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The Role of Governments in Gaming Economies

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How blockchain gaming developers function as government entities in gaming economies

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Executive Summary

What we’ve been noticing:

The report looks at the similarities between the role of government institutions in GDP calculation, and game developers in blockchain gaming economies. Various literature relating to monetary and fiscal policy, government revenue and expenditure, and overall policy priorities are applied to blockchain gaming economies through similar activities done by game developers.

GDP, Government Expenditure, and Game Developers

The backdrop:

A country’s economy is considered a marketplace because value is created and transferred within and out of these regional economies. The statistic that policymakers and investors look at to determine the value inside these economies is called Gross Domestic Product (GDP).

GDP is a metric that is used to measure all activities that contribute to the economic state of a country. Since trade and the manufacturing of goods take place within a country, GDP measures the total cash value of all the finished products and employment created within a country in a specific period. GDP data can thus estimate the size of economies and indicate the growth of an economy when the GDP values of a country increase over time. 

Blockchain technology being integrated into gaming opens up a new branch of research that follows a similar principle. Blockchain gaming economies are also considered marketplaces since transactions occur within their NFT marketplaces with the production of goods and services within the economy such as the breeding of new in-game assets. As such, GDP can similarly be used to capture the economic value of the game by recording the value of trades and final products produced to compare against other gaming economies as well. 

GDP data are closely monitored by businesses, investors and governments since they can affect many of their decisions. Business owners might decide on the type of business strategies to execute depending on the amount of GDP growth in a country, investors can better form asset allocation of their capital based on the type of economies they want to invest in based on GDP data, and governments decide on the type of policies to implement based on the GDP data to promote growth or maintain inflation within a country (Fernando, 2022).

One of the components of GDP is Government Expenditure (GE), which takes a look at how the governing body of the economy creates and spends its budget. In the blockchain gaming sense, the governing body can be the Decentralized Autonomous Organization (DAO), or the development team of the project. 

This article aims to understand how the factors of GE will affect an economy’s GDP as well as which factors affect future long-term growth positively or negatively. It covers:

  1. A review of economic literature

  2. Relating it to blockchain gaming

  3. Key points to keep in mind for prospective investors in and developers of blockchain gaming economies

According to Economic Literature

Before diving into the specific details of how variables or certain factors affect government expenditure which leads to an effect on the long-term growth of an economy, it is important to understand what are some decisions that governments make that can affect their own expenditure and the growth of an economy. 

Fiscal Policy

There are two types of policies that governments focus on that affect the economy. The first type is called fiscal policy. It is used to adjust economic conditions to an optimal level by determining the amount of government expenditure to be spent on projects, and revenue by controlling taxes to influence demand and subsequently economic growth (Hayes, 2022). 

The amount of government expenditure can be affected by a variety of factors. Growth in government spending is usually accompanied by an increase in national income, known as Wagner’s law. A paper explored a modified version of this law, by incorporating other factors such as oil revenue, trade openness, public debt, oil price, population and inflation on GE using an autoregressive distributive lag model to determine the relationships between these factors and GE. The results find that all the listed factors have a positive and significant relationship with GE at least the 10% significance level except for public debt, which has a negative and insignificant relationship. This may be attributed to the fact that increasing these factors increases government revenue, which translates to increased spending over time from a greater pool of funds available (Jibir and Aluthge, 2019).

Tax revenue controlled by government fiscal policies can come from different sources such as goods & services tax, corporate tax, personal income tax and more, and governments control the amount to be taxed from each source. This tax structure can determine the amount of government revenue that will be received from taxes for their expenditure (Gorton, 2022). 

Finding out the types of taxes that can affect government spending can affect the country’s associated long-term potential growth. A study by (Gashi, Asllani and Boqolli, 2018) determined the effects of different tax types on the effect of government spending and its relation to economic growth. It found that most tax varieties have a positive and significant relationship to government spending and economic growth, except for personal tax and withheld tax which have a negative but insignificant relationship. These taxes were found to best affect GE and economic growth through smaller gradual tax rate changes should governments decide to implement other forms of taxes within the country.

