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Note: This article was originally posted on Game7’s blog here.
Introduction
Building a harmonious game economy right from the outset is an elusive task for any game developer. The intricate interplay of resources, rewards, and player behavior makes achieving a flawless balance from day one virtually impossible. This is especially challenging for Web3 games, where game assets are tokenized as NFTs and player-to-player trading brings its own set of complexities.
However, by skillfully designing economic control levers and gaining insights from player feedback and data analytics, game developers can fine-tune and shape the game economy to meet the evolving needs and desires of the players.
In this article, we will discuss the available economic control levers for managing NFT economies.
Framework
We introduce a framework below for designing economic control levers for NFTs:
In this framework, we categorize control levers into three main groups. Supply and demand are two primary factors that drive all markets and goods. In traditional Web2 games with limited player trading, game developers can better manage these two factors due to each player essentially having their own siloed “market”. In Web3 gaming, transferability is the third key factor that affects the implementation of supply and demand levers by allowing game items to freely switch between players.
Supply — Sources
Supply-side levers influence the circulating supply of NFTs in a game economy. Sources, that control NFT creation, can be broadly categorized into primary market and asset production.
Primary Markets
Primary market sources are NFTs created by and transferred directly from developers to players. They can be in the form of sales if fiat or token payment is involved, or rewards if it is “free” (in exchange for some form of player engagement).
When designing primary market sources, game developers should consider the following levers:
Probabilistic sale mechanisms such as Gacha usually offer a more exciting user experience and generate higher revenue compared to their deterministic counterparts. For further explanation on how to design a successful Gacha system, check out this article by Adam Telfer .
Web3 game developers may reference design principles derived from traditional Web2 games when designing these control levers, but must consider new elements such as transaction costs and transferability. The aim of game developers in Web2 is usually to maximize primary sale profits, but this could be undermined in Web3 if assets are transferred between players, causing an oversupply and lower secondary market prices.
To manage the issue, we can separate assets sold in the primary market from those in the secondary market. For instance, only basic resources can be sold or given out in the primary market, with limited reselling, while higher-level assets must be crafted or leveled up (“asset production”) and then traded in the secondary market.
Asset Production
Asset production is a game loop where players produce new game assets with other game resources or assets. This loop is often paired with an x-to-1 sink mechanism, which requires players to burn duplicated or lower-tier items to craft or upgrade to higher-tier assets.
Some common levers include:
Asset production loops, as defined by Ernest Adams in Fundamentals of Game Design (2004), are converter nodes that serve as both a source for output assets and a sink for input assets. As such, such sources can be controlled explicitly through the quantity of output assets or indirectly through adjusting the requirements of input resources.
A player-crafted economy that focuses on asset production creates a higher affinity attached to the NFTs and fosters a more vibrant GDP-centric economy. To achieve this, primary markets should generally focus on lower-tier assets or crafting resources, while asset production loops should produce hard-to-obtain items.
Moreover, with more steps built into the path of acquisition, game developers will have additional levers to regulate the source flow, such as production recipe and costs, fusion success rate, and output quality.
Supply — Sinks
Sinks are economic levers that control the removal of NFTs from the game economy. Many Web3 games have effective sources to scale up NFT supply as the player base grows, yet often lack sufficient sinks to scale down supply as growth plateaus.
Burn Mechanics
Burn mechanics are the most popular sinks among Web3 games. This includes x-to-1 fusion/upgrade, Gacha redraw, recouping materials, and burning in exchange for rewards or access.
In the short term, x-to-1 fusion can be effective in reducing the supply of the underlying collection of NFTs. In the long term, however, fusion shifts the supply towards the output assets, which are generally higher-level assets. Without other sink mechanics, the economy can face an abundance of scarcity, where an oversupply of high-level assets will lead to low perceived value, with even lower value for low-level/input assets.
One way to extend the effectiveness of x-to-1 fusion is by increasing the burn requirement. For example, if leveling up a Hero NFT requires burning an increasing number of identical Hero NFTs (e.g. burn 1 level 1 Hero to upgrade from level 1 to 2, burn 2 level 2 Heroes to upgrade from level 2 to 3 and so on), the burn quantity (implied amount of level 1 Heroes) required to acquire high level Heroes increases exponentially.
However, this must be balanced by the perceived value of the output asset. In the same example above, if players generally enjoy keeping the input assets more than burning them in exchange for the output assets, then they would simply not engage in the burn / asset production loop.
A burn mechanics sink (of input assets) is the counterpart of an asset production source (of output assets) to form a converter node. Therefore, they share similar levers.
Asset Lifespan
Sinks can be created by giving assets a finite lifespan. Web3 game assets are typically designed to be durable goods, whereas in traditional Web2 games, consumable items are commonplace.
Making game assets perishable creates a permanent sink for such items and their upstream resources. This helps curb resource inflation and increase demand for these game items over the long term.
There are two major determinants for these types of sinks — the lifespan and the degradation curve. Lifespan is usually quantified as a fixed time period or a usage quota, although other measurements like number of defeats also work. Assets can either experience a simple destruction of all utility at the end of their lifespan or show a gradual decline of utility over time.
