How blockchain gaming developers can leverage government policies for gaming economies
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Executive Summary
What we’ve been noticing:
This report looks at the different tools available to government agencies and the central bank that can influence the economy. Since blockchain gaming economies and regional economies act similarly to marketplaces where the transfer and creation of value happens, economic tools can also be leveraged by blockchain gaming developers to influence their economies. There are however a few differences in the implementation of these tools in blockchain gaming economies than to the original version in regional economies.
Game Developers As Government Officials
The backdrop:
Countries have marketplace-like characteristics because this is where the creation and transfer of value occurs. This value is measured through GDP, which allows investors and government officials in these regional economies to baseline how much value is being created and transferred. Government entities have several tools at their disposal to influence the economy in order to achieve specific economic goals.
Video games created virtual worlds that were still governed by economic laws, with one of the early research in the space done in the 1990s by researcher Edward Castronova. These gaming economies acted like countries since they also facilitated the creation and transfer of value. This value was limited to inside the gaming economy, up until blockchain technology was integrated into video games in 2017, and rose in popularity in 2021.
Since then, game developers building blockchain games not only have to produce a fun and engaging product but also create mechanisms for a balanced economy within their virtual world. In this sense, game developers also act as the governing body of the ecosystem, especially at the early stages of the project. Therefore, creating mechanisms that developers can use to influence the economy is a must when building blockchain games.
With this in mind, this article starts by exploring different monetary and fiscal policies that governing bodies of regional economies use to influence their economy. These policies will then be taken into the context of blockchain gaming economies, before ending with some key insights that developers should keep in mind about their economy.
Monetary and Fiscal Policies
Government agencies and regulatory bodies within regional economies have tools at their disposal that they use to influence the economy in order to achieve a specific goal. These come in the form of Monetary and Fiscal policies.
Monetary policy is managed by a country’s Central Bank with the goal of balancing economic growth and price stability. Inflation is seen to decrease an economy’s growth rate and causes uncertainty in the economy (Hameed, 2011). Therefore, keeping the inflation rate low (Friend, 2000) and prices stable (Blejer, 2000) is one of the main functions of the Central Bank. The agency manages this through contractionary or expansionary monetary policies that influence the money supply in an economy through changing interest rates, issuing of bonds, or printing of money.
Inflation is generally seen as impacting the economy negatively as it causes economic uncertainty, which negatively affects the growth of an economy’s output (Lucas, 1973). However, there is a trade-off between inflation fluctuations and output variability (McCaw, 2005). Therefore, Central Banks set an inflation target, depending on the overall goals of the economy, and implement monetary policies to stay within the set inflation rate range.
Changing short-term interest rates affects the overall money supply as it influences how much money is taken out of circulation. Higher interest rates mean greater profits for those who put their money inside the bank, causing the money supply to contract. Another monetary policy tool that Central Banks have is the issuing of bonds. Bonds are considered a generally safe investment instrument, therefore issuing more bonds means taking more money out of circulation, while buying back bonds is the opposite. Lastly, the Central Bank has the power and authority to print money as an expansionary monetary policy that directly affects the money supply.
A cohesive policy structure is needed since policy volatility affects economic growth negatively (Fatas and Mihov, 2011). Monetary policy alone is not sufficient in order to fully impact the economy. A sound fiscal policy should also complement any monetary policy done in the economy.
Fiscal policy affects how the government collects revenue, through taxes or debt, and how it exhausts its budget, through government spending. Research done by (Vdovychenko, 2018) shows that fiscal policy stimulates economic growth if the fiscal multiplier is greater than one. The value of this fiscal multiplier is affected by various factors, including trade openness, labour rigidity, exchange rate regime, public debt, business cycles, politics, and other factors.
There are three types of fiscal policies that the government can utilize:
1. Contractionary
2. Expansionary, and
3. Neutral fiscal policies
Contractionary fiscal policy is when the government spends less than what it taxes and is usually done to slow down economic growth due to high inflation. New taxes are introduced that slowdown consumer spending in the process.
Expansionary fiscal policy is when the government spends more than what it taxes to stimulate the economy, usually in times of recession, to put more money for consumers to spend.
A fiscally neutral policy is where the government equally spends what it taxes.
The fiscal multiplier being greater than one means that one additional dollar of stimulus causes a real GDP growth of greater than one dollar. This determines the effectiveness of fiscal stimulus to the economy. Trade openness affects the fiscal multipliers by influencing the demand for domestically produced goods, labor rigidity complicates the desired outcome, while flexible exchange rates tend to diminish a fiscal shock. Public debt reroutes the budget towards repayment instead of fiscal stimulus, business cycles influence what kind of fiscal policy a government should take, while politics hinder government budget allocations.
An Application To GameFi
These monetary and fiscal policies are in the governing body’s tool kit when the need arises to influence the economy in a certain direction. Blockchain gaming developers, being decision-makers and the governing body of these digital blockchain gaming economies, have similar tools at their disposal.
In terms of monetary policy, developers can influence the circulating token supply in their virtual economy, similar to that of a country’s central bank, through token staking programs and mechanism changes in token minting. Interest rate changes can be done through rewards adjustment, increasing or decreasing APY, and in regular token staking. Bond issuance in blockchain gaming economies comes in the form of time-locked token staking with a fixed APY reward. Lastly, the printing of new money can be likened to token minting through gameplay interaction.
