Author: Lorenzo P. Martin
Disclaimer: This is not financial advice.
Introduction
Blockchain gaming took off in 2021 thanks to the rise of Sky Mavis’ Axie Infinity. The game allowed people all over the world, especially those from developing regions, to earn an income from basically playing a game. And though the 2021 version of that economic model ultimately proved to be unsustainable, it served as a catalyst for other projects to build upon what Sky Mavis has started and push the industry forward.
Earning from video games isn’t something that blockchain technology opened up to the gaming industry. Whether it’s through content creation, ESports, or virtual item sales, people have been earning from playing video games way before the blockchain, Web3, and cryptocurrencies became popular. The main characteristic that blockchain adds to a game is digital ownership, a more secure and systematic way for people to identify which person has the rights to a digital asset.
However, the current blockchain gaming model that makes use of these digital assets has been crafted in a way that access is the main utility of these NFTs. Most of the current games out in the market follow this model. However, there have been strides, especially from newer games in development, to incorporate a Free-To-Play mechanic in their game.
Using Axie Infinity as an example, players who want to earn from interacting with the ecosystem would need an initial investment first before gaining access to the game, or at least to the earning aspect of the project. This essentially prices out players from entering the ecosystem, which ultimately is harmful to the game economy. They do have a Free-To-Play mechanic through the use of starter Axies, these NFTs are far from being competitive in the main game experience of the project.
Another critique to the current blockchain gaming model is that it is not only a “pay to play” economy, but also a highly “pay to win” economy mainly because NFTs are static. Players would need to purchase, or sometimes “breed”, new assets in order to remain competitive in its current gameplay, a model that is highly unsustainable to casual players.
Therefore, this article looks to reintroduce a game model where players aren’t priced out of accessing the game, but can still be able to create value out of their digital assets. A “free to play and earn” model is highly contingent on a game economy that values progression and continuously produces new content for players to explore. In order to understand this, we first look at how markets are created in virtual economies, how progression adds value, and how this can all be tied up to blockchain gaming.
How Markets are Created In Virtual Economies
Blockchain projects’ virtual economies can be compared to a country’s regional economy because both economies are marketplaces where the transfer and creation of value occur. The main difference is that one market’s assets are in the metaverse, while the other is in the physical world.
Market creation can be analyzed through an economic concept called opportunity cost, a topic that was explored in depth in a previous paper. Supply and demand in the virtual economy can be seen through the opportunity cost between both time and income. Given that time is a limited resource that everyone has, how they spend it will be connected to the utility that a person gains from doing a particular activity. Let’s assume for a bit that the utility in this case is highly correlated to income and that a person would value how much income will be earned in order to decide how to allocate their time.
In this virtual game economy, a person is left to choose between playing a game or using that same time for real world responsibilities, let’s say that is work for now. If the person has low real world responsibilities, meaning work has little impact on their lives or they earn a small amount of money from working, then it will be logical for that person to choose to play a video game instead of working since the impact to their lives isn’t that big. However, if that same person has a high level of real world responsibilities, meaning that they need the money more or earn a high amount of money, then they would rather choose to use that time to work instead of play a game.
From a monetary aspect, if playing a game and selling items from that game on the secondary market earns more than what you earn from your job, the logical choice to allocate one hour of your time would be towards the activity that would earn you more monetary benefits.This takes care of the supply side of the economy as players who allocate their time towards grinding in the game, leveling up their characters, searching for rare digital asserts, will supply the virtual assets.
On the other hand, those who have more real world responsibilities or earn more from their job than the sale of digital assets gathered from playing a game would opt to allocate their time towards working instead and not have time to grind in-game, level up their characters, and search for rare equipment. Now if you consider that utility isn’t just made up of the monetary aspect, but also some intrinsic value that players associate with the game, then there will be some motivation for players who have high real world responsibilities to still play the game. Examples of which are those who want to play with their friends in high levels, but do not necessarily have the time to grind their characters to be able to participate on those levels.
