GameFi's industry ecology help promote marketing, recruit players, train users, and provide rental services for players who do not have sufficient fund to buy game characters. At present, most of the chain game associations are concentrated in Southeast Asia. People who lost their jobs due to the pandemic showed strong appeal for "Play to Earn" so that they turned into the main force of cheap labor. YGG, Merit Circle, and GuildFi hold a huge number of NFT assets and reward tokens. They are the most representative betas in the chain game sector.
Summary: In my opinion, GameFi’s position in the decentralized world is different from DeFi. DeFi protocols based on transactions and lending satisfy the liquidity demands of users in the blockchain world. It is precisely because of protocols such as Uniswap and Compound that the circulation of tokens becomes faster, which is a prerequisite for industry innovation. GameFi and NFT meet the more complex spiritual needs of users. Whether it is Axie with gold income or Punks, the encrypted world has begun to enter the next stage.
Problems of GameFi in 2022
At the end of 2021, problems of the GameFi ecosystem are constantly exposed. Problems of excessive game valuation, excessive Reward Token Price fluctuations, and poor game experience are gradually exposed. When it comes to 2022, the GameFi sector starts to look a bit crowded. Defects of the gold-making mechanism are gradually revealed.
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Excessive financialization and insufficient game value: The game is an economic world, behind which is the balance achieved by countless players in value and experience. In GameFi, players buy NFTs (game characters) in the hope of earning money; the project party hopes to obtain a source of funds by issuing tokens. If all participants want to get a "gold standard" return through "Play to Earn", someone has to do the "gold standard" investment. Majority of the chain games in the market attract players through a short payback period. Users participate in the game in order to obtain income. If no one is willing to pay for the real game experience, it will be difficult for the economic world behind it to achieve sustainable prosperity.
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Excessive NFT issuance and devaluation of revenue tokens: Decentralized games are different from traditional online games. The ownership of game characters belong to users. Game development is highly bound to users' rights and interests. In fact, players spend ETH to buy game characters, bearing the risk in the game (the exposure to NFT assets). Without the inflow of external funds, the return period and the preservation of NFT / Reward Token cannot be realized at the same time. When the game character (NFT) is first released, the extremely short payback period entices participants to frantically snap up, which leads to the price pump. Seriously hinder user growth. The project party will reduce the price of NFT by increasing or promoting the reproduction of NFT. If the developer tends to guarantee the return period of the game, the increase in NFT price will cause the increase in the supply of breeding tokens and NFTs, resulting in excessive issuance of NFTs and Reward Tokens. Taking Axie Infinity as an example, the price performance of Reward Token (SLP) is weak, compared to Governance Token (AXS).
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The lack of interoperability between games makes it impossible to explore Metaverse: At the beginning of 2022, Metaverse has become the hottest topic in the crypto world. GameFi are expressing their own Metaverse features in their announcements. While Metaverse emphasizes the borderless virtual in the current chain game ecosystem, user interaction can hardly be observed between games since both NFT assets and game tokens are applied in single games. In addition, modular, instrumented NFTs or tokens did not appear. The reason behind this is that, under the economic model centered on "Play to Earn", developers need to constantly balance the price correlation between NFT and reward tokens by modifying game settings to attract users, which is equivalent to closing the game between games. possibility of interaction. Controlling the inflow and outflow of funds needs to be feasible in a closed economic environment. As mentioned above, "Play to Earn" is a great way to attract users, but it is not the cornerstone of the game's long-term development. It is reasonable to assume that the form of Metaverse chain games will come out when GameFi has its real game value.
GameFi Economic Model Analysis
In the setting of the chain game, the ownership of characters belongs to the user, and the developer needs to set up a token model that matches the game mechanism in order to achieve a benign game. We select three popular games on the market to analyze their economic models in regard of the advantages and disadvantages of their design:
DefiKingdoms: Death Mechanism Avoids NFT Overshoot
It is a single-currency MMORPG game launched by DefiKingdoms on Harmnoy. NFT heroes have four attributes, each of which corresponds to different occupations and gameplays: minging, gardening, foraging, and fishing. The risk-reward ratios corresponding to the four gameplays are quite different. Multiple needs for returns. Compared with the single Play to Earn mode, DefiKingdoms provides players with different modes. The user's revenue curve is more flexible.
