By Pavun Shetty
Translated by: Spinach Spinach｜bocaibocai
Preface
When blockchain games just started to explode, punters used real money to participate in many Play to Earn games, but they basically lost everything in the end. At that time, there was a very obvious feeling that the first players to enter the market could get the most dividends, and they only needed to dig, withdraw and sell every day to suck the blood of later players. After the new players entered the market, they had to take over the high prices and find ways to continuously attract new players to enter the market, making GameFi basically only Fi but no Game. There are also problems with the design defects of the token model. However, this recent paper from Yale University proposed two new token economic models and conducted a series of simulations, providing GameFi with some new ideas for sustainable development.
Spinach translated the Yale University paper and extracted some of the essence to share with you:
summary
Blockchain-based games have introduced new economic models that combine traditional games with decentralized ownership and financial incentives, leading to the rapid rise of the GameFi space. However, despite their innovative appeal, these games face significant challenges in terms of market stability, player retention, and sustainability of token value. This paper explores the evolution of blockchain games and identifies the main flaws of current token economic models through the theory of entropy increase. We propose two new models - ServerFi, which emphasizes privatization through asset synthesis, and a model focused on providing continuous rewards to highly retained players.
These models are formalized into a mathematical framework and validated through group behavior simulation experiments. Our results show that ServerFi is particularly effective in maintaining player engagement and ensuring the long-term viability of the gaming ecosystem, providing a promising direction for future blockchain gaming development.
introduction
As technology continued to advance, the gaming industry flourished on the journeys of adventurers and outdoor enthusiasts[1]. Starting in the 1970s, Atari introduced Pong, an arcade table tennis game that captivated consumers during the turbulent 1970s and inspired many inspiring imitation versions. With the advent of more powerful microprocessors, dedicated graphics chips, and personal computers such as the Commodore 64, it became possible to create complex, visually appealing, and sound-rich games. Following in the footsteps of these pioneers, Nintendo quickly captured a large share of the console market with its home console, the Nintendo Entertainment System (NES), which released games like Duck Hunt and Motocross.
At the same time, Sega and Sony also became competitors with their outstanding works. Sega launched Genesis and Game Gear, while Sony launched PlayStation 2 and 3, which were equipped with CD-ROMs for enhanced game storage and together defined the future of game consoles after 1994. The last important milestone in game development was the wave of adoption of the DirectX API driven by Microsoft in the gaming industry.
Online multiplayer games like World of Warcraft and Fortnite have revolutionized the way players interact with each other and, driven by Internet technology, have marked a leap forward for the gaming industry. These games have become cultural phenomena, enabling millions of players to share virtual worlds and fully enjoy the fun of technology. The rise of Google Stadia and Microsoft xCloud has also been remarkable. They stream games directly to players' devices, providing high-quality gaming experiences without the need for powerful hardware support[2]. These groundbreaking innovations have brought players into a highly social and connected world of experience, which relies on the development of Internet technology and has undoubtedly driven the gaming industry into the next era.
These visionary changes have brought renewed public attention to the issues of decentralization and data ownership. In the era of traditional games, players' data and assets are absolutely centrally stored on servers run by game companies, even including virtual items purchased by players. The ownership of these controversial items has never been in the hands of the players who purchased them, which is under the continuous influence of the classic economic model. This traditional model has operated around player spending and company profits for decades, and players have received little return on their investment in valuable resources such as time and money except for a small direct return. Often referred to as "walled gardens", these games host in-game items, characters, and currencies on the developer's servers, and players cannot obtain ownership of their accounts, content, and in-game assets.
This time period narrows the scope of rights for players, even though their time and financial investment in the game is significant, and does not even generate any economic value for those who keep the financial cycle in the game running smoothly and provide sustainability.