This is where the demand side of the economy comes from. Those who have the money because of real world responsibilities, but not the time to play the game, can pay those who have time to play the game and would need the money because of low real world responsibilities. Matching the supply and demand side is how markets are created in these virtual economies.
How Progression Adds Value
In the real world, one of the basic valuations for an asset depends on the sum of the different components needed to create that asset. For example, a tire is more expensive than rubber even though tires are made up of rubber because someone had to process that rubber in order to make the tire. The tire in itself is cheaper than a fully assembled car because it is only one of the needed parts to make a functioning car and someone had to gather and assemble all those parts in order to make the car.
During the progression from rubber to the tire to the car, value was added by someone else that caused the price of those assets to increase. Of course there are other factors, like marketing and supply chain management, that factor into the prices of assets, but those can also be considered add-ons to the final product that can ultimately add value to the asset. These activities affect the price mainly because it takes time and effort, and sometimes even a specialized skill set, in order to add value to the asset.
That same concept applies to virtual assets. Progression adds value to digital assets because of the time, effort, and skill input needed in order to increase the asset’s utility. Level requirements are a good way to add progression to a game economy. Characters gaining experience points level up and thus get access to certain in-game content or digital assets specific to that level. It takes a certain level of playing commitment to progress the character more than the average player, something that other people would rather pay for instead of spending time on doing. Therefore, these digital assets gained value through progression given that they are in the right market.
Applying Progression to Blockchain Gaming Economies
As mentioned earlier, the current application of the utility of digital assets in blockchain games is to get access to the ecosystem through Non Fungible Tokens or NFTs. These NFTs are mostly static wherein it cannot be changed presenting a big challenge when it comes to progression. These NFTs are mostly the main digital characters in the ecosystem, making them integral to the gaming experience.
However, this is not to say that blockchain games do not put an effort in having some sort of progression in their economy. Axie Infinity’s main progression system lies in its skill-based leaderboard ranking system. The game also introduced runes and charms, NFTs that can be equipped to the Axies in order to change how these digital pets can interact with the ecosystem. These mechanics add some level of progression to the gameplay experience and variability to the static NFTs. This is what most blockchain games have been doing. The team did talk about adding a progression system for their NFTs, a concept they call Axie Core, sometime in the future.
Another project called Sunflower Land, introduced a new profile picture project called Bumpkins. They used a different kind of NFT system, which they later called semi-fungible tokens. These semi-fungible tokens are what we now call Dynamic NFTs. Essentially, owners can swap around what the avatar is wearing in order to create a new NFT within the blockchain. Developing this technology can be how blockchain gaming can apply progression in their economies. They also implement a similar system to their farm NFTs. Each farm can progress after enough resources have been collected. Farms can be transferred or sold as a whole and in its current state.
A progression system similar to traditional games can now be applied to blockchain games with the use of Dynamic NFTs. These digital assets, which are at the core of the project’s gaming experience, can now progress and develop the more they are used in the ecosystem. Progress can come in the form of leveling up your characters, or applying certain inputs in order to craft and progress an item to a higher tier. Either way, the progression helps add value to the digital asset, be it a character or an item, and increase its price depending on the gaming environment the project has set.
The Free To Play And Earn Model
The potential of blockchain gaming lies in its ability to earn from playing the game because the technology allows for ownership distinction between digital assets. The bear market that caused the collapse of a lot of blockchain games highlighted the vulnerabilities and sustainability challenges of the Play-To-Earn model, where players are rewarded with cryptocurrencies from participation within the game.
This left the secondary market as one of the main potential income sources from the ecosystem. But because the main utility of most of these gaming NFTs is access to the game, it prices out potential players from entering the game simply because they cannot afford it or because the return isn’t as fast as it used to be during the height of the bull market. Some games countered this by adding Free-To-Play mechanics in their game, but these mechanics just give access without allowing players to compete and unlock the full potential of the game.
The static nature of these NFTs force players who want to go deep in the ecosystem to still purchase assets in order to remain competitive, making it a requirement to put money into the ecosystem before actually entering the game. This puts the economy back to square one where players are priced out from entering the game, a scenario that is not beneficial to any gaming project because players are the lifeblood of their ecosystem.