These GameFi applications are not a direct equivalent to the policies that regional economies have as there are slight variations to keep in mind. Depending on how a game’s token allocation is structured, most games have a hard cap on their tokens, especially the governance token, which limits their ability to mint. This becomes problematic since, at some point in time, developers will lose the ability to influence interest rates as there won’t be enough token rewards to increase a regular staking pool’s APY.
Another key difference that can possibly solve this is that blockchain gaming developers can essentially fabricate rewards out of thin air because everything is virtual. Therefore, developers can create in-game items to attract players to stake their tokens instead of adjusting the pool’s APY, a method being used by some blockchain games through time-locked staking.
Lastly, the developers can freely adjust the minting and burning of tokens by adding new features to the game, or simply fine-tuning current emission or burning rates. The latter option will heavily impact the community since it is changing the current norm inside the ecosystem.
In terms of fiscal policy, how the team decides to generate and spend their revenue in tokens will have an impact on the economy. Revenue generation is through tax and debt, which comes in the form of transaction or breeding fees, and token sales, while expenditure is in the form of infrastructure development, like software, servers, and security infrastructure.
Though a diversified tax structure with multiple sources of income helps in maintaining a stable revenue (Caroll, 2009), the team should be careful about how they implement new taxes as they might not be well received by the community. Taxes are also usually used on either a very inelastic demand for an activity, or to make it harder for economic agents to participate in that activity. Examples of tax in GameFi economies are transaction, breeding, or withdrawal fees.
Public debt, on the other hand, can lead to political influences by external parties, like guilds, whales, or other big economic agents, on the decision-making of the development team. However, as previously mentioned, developers can always create rare in-game items. Selling these items can be a way to raise funds or influence the economy towards a certain activity or behaviour.
Another component of fiscal policy is how the governing body spends the funds they’ve gathered. Spending should be focused on the needs of the economy or risk having a negative impact (Lahirushan & Gunasekara, 2015). Financial infrastructure, like adding DeFi protocols to the ecosystem, capacity infrastructure, like server upgrades, or gameplay infrastructure, like anti-cheat or botting systems, are some examples of needs that a game developer should be aware of. As previously mentioned, policies should be aligned to the overall goal for it to impact the economy positively.
However, multiple factors can influence a policy maker’s decision or impact the effectiveness of fiscal policies set by the team. Trade openness functions similarly to the ease of new market entrants to the gaming economy, labor rigidity has to do with the reaction of the players, especially the scholar class, to market stimulus, while the exchange rate regime is the price of the token the team maintains as part of its overall policy. Public debt was previously mentioned and relates to politics, while business cycles, in this case, are the overall market cycles of the crypto economy.
What Developers Should Keep In Mind
The big takeaway:
The main thing that developers should note is that policies, be it monetary or fiscal in nature, should be aligned toward a certain goal. For example, if the goal is to prepare for mass onboarding of players, then policies should make it favourable for players to enter the economy. This can be in the form of monetary policies that decrease the price of tokens or assets so it becomes cheaper for players to enter, while fiscal policies gear towards investment in infrastructure so the servers do not crash when a surge in player base happens.
But at the same time, developers should understand that there is a trade-off between inflation and growth stability. Even if it’s better to have everything planned out from the start, especially for tax-related mechanisms, there will be unforeseen shocks to the economy that makes balancing between the tradeoffs difficult. The team should try and anticipate this by adding economic levers through their mechanism design to try and offset, or at least minimize, the effects of these shocks.
These levers should be well studied before being implemented and should be crafted with a particular player base to target. Each new policy being implemented will take time before its impact can be felt as a new policy will be considered a shock to the economy. Eventually, market agents will adapt to the policy. Do take note that certain market players might have a different reaction than anticipated, and should be accounted for by the development team. Various members of the community will have opposing views on the policies that the team will implement, and this depends on their motivation on joining the ecosystem.
Works Cited
Blejer (2000). Inflation Targeting in Practice: strategic & Operational Issues & Application to Emerging Economies, International Monetary Fund.
Caroll, D. A. | (2009) Diversifying Municipal Government Revenue Structures: Fiscal Illusion or Instability? Public Budgeting & Finance, 29(1), 27-48. https://doi.org/10.1111/j.1540-5850.2009.00922.x
Friend (2000). Maintaining Low Inflation: Rationale & reality, Inflation Targeting in Practice: strategic & Operational Issues & Application to Emerging Economies, International Monetary Fund.
Fatas A. and Mihov I. | (2013) Policy Volatility, Institutions, and Economic Growth, The Review of Economics and Statistics, 95(2), 362-376. https://doi.org/10.1162/rest_a_00265
Gashi B., Asllani G. & Boqolli L. | (2018) The Effect of Tax Structure in Economic Growth, International Journal of Economics and Business Administration, VI (2), 56-67. 10.35808/ijeba/157
Hameed, Irfan. “Impact of monetary policy on gross domestic product (GDP).” Interdisciplinary journal of contemporary research in business 3.1 (2010): 1348-1361.
Lahirushan, K. P. K. S., and W. G. V. Gunasekara. “The impact of government expenditure on economic growth: A study of Asian countries.” International Journal of Humanities and Social Sciences 9.9 (2015): 3152-3160.
Perotti, Roberto. “Estimating the effects of fiscal policy in OECD countries.” Available at SSRN 717561 (2005).
Vdovychenko, Artem. “How does fiscal policy affect GDP and inflation in Ukraine.” Visnyk of the National Bank of Ukraine 244 (2018): 25-43.
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