The advent of web3 technology in game development has opened up innovative avenues for gameplay mechanics, primarily centered around enhanced player ownership, utility, and engagement. This evolution is significantly driven by the introduction of tokens within gaming ecosystems. However, the mere distribution of tokens to players isn’t enough to guarantee a game’s success. A crucial aspect lies in the thoughtful and responsible design of the game’s economic system, ensuring a sustainable and thriving in-game economy. 

This brings us to the concept of tokenomics – a fundamental element in the realm of cryptocurrencies and blockchain-based projects. Tokenomics, a fusion of ‘token’ and ‘economics,’ delves into the economics of a cryptocurrency or digital token. It involves a comprehensive analysis of various factors that influence a token’s functionality, value, and long-term viability, making it an essential topic in the discussion of blockchain technology in gaming.

Key elements of tokenomics

• Supply Mechanics: This includes the total supply of tokens (fixed or infinite), the rate at which they are released into the market, and any mechanisms for reducing supply, like burning tokens.

• Distribution: How the tokens are distributed initially (such as through an Initial Coin Offering (ICO), airdrops, or mining) and over time. This also includes how many tokens are allocated to the development team, advisors, and early investors.

• Utility: The practical use of the token within its ecosystem. This could be for transactions, governance (voting rights), staking, or accessing certain features of the game or gaming platform.

• Demand Drivers: What factors will drive demand for the token? This can include the number of users or transactions, partnerships, or real-world applications.

• Incentives and Rewards: How tokenomics incentivizes certain behaviors to ensure the health and growth of the ecosystem, such as rewarding users for participating in the network or holding tokens.

• Governance: If and how token holders have governance rights within the ecosystem, like voting on future developments or changes in the protocol.

• Security: Considerations regarding how the tokenomics structure impacts the security of the network, including potential vulnerabilities to attacks.

• Regulatory Compliance: Ensuring that the token complies with relevant laws and regulations, which can significantly impact its design and distribution.

Coins vs. Tokens: There are no gaming coins yet

Why are we talking about tokens when all talk about coins? The terms “coins” and “tokens” are often used in the context of cryptocurrencies and blockchain technology, and they have distinct meanings despite being often interchangeably misplaced

Coins

Coins are digital currencies that have their own independent blockchain. They serve as a form of money or digital asset.

• Examples: Bitcoin (BTC), Ethereum (ETH), and Litecoin (LTC) are coins. Each of these cryptocurrencies operates on its own blockchain.

• Primary Function: Coins are primarily used as a medium of exchange, a store of value, or a unit of account. They are akin to traditional fiat currencies but in a digital form.

• Blockchain: The key feature of a coin is that it is native to its blockchain. For example, Bitcoin operates on the Bitcoin blockchain, Ethereum on the Ethereum blockchain, etc.

Tokens

Tokens are digital assets that are created on top of an existing blockchain. They do not have their own blockchain. While commonly referred to as “coins,” gaming coins are more accurately described as tokens, given that they are not the native assets of the blockchains on which they are created.

• Examples: ERC-20 tokens like Tether (USDT) and Chainlink (LINK) are built on the Ethereum blockchain.

• Primary Function: Tokens can represent a wide variety of assets and utilities. They can be used as part of decentralized applications (dApps) to create complex smart contracts, represent voting rights, digital items in games, or even real-world assets.

• Blockchain: Tokens leverage the technology of the blockchain they are built upon. For instance, tokens created using the ERC-20 standard utilize the Ethereum blockchain’s technology.

Types of tokens explained

Gaming tokens are the digital ‘coins’ acquired either through direct purchase from the gaming project or by playing and succeeding in the game. These tokens come in two types: fungible and non-fungible. 

Fungible tokens, often rewarded for in-game achievements, are interchangeable and have equivalent value. 

Non-fungible tokens (NFTs), on the other hand, are unique digital assets that enhance the gaming experience. Both types of tokens can be converted into traditional currency via cryptocurrency exchanges. Generally, gaming tokens can be divided into following subcategories:

Governance Tokens 

These tokens function similarly to company shares, providing owners with voting rights on organizational decisions. Governance tokens are key to decentralized and autonomous decision-making processes. Although there’s a concern about major holders influencing decisions, these tokens are valued for promoting collaborative and tight-knit communities. They operate on a one-token-one-vote principle, fostering more equitable decision-making. 

Utility Tokens 

Often the most recognized form of cryptocurrency, utility tokens are designed with specific purposes within their ecosystems. They grant access to certain products or services within a platform. Examples include Axie’s SLP and ThetanArena’s THC, which offer unique benefits or functionalities within their respective games.

Non-Fungible Tokens (NFTs) 

A standout in blockchain gaming, NFTs extend beyond their conventional use in art or music. In gaming, they are interactive assets like digital land, game skins, and character models, allowing players to not only own but also interact with these assets, thus deepening the gaming experience.

Non-Fungible Tokens (NFTs) have become pivotal, offering a diverse range of utilities that go beyond simple in-game asset ownership. NFTs empower players with true ownership, allowing them to monetize, trade, and earn royalties from their assets on secondary marketplaces. They also bring a unique dimension of interoperability and transferability, enabling assets to be used across multiple gaming platforms, thereby enhancing their value and utility. This feature is particularly significant in the context of expanding digital universes and metaverses.

Security Tokens 

These tokens are digital, liquid contracts for fractions of any asset that already has value, like real estate, a car, or corporate stock. Similar to traditional securities, security tokens are subject to federal laws that govern securities, offering promises of profit, voting rights, or dividends. They represent an investment contract into an underlying investment asset, such as stocks, bonds, funds, and real estate investment trusts (REIT).