The degradation curve can be more complex too. Folius Ventures suggests that game developers may introduce variance in the degradation as the items age. Additionally, assets can improve in certain aspects and deteriorate in others, creating an interesting tradeoff for players.
Asset destruction can also be embedded and encouraged in high-stake gameplay, such as high-intensity PvP battles. This kind of destruction, also called the perma-loss mechanism, acts as an organic sink for game assets, scaling dynamically with the game’s traction. Galaxy Interactive’s Richard Kim says PvP destruction is the ultimate sink for sustainable in-game economies.
An additional benefit of perma-loss is that it increases the stakes of a game, adding meaningfulness and enhancing players’ emotional attachment.
Staking
Historically, Web3 games utilize staking and similar lock-up mechanisms as NFT sinks. However, these designs only serve as temporary sinks and have little purpose in growing the game’s GDP, whilst promising additional sources as compensation.
Demand
Demand-side levers influence how players perceive the value of NFTs within a game economy, which can be driven by utility or affinity. Game designers typically focus on supply-side levers, i.e. how to better manage asset sources and sinks. However, it is equally crucial to understand and utilize demand-side levers, albeit sometimes less quantifiable.
Utility
Utility is the value players derive from accessing project features or in-game advantages. For example, in an RPG game, the utility of a character increases when it is used for combat, fishing, or engaging with any additional game loops.
The aggregate utility of NFTs in a game can be expanded via additional game modes and game loops. However, not all game modes/loops are created equal. For example, Diablo IV is designed on essentially one simple yet powerful game loop: kill monsters → get loot → get stronger → repeat.
The utility of different NFTs can be stratified by their access to different features within the game. For instance, players may need different NFTs to unlock PvE or PvP modes. Within the same game loop, game developers can introduce relational advantages to each NFT to give them idiosyncratic utility. For example, in Pokémon, the catching mechanism dictates that players use a wide range of Pokémons with varying attributes and levels for different circumstances.
Affinity
Affinity is the value derived from emotional payoffs to a player. Utility is usually limited by development scope and timeline of a game, but affinity has no upper limit; its impact is determined solely by the collective emotional capacity of the player base. Moreover, utility is valuable only if it is able to activate affinity.
Quantic Foundry provides a framework to breakdown affinity into 12 motivations:
As a prerequisite to generating demand for game assets, game developers need to provide players with fun gaming experiences. Then, they must design game loops and features that create utility to activate affinity.
With that as foundation, game developers can deploy second-degree discrimination strategies (using utility or affinity instead of price) to stratify player demand across different game assets. Furthermore, game developers can leverage the evolving game meta to create mismatched demands across game assets and players to stimulate a healthy trading economy.
Transferability
Transferability is a new dimension of economic control levers, which have not been extensively explored in traditional Web2 gaming.
Previously, each player represented a siloed economy. Game developers were able to design sources and sinks and balance them within a single-person market. The non-portability of game items affords them plenty of margin for error.
Player trading dramatically impacts game economics. Rare loots that used to drive grinding may now be bought, turning the metagame of status pursuit pay-to-win. Churned players’ game items are more likely to be sold to active players, keeping them in circulation.
As such, a whole new set of control levers should be considered.
Open vs. Closed Economy
Game developers may choose to either open or close off parts of the game economy for P2P trading. A fully closed game economy, where no trading is allowed, is usually used in Web2 game development. . That said, Web3 game economies do not need to be completely open.
As mentioned in early parts of this article, game developers can segment game assets between primary and secondary markets to mitigate cannibalization between the two. For example, lower-tier resources are typically commodities that would create a price war racing to the bottom in a fully open market. Limiting these assets to primary markets, either through sales or rewards, allow game developers to be the sole supplier and have better control of the economy.
Conversely, preserving higher level assets for P2P trading in the secondary market funnel player experiences through asset production game loops and foster a GDP-centric economy.
Taxation
Web3 games interested in a GDP-centric economy should make taxation (trading fee) a major revenue source. When thinking about tax revenue, there are three components:
Game developers should find a tax rate that effectively monetizes the game without exploiting or suppressing players. Additionally, they can experiment with dynamically adjusting the tax rate based on player trading volume or in-game achievements to drive new player behavior.
Tying back to previous sections, total value of game assets should be optimized by balancing sources and sinks and maximizing aggregate utility and affinity across game assets. Game developers should then generate mismatched demands between players and assets to increase trading velocity.
Trade Incentives and Penalties
Trading incentives or penalties can be used to influence trading activity tactically. For instance, offering a reduced tax rate based on individual trading volume encourages more trading. A progression reset on assets traded can act as a deterrent, motivating players to engage with the progression game loops.
Final Thoughts
This article seeks to provide a framework and outline available economic control levers for Web3 game developers. In practice, designing a game is much more complex and intricate. Game developers must combine first principles and trial and error to find the best solutions. I salute all the buidlers pioneering the field and paving the way for what is to come.
Additional Reading
To sail beyond the liquidity sunset of taxation-based Web3 games | Folius Ventures
The Pillars of Internal Economy — An Introduction to Game Economics | Cores of Game Design
Types of Virtual Items | Building the Metaverse
How to Design a Gacha System | Mobile Free to Play