Thoughts on sustainability of P2E dual token economies.
Understanding the dual tokenomic model of Play2Earn games.
X2Earn has been an important narrative from 2021, it all started when Axie infinity a Play2Earn PvP game gained traction, players were leaving their jobs to play Axie and earn more than their jobs, when this caught the eye of Crypto Twitter, $Axs jumped more than 10000% in a matter of weeks. This gave rise to all kinds of X2Earn models, including a Move2Earn game Stepn. At it’s all time high Stepn had FDV (fully diluted valuation) of more than $20b. Looks like Stepn had some game changing tech to reach a tremendous valuation in less than 6 months. Turns out no, Stepn is just game where in players earn when the move IRL( not in metaverse ;) ). So an app that tracks your steps and rewards you in tokens had more valuation than adidas ? Well there is more to it, Stepn also included Sneaker NFTs and some improvements to the original step tracking design to prevent malpractice. Now that we have some background let’s dive in.
Many of these X2Earn protocols adopt a dual token model, let’s see why ?
Token A : Fundraising, Governance, non inflationary (fixed supply), Staking/Revenue sharing, in game spending.
Token B : In game utility, Distributed as reward, Inflationary (no fix supply), breeding, repairing (sinks) etc
Example: Alice finds out about a new p2e game that is making waves and she wants in. Alice buys token A from market and uses it purchase in game NFTs and gets started. As she is playing she starts to earn token B (faucets), the rewards from token B cover all the initial NFT minting costs in a matter of weeks. Over time she also burns some token B as breeding and repairing charges (called sinks). As she levels up , she is rewarded in Token A as well, she stakes the earned Token A to get a share of the revenues the game earns from various land and NFT sales. There is also a market place where she can lend her NFT to other players and earn interest on it.
Sounds great right ? Alice spent some initial amount in minting the NFT but she covered the spend in a few weeks and is on an earning spree, more over the demand of in game NFTs is so high that the floor price of NFTs has more than doubled.
This is the story of every X2E game at the inception, former players have multiple revenue streams even though the game doesn’t have much revenue. Other players start to flock in, to profit from these revenues which drives more demand and the cycle continues.
If we carefully observe, Token B has all the negative parts ( or unsustainable economic model) where as Token A has a sustainable model ( revenue sharing, fixed supply). So what happens to these models at a later stage ?
Firstly let’s understand why are the former players turning profitable.
1) The earning mechanism is supported by a highly inflationary Token B, even though it’s inflationary the price of Token B soars, why ? It’s driven by demand from new players entering overtime.
2) Price of Token A also soars from the demand from new players to mint new NFTs, as price of A rises so does the cost of minting an NFT and floor prices.
3) Soaring NFT prices drives some new players to lending marketplace, where they can borrow the NFTs and lender get’s a fixed cut.
4) As the Token A (due to demand) soars so does the ROI of staking.
So you see, the problem ? The p2e model is sustainable only until the point new users are coming at a higher rate than before, to sustain the economy and formers users. In short the model is self sustainable until the point the cash outflows match the monetary inflows by entering of new investors, a standard definition of a ponzi .
What happens when the party stops, and the demand stagnates/slows down ? The inflationary pressure on Token B explodes, there is not enough demand to sustain the supply and Token B starts dumping, as Token B is the earning currency, user earnings fall, less demand for NFT minting stagnates Token A price as well as NFT floor prices, all of a sudden the earnings of users decline at faster pace and users start to leave, this creates a death spiral and the ponzi collapses.
This happens at a much faster pace in crypto given that everything is driven on hype with limited liquidity, once the hype is gone the party stops and less liquidity is the last nail in the coffin.
Although this is not a very detailed explanation and other factors come into play, the gist is spendings of new players subsidise the earnings of former players.
Axie Infinity & StepN
Axie Infinity uses a dual token model (Axs/SLP), StepN uses a dual token model ( GMT/GST).
The inflationary pressure on SLP was so much that it is 99% down from it’s ATH
Although down $Axs is a whooping 17000% up from ATL.
What are the ways to prevent this inflationary death spiral ?
Some people say a changing monetary policy, changing the inflation, earnings, lending interest etc can be helpful, but imo it’s not a long term solution (you are not FED ;) ) .
Axie and StepN have various in game sinks in place to make sure that a portion of in game resources are burned, for eg : the most important recurring sink ( a mechanism to reduce resources out of the economy) in StepN is repairing, where in the GST repairing cost is burnt forever to reduce the supply, many other sinks are also implemented to keep the supply in check. But the problem is that, these sinks are net negative ( although in short term the supply is reduced , but you end up more resources in a period of time)
Game economies should be designed such that the cash inflows from players should be divided into player earnings and treasury. Games should be designed in a way it’s fun and not a monetary source of income. Blockchain gaming currently is all about incentivising as many players to hype the game to bring in more players which becomes unsustainable at one point. Sinks should be designed in a way that players spend in game not for monetary incentives but fun (net positive sinks). Eg: Spend $100 (through NFT minting) to create a cash inflow of $20 per week. Which means a player becomes a liability after 5 weeks.
StepN introduces many sinks but is still not sustainable and may blow up at some point in time.
Projects are now turning towards p&e model from p2e model.
Recently $UST stable coin blew up, $UST holders were incentivised to hold $UST through a unsustainable 20% fixed APY policy through Anchor. Will discuss about it in next article.