Token Count Models in Crypto Games

Dual Token Model

The tokenomics of blockchain-based games like Axie Infinity has inspired many others, such as Illuvium or Star Atlas, to adopt a dual-token model. This approach involves a share token (ST) and an in-game currency (IGC), each serving distinct purposes. The IGC aims for price stability by balancing the demand from new players and the supply from existing players selling their in-game earnings. Meanwhile, the ST’s value grows with the game’s user base, boosted by the fees collected within the game.

However, some games like Aurory or Defi Kingdom have chosen a single-token model. In this setup, part of the ST is given as in-game rewards. This amalgamation of assets poses two main risks. First, if the token’s value soars, it could become too costly, potentially locking out players with fewer resources. Secondly, distributing the token as rewards might lead to inflation, hampering its value growth.

This dilemma is exemplified by Ethereum’s native token, $ETH, which serves both as a utility token for transactions and a security token gaining value with increased Ethereum usage. As $ETH’s price rises, it can become prohibitively expensive, excluding users from the network.

On the flip side, the single-token model has its merits. By using the main token for in-game rewards, it avoids dividing players and investors, fostering a unified community. Additionally, the varied applications of the main token enhance its overall utility and market appeal.

Advantages of the dual-token model:

• Stability of IGC: The IGC is designed to be stable in price, making it a more predictable medium of exchange.
• Growth of ST: The ST’s value is tied to the growth of the game, incentivizing players to hold onto their tokens.

Disadvantages of the dual-token model:

• Complexity: The dual-token model can be more complex to understand and manage.
• Potential for market manipulation: The separation of tokens could create opportunities for market manipulation.

Single Token Model

In a single-token economy for blockchain games, there’s only one type of token which serves both as the share token (ST) and the in-game currency (IGC). The price of this token is influenced by how well the game is doing financially. If the game makes more money than expected, the value of the token increases, and if it earns less, the value decreases.

Unlike a dual-token system, where there are separate tokens for shares and in-game transactions, a single-token model relies on just one token for everything. This can lead to two situations: either there’s more demand for the token for in-game uses, but not enough tokens available, or there’s plenty of tokens but not enough demand.

In this system, as the game becomes more popular and the token’s value increases, players might find it too expensive for regular in-game transactions. However, they might still buy the token, not necessarily to use in the game, but as an investment to earn returns over time. The result is that while the number of in-game transactions might decrease, the value of each transaction could be higher.

Overall, in a single-token economy, the game can still be profitable because it makes money from the higher value of fewer transactions. Plus, for players, the game becomes an attractive financial investment since the value of the token they buy tends to increase as the game gets more popular.

Advantages of the single-token model:

• Simplicity: The single-token model is easier to understand and manage.
• Unified community: The use of a single token can foster a more united community of players and investors.

Disadvantages of the single-token model:

• Inflation risk: Distributing the token as rewards can lead to inflation, potentially harming its value.
• Accessibility issues: As the token’s value rises, it could become too expensive for new players.

Ecosystem token models

Ecosystem token economies, exemplified by platforms like Gala Games or QORPO Game Studio, represent a pioneering approach in the realm of gaming tokenomics. These economies span a network of multiple games or platforms, forming a vast ecosystem where a single token serves a multitude of functions. This model excels in its versatility, as tokens adapt in role and value according to their specific application within different segments of the ecosystem.

One of the key innovations of this model is its broad appeal. The diverse utility of the tokens caters to a wide range of users, from gamers to investors, thereby building a larger and more engaged community. This inclusivity is a major stride forward in blockchain gaming, offering varied experiences and investment opportunities within a single ecosystem.

Moreover, this model fosters interconnectivity and synergy between different games and platforms. Tokens gained in one game could potentially have different utilities or values in another, encouraging exploration and interaction across the ecosystem. This interplay not only enhances user engagement but also drives network growth and dynamism.

Monetary policies overview

Projects built with tokenomics in mind operate like miniature autonomous units, each with its own economy and the need to manage its monetary policy, track outcomes, and apply necessary controls. The impact of monetary policy on gaming can be observed through various examples:

• Deflationary Models: Here, the supply of tokens decreases over time. In a thriving game economy, this can lead to higher demand due to the scarcity of tokens. However, it might also slow down in-game activities if it attracts many token holders who are more interested in holding tokens than actively participating in the game.

• Inflationary Models: In this scenario, the supply of tokens increases over time. While this ensures a ready supply of tokens for in-game activities, it might lead to an oversupply that exceeds demand. The advantage is that it usually means there are enough tokens to support game operations.

It’s important to balance the value leaving the game (like players selling items) with the value entering it (such as new players joining or existing players investing money). If more value is extracted than injected, the game’s economy might face sustainability issues.

Wrap up

In conclusion, the world of gaming tokenomics is a dynamic and evolving landscape, offering diverse and innovative models for in-game currencies and assets. From the traditional single and dual-token models to the complex ecosystem token economies, each system presents its unique advantages and challenges.

 Key considerations like supply mechanics, distribution, utility, and demand drivers play crucial roles in shaping these economies. As blockchain technology continues to integrate with gaming, understanding and effectively managing these tokenomic models becomes essential for creating sustainable and engaging gaming experiences. 

Whether through deflationary or inflationary policies, the overarching goal remains to balance the in-game economy, ensuring both the game’s longevity and an enriching experience for players and investors alike.