Token: $JEWEL
- $JEWEL: Fixed Supply Token: Players purchase useful items and NFTs in the game through JEWEL. Heroes' participation in gold is rewarded by JEWEL. Maintaining stamina and multiplying heroes require spending JEWEL to obtain stamina potions. Users can also get dividends from the game revenue by staking JEWEL.
Conclusion: In the game settings, users need to spend JEWEL to buy heroes to participate in the game. They also need to pay a certain amount of JEWEL to supplement their physical strength during the gold-making cycle. In the specific setting, the amount of JEWEL consumed by NFT battles will increase linearly; each hero is set with an upper limit on the number of times they can participate in the game. The setting allows NFTs in the game to have a decay cycle and death mechanism, which can avoid NFT hyperinflation caused by over-issue. However, the non-gold standard entry method increases the difficulty of game control because players buy heroes by paying JEWEL. When users flood in on a large scale, the price of NFT will be raised, and the pressure on players to benefit from the withdrawal of gold will nagatively affect the platform token. Bear, such a situation will increase the selling pressure of JEWEL and further deteriorate the NFT price. Although DefiKingdoms has designed many functions to enforce the soft lock of JEWEL, it cannot make up for the shortcomings of the single-coin mechanism: return cycle and reproduction cost cannot be controlled at the same time, that is, the price ratio between NFT and Reward Token cannot be adjusted at the same time.
DeFi Land: "DeFi + GameFi" to meet diverse needs of users
DeFi Land is a manor farming game launched on Solana. Unlike Farmer World, Defi Land opted to integrate Dapps from the Solana ecosystem into the game instead of building a game world from scratch. Developers hope to introduce users to the Defi world through games. In the game, users can borrow from the bank and trade on the market. Besides, DeFi Land has made some tricky designs to provide functions, including gambling, farming, governance, and NFT transactions.
Tokens: $DFT, $GOLD
- $DFT: Fixed Supply Token: Players need DFL for crafting, trading NFTs and building upgrades. Participating in the game and winning can also be a part of DFT. Moreover, staking DFT can share parts of the proceeds from the sale of NFTs by DeFi Land.
- $GOLD: Variable Supply Tokens: Players can earn gold by participating in the game.
Game Mechanism: Buy NFT through DFT, upgrade, and earn GOLD rewards. From an operational point of view, the project party can control the return cycle of the game by controlling the price comparison of DFT/GOLD. There are four types of NFTs in DeFi Land: heroes, pets, fishing rods, cows. All types of NFTs require DFT as an invoicing currency. Foods and potions they produce can be used as "stamina potions" for hero battles.
Conclusion: On the basis of Play to Earn, Defi Land adds the DeFi mechanism to satisfy the financial needs of players in the game world, which is conducive to enhance the playability and stickiness of the protocol, as well as the formation of user retention. Furthermore, function settings of the game are not single. Except for Play to Earn, the game has other gameplays: gambling, prediction, farming, etc. The status of dual currency mechanism in the game operation is weakened so that it can be combined with Guilds to provide the game. Liquidity can also take into account the various needs of users, which helps improve the life cycle of the game. In addition, the orderly project has not announced the mechanism for the reproduction of heroes. If the developer does not restrict the reproduction of NFTs, even if the current cycle is controlled, the principal and income will be synchronized in a downward phase. The decline in the absolute price of NFTs will make users and guilds lose interest in the game.
Crypto Raider: Death Mechanism + Dual Currency Model Fully Control the Game Operation
Crypto Raider is an RPG game launched on Poylgon. The game settings are somewhat similar to Axie Infinity. Players buy game character NFTs to participate in the game and earn profits by fighting and completing tasks. It is the most mature game setting mechanism at present. Under the dual currency-driven economic model, the cooperation between the guild and the game party will be more convenient.