Diversifying government revenue can help to stabilise GE over time, since having more sources of tax revenue ensures that the revenue collected will not fluctuate excessively should one form of tax collected be affected significantly. This ensures that there will be a more stable revenue flow with the possibility of budget surpluses, forming a sufficient capital base for governments to tap on in the future should they wish to implement new policies (Caroll, 2009).

Identifying any changes in taxation can indicate its impact on economic growth and vice versa. This is because how well an economy is performing will also be tied to the amount of taxes that will be collected, while the amount of taxes collected may also affect how much the government can stimulate the economy (Poulson and Kaplan, 2008). When a country is able to generate sustainable tax revenue, this can then result in longer-term economic growth.

Monetary Policy

Governments also determine the policies to be put in place for the country in the form of monetary policies. Monetary policy involves the controlling of money supply and interest rates to influence the exchange rates of their local currencies to drive export growth. This can help promote growth during economic slowdowns and modulate growth during economic booms (CFA Institute, 2022). 

As governments control the money supply and interest rates to affect the monetary policy in the country, countries which are open and have depreciated currency exchange rates will stimulate export growth. Furthermore, developing countries’ economic growth can be hindered since their exports experience large volatility when there is greater exchange rate volatility. Furthermore, trade liberalisation in these countries helps to preserve tax yield which will positively affect GDP in the long run (Jayachandran, 2013). 

Other Factors

Lastly, there are other factors that can influence the size and growth of an economy. These factors are usually controlled by the government’s discretion in terms of the goals they want to achieve for the country. This can include factors such as the openness of an economy, the frequency and extent of policy changes and more. Some governments impose more tariffs or restrictions on imports and exports, while other governments allow for free trade in their economies. Depending on the type of country, the extent of trade openness can affect the size and growth of the country’s economy (Keman, 2022). 

Governments control the policies in place for a country depending on the economic conditions of the country itself and the external factors that can affect the country. They adjust their policies to prevent either negative growth or excessive growth and try to maintain more stable growth over time. Thus, there is bound to be policy volatility within a country, which was found to have an effect on long-term economic growth as well. It was found that policy volatility has a negative relationship with economic growth, since governments may implement policies that may not be related to the state of the economy (Fatas and Mihov, 2011). 

Since these policies affect GDP to move towards the ideal state of the economies that the government aims to achieve, the consumption of citizens in the country will be affected by the government’s decision to either spend more or less based on the fiscal policies. Thus, having excessive policy volatility will also affect consumption volatility positively which translates to a more volatile long-term growth (Herrera and Vincent, 2008).

Applying Literature to Blockchain Gaming Economies

GameFi economies include players’ experience such as the time taken or the number of tasks completed with rewards for the task (GuildFi, 2022). Trading and attaining new in-game assets are also part of that gaming experience to earn or progress further in the game, making blockchain gaming economies similar to regional economies. 

Although gaming economies have no natural resources that can be sold off for monetary value, there is the production of resources which is worth value such as the creation of new in-game assets through breeding. The amount of inflation in a country can be linked to the inflation rate of their in-game native tokens, while the population of their economy refers to the player base which generates additional value from playing the game. The degree of openness of games can also be determined by whether their in-game assets can be used in other protocols or games, whether their token has additional utility elsewhere, or if the game can be played on multiple chains instead of just a single blockchain. These factors will then form the basis of government expenditure that can affect the gaming economies’ long-term growth.

Having a variety of taxes collected in-game can help to reduce the selling pressure of the game’s token since a larger portion of the value is recaptured back into the ecosystem. These taxes can come in the form of breeding tax, playing battle tax, betting tax, transaction tax and many more depending on the design of the game. It helps to diversify the development team’s revenue as well. 

Having a diversified revenue stream ensures that there will be a more stable flow of revenue which will not fluctuate excessively if one part of the taxes collected in the game were to suddenly be affected negatively. This ensures that the development team or Decentralised Autonomous Organisation (DAO) of the game will have sufficient resources to tap into should they wish to implement changes in policies in the game. 

These diversified taxes affect the amount of taxes in-game as well. Games which are able to implement a variety of taxes and can sustain an increased tax revenue will help to stimulate long-term growth since the taxes can be used for providing incentives to players or to attract new players into the ecosystem. One thing to keep in mind is to be very careful in what activities the team wants to tax as this usually disincentivizes people from participating in that activity.