Blockchain gaming developers don’t need to reinvent the wheel and can just take a page out of traditional gaming. Making the game Free-To-Play for everyone opens the game to a lot more players and takes away the initial payment needed to start interacting with the project.
However, if we take away the required asset purchase to enter the ecosystem, where will the value of the NFTs come from if their main utility is giving access to the ecosystem? Value cannot come from thin air.
In order to be able to extract value from an economy, value must first enter the economy. Anything less will negatively impact the sustainability of the project. Therefore if no monetary value enters the economy through the purchase of NFTs, then a different kind of value, which players would be willing to spend money on, must replace it.This is where adding progression mechanics can help the blockchain gaming industry.
Progression allows for a secondary market to exist in the economy even if everyone else starts with the same assets. The way game developers define progression in their economy will impact the secondary market of in-game assets. At the beginning, all players will have access to the basic and common items within the game, making these assets virtually valueless on the secondary market.
However, as the game progresses and each character or asset branches out to their desired specialization, these digital assets will start to get valuable to a certain set of players. The time and effort needed to progress the digital asset is the value input that, when structured correctly, players will be willing to pay for, instead of grinding in-game, to achieve. Therefore, how developers choose to structure in-game progression directly impacts how digital assets become valuable to players.
It is also good to note that time and effort alone is not a good metric to base progression on as this opportunity cost quickly becomes negligible if users find a way to automate these tasks through botting. Complexity should also be introduced into the economy in such a way that there will be tradeoffs to decisions made throughout the progression. Developers should also make efforts in introducing anti-bot mechanics in their game.
Virtual items in games become valuable because they offer benefits that enhance a player’s gaming experience, provide a sense of achievement and status, and sometimes give them an advantage over other players. Cosmetic and functional upgrades like new outfits and weapons can make the game more enjoyable. Rare or difficult-to-obtain items can demonstrate a player’s investment of time and effort, and owning them can provide a sense of status.
Additionally, powerful items like weapons and armor can give players an edge in battles. The value of virtual items is determined by supply and demand, where rare or highly sought-after items will command a higher price. Players who are willing to spend real-world money on virtual items contribute to the demand and drive up their value. Ultimately, the subjective nature of value means that virtual items can fluctuate in price based on various factors like changes to the game and market trends.
So how does blockchain fit into all this given that these principles are already being used by traditional Web2 game developers? As mentioned previously, the main potential of blockchain gaming lies in its ability to earn from playing a game because the technology allows for ownership distinction between digital assets. Therefore, blockchain allows for the secondary market to thrive because players own their assets and are not “rented out” by Web2 game developers.
Players do not have to go to third-party websites in order to sell their digital assets because the blockchain gaming project already provides a platform for the sale to occur, which is good for the sellers. Buyers benefit from the technology through the reduced digital fraud risks associated with account resale scams as all digital assets are accounted for through the blockchain. Blockchain technology facilitates the transfer of value between economic agents within the ecosystem.
Developer Notes
Blockchain gaming developers do not need to look far in order to create a decentralized virtual economy for their gaming project. Progression not only adds a sense of achievement for players, but is also a key ingredient in creating a secondary market for digital assets in the game. This has been existing way before blockchain technology was developed and can be utilized by blockchain gaming developers.
Progression mechanics not only allow for secondary markets to be created, but also open up the core gameplay for Free-To-Play users to still enjoy the game and generate value for the digital assets by progressing them to a point other players would want to purchase it. Players are willing to spend for virtual items that enhance their playing experience. However, devs should find a way to protect the economy from botting as this can undermine the progression mechanics of the ecosystem.
The main benefits of blockchain thus becomes the safer and easier facilitation of the transfer of value between economic agents. Once value is created through progression, the blockchain helps identify who owns which digital asset and can easily transfer the asset between agents that want to trade it. This approach may forfeit potential revenue from the initial sale of NFTs that give access to the game in the short term, but can easily have a more player-driven economy that could benefit the game in the long-run.