Tokens: $AURUM, $RAIDER
- $AURUM: Variable Supply Tokens: Consumption: Game Stamina, Recruiting Characters; Increase: Gold Gain, Pledge Raider;
- $RAIDER: Fixed supply tokens: used for hero breeding; players pledge Raider to get AURUM consumed in the game every day;
Conclusion: Players enter the game through ETH (gold standard), while project parties obtain ETH by selling NFTs. Raider is a necessary condition for Breeding. The system can control both the cost price of future NFTs and the payback period of players. Unlike Axie Infinity, the death rate of heroes is set in different environments in the game. Under the condition that the total number is fixed, the price of NFT can have a stable price center. Meanwhile, the project party has improved pledge rules of RAIDER: the pledge income will increase with the passage of the token lock time, which will help the project party to achieve soft lock-up of the governance token. With respect to the mechanism, Crypto Raider's economic model has a more comprehensive control over the operation of the game.
How can we be better
The game brings multiple experiences and internal value retention: GameFi begins to see some changes. Users who buy game characters to participate in gold mining are different from those who bought the project Token and rushed into the second pool for mining in early 2021. Gamblers are no different, the entertainment value of games is forgotten by users. Developers should provide users with a better participation experience and cash out the entertainment value of the game so that users are willing to pay time and money for the game. In the meantime, in addition to functional gold NFTs, developers can consider adding NFTs with symbolic attributes to retain value for the game ecology, which can reduce the speed of currency flow to conduce to the continued growth of the game.
Optimize the economic model and control the supply of NFT / Reward Token: We acknowledge that "Play to Earn" has brought a large number of initial users into GameFi. However, developers may be able to gradually optimize the model to suit the development stage of the game. In the early stage of game development, strong APY is naturally a necessary condition for "go to market". As games step forward, "Play to Burn" can be promoted in the form of round-robin competitions and reward competitions so as to maintain the relationship between Reward Token and NFT. value center. For example, RPG games can set up prize pools for tournaments, and players need to burn tokens or NFTs to participate in competitions to win excess rewards, which can not only meet the high-level needs of experienced users, but also control the supply of token burning. Developers can also consider using a differentiated revenue curve to allow different players to enjoy satisfaction brought by the game. If there is no reasonable consumption mechanism, NFTs and variable supply tokens of most projects will be over-issued, and the depreciated value of game characters will have an negative impact on user retention. The industry needs more people who feel satisfied: GameFi instead of FiGame.
Introduce multiple parties to participate in the game and form an open Meta: The biggest advantage of chain games and online games comes from the fact that the decentralized network provides users with a completely open world. Players can move more freely in the virtual world in the game. For the time being, games in the GameFi sector are more closed worlds. In 2021, the "Dao to Dao" collaboration model in the DeFi sector was adopted by a lot of protocols. Curve and Tokmark aggregated liquidity for other protocols and introduced third parties to join the ecological construction to provide on-chain users with better financial services. GameFi can dive into its own path in the metaverse world and catalyze the new demand for governance tokens and reward tokens. The interaction of NFTs in different game worlds is more worthy of imagination.
Conclusion
Every game has its own life cycle, whether it is Fantasy Westward Journey, World of Warcraft or League of Legends. Investors should think over the industry value brought by GameFi from a longer-term perspective. Although the GameFi sector grew rapidly in the second half of 2021, the current market development is far from what people imagined. There are still areas worth researching in the ecology. What we can do is to figure out feasible solutions among these potential possibilities. Potential Alphas are waiting to be mined by practitioners.
Reference documentation
1. https://mp.weixin.qq.com/s/JM6pfvVOlCT58dE2qkIKWA
2. https://blog.cryptoraiders.xyz/crypto-raiders-a-utility-based-nft-rpg-game/
3. https://blog.cryptoraiders.xyz/crypto-raiders-tokenomics-and-economy-launch-plan/
4. https://docs.defiland.app/gameplay/gamified-defi-land-free-to-play/achievements-factions-and-referrals
5. https://docs.defikingdoms.com/how-defi-kingdoms-works/decentralized-exchange
6. https://docs.google.com/spreadsheets/d/1jfG6E6otW1V6ZLQycF5DumoBr_LrpQaz7cTmDPpwV2s/edit#gid=1434917147