Games with smaller market capitalization or player base may be more affected by exchange rate volatility as well. These exchange rates in the context of GameFi economies refer to the prices of their native token relative to other tokens or stablecoins. If there are measures that can reduce the exchange rate volatilities in these games, this will be better for the long-term growth of the games. This is because a more stable exchange rate will also signify that a larger value of the token is captured in the ecosystem since it brings more utility to the game, and the selling pressure is not as strong for these games with less volatile exchange rates. Smaller games with better interoperability allow them to reach a larger target player audience as well, which can improve economic growth. 

Lastly, the development team should not engage in large excessive changes in policies. These policies may refer to the reward incentives provided to players, or the design of the game in terms of taxes. Large changes in policies such as providing excessive reward incentives can cause a short-term growth in player base and subsequently government revenue, but this may not be sustainable in the long run as the players that enter the gaming ecosystem will prioritise earning the maximum reward and cashing out immediately. 

Final Thoughts

The big takeaway:

Although these factors can be said to affect long-term growth in both traditional and gaming economies, it is not something that may be guaranteed. Instead, these developers should keep in mind these variables to create a better-designed economy. However, the designs of games should still be explored more and executed well before the game or token is released. Here are some recommendations to keep in mind when designing a game economy: 

  1. Taxes should be well studied, structured, and taken into consideration before adding a new form of tax. To better extract taxes from these resource assets produced in-game, these assets should have a clear value of utility before taxes can be designed to be extracted from them.

  2. Once these resources and activities have value, design taxes that retain value back into the ecosystem. However, these taxes should be introduced at the start instead of being introduced midway after the game has been released. 

  3. This larger variety of taxes diversifies the government revenue, which also ensures better revenue stability.

  4. Cross-chain games or games with marketplaces that can operate on multiple chains can better attract players and their subsequent game growth.

  5. The development team/DAO governing the game should not engage in excessive policy changes as it will not be sustainable in the long run even if it works out in the near term.

  6. Tokens should be designed to have sufficient utility in-game that is tied into good gameplay, if not the tokens are merely an investment tool that players will immediately seek to sell away – which will not be sustainable for the game growth in the long run. 

Works Cited

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

CFA Institute. (2022). Monetary and Fiscal Policy. CFA Institute. https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/monetary-fiscal-policy

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

Fernando, J. (2022). Gross Domestic Product (GDP). Investopedia. https://www.investopedia.com/terms/g/gdp.asp

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

Gorton, D. (2022). Income Tax Terms Guide. Investopedia. https://www.investopedia.com/terms/t/taxes.asp

GuildFi. (2022, April 8). In-Game Economy – GuildFi – Medium. Medium; GuildFi. https://medium.com/guildfi/in-game-economy-4f9d9d95a57e

Hayes, A. (2022). Fiscal Policy. Investopedia. https://www.investopedia.com/terms/f/fiscalpolicy.asp

Herrera S. and Vincent B. | (2008) Public Expenditure and Consumption Volatility, Policy Review Unit, Development Economics Vice-Presidency, 4633, 1-23. https://doi.org/10.1596/1813-9450-4633 

Jayachandran, G. | (2013) Impact of Exchange Rate on Trade and GDP For India: A study of last four decades, International Journal of Marketing, Financial Services & Management Research, 2(9), 154-170. Retrieved from www.indianresearchjournals.com

Jibir A. & Aluthge C. | (2019) Modelling the determinants

of government expenditure in Nigeria, Cogent Economics & Finance, 7:1, 1620154. 10.1080/23322039.2019.1620154

Keman, H. (2022). economic openness | political economy | Britannica. In Encyclopædia Britannica. https://www.britannica.com/topic/economic-openness

Poulson B. W. and Kaplan J. G. | (2008) State Income Taxes and Economic Growth, Cato Journal, 28(1), 53-71. Retrieved from https://citeseerx.ist.psu.edu/viewdoc/downloaddoi=10.1.1.523.8109&rep=rep1&type=pdf

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