The emergence of GameFi has reshaped economic production relations and brought real-world incentives. When it comes to combining "games" and "finance" in a smoother way than expected, "play to earn" (P2E) games built on blockchain networks are well prepared for a remarkable debut. Blockchain-based games generally create crypto assets in two mainstream ways: marking in-game items as NFTs and granting homogeneous tokens the qualification to become in-game currency[3]. By combining traditional games with on-chain assets, these games achieve decentralized ownership, transparency, and bring tangible economic incentives to players. However, there are still major challenges in terms of market stability, player retention, and sustainability of token value.
This paper first provides an overview of the development context and pioneering cases of blockchain games. We then apply the theory of entropy increase to analyze the underlying causes of current challenges and shed light on the factors driving market dynamics. Building on these insights, we introduce two innovative token economic models: the ServerFi model that achieves privatization through asset synthesis, and a model that continuously rewards high-retention players. These models are formalized into a mathematical framework and their effectiveness is verified through group behavior simulation experiments. Our results highlight the potential of the ServerFi model in maintaining player engagement and ensuring the long-term viability of the gaming ecosystem.
Background: The rise of GameFi
Blockchain-based games create crypto assets in two main ways: marking in-game items as NFTs and granting homogeneous tokens the right to be used as in-game currency. 2013 saw some key moments, such as Meni Rosenfeld’s concept of Colored Coins, which drew attention to the importance of virtual asset ownership and mapped real-world assets onto the Bitcoin blockchain [4]. Four years after Meni Rosenfeld, Larva Labs launched the CryptoPunks NFT series. This series marked an important milestone in the development of NFTs and inspired the ERC-721 standard for digital art and collectibles on Ethereum through its 10,000 unique, randomly generated character images [5, 6].
NFT technology is undoubtedly being embraced by visionary founders. Dapper Labs launched the first blockchain game on Ethereum called CryptoKitties, which congested the network for a short period of time, causing significant transaction delays. In the game, players can buy, breed and trade virtual cats, each with unique visual characteristics and varying degrees of rarity.
The huge success of CryptoKitties highlights the appeal of NFT-based gameplay. CryptoKitties leverages the psychological appeal of real ownership and potential financial gains, attracting avid collectors and savvy investors through an in-game financial loop, providing incentives to breed and trade rare cats, and creating a speculative environment. In the same year, discussions about CryptoKitties almost became a mainstream topic. This creative GameFi game attracted millions of players who not only owned these rare "cats", but also gained social identity and a sense of belonging through the CryptoKitties community.
Among crypto games involving NFTs and the “play to earn” (P2E) model, Axie Infinity, developed by Sky Mavis, has emerged as an important successor to CryptoKitties and has quickly become a popular game with players often staying addicted until late at night due to its engaging gameplay loop. Axie Infinity allows players to collect, breed, and battle fantasy creatures, called Axies[7]. Behind each Axie is an NFT with unique attributes and abilities that can be enhanced through strategic breeding and gameplay[8].
This delightful GameFi game not only provides economic incentives similar to CryptoKitties, but also introduces more complex game mechanics and a powerful in-game economy. Its far-reaching design concept attracts a wide player base, setting a new standard for this era's darling and setting a benchmark for all future blockchain games.
Challenges of Token Economics and Our Solutions Faced with a lot of competition from traditional online games running on centralized devices, blockchain-based games are getting used to storing digital assets on the blockchain, allowing player-owned items to be sold or even transferred to other games or used in specific DeFi applications. Incentive models are gradually becoming more sophisticated with the mass adoption of blockchain technology. This opens up a whole new path to establish cutting-edge production relationships between players and developers. Times have changed, and these innovations aim to reshape the electronic society, with the potential to thrive in the post-gaming era.
Against the backdrop of these major developments, we have to ask: Why would game developers choose a new production relationship that originates from the GameFi field in the context of the leap into the Web3 era, where players have different demands for assets and the traditional, easy gaming experience is put on the back burner?
Most games have a certain life cycle, and CryptoKitties is no exception. Among the important mechanisms of its operation, the breeding mechanism allows players to produce new "cats", but this inadvertently increases the supply, thereby reducing the rarity and value of individual "cats" over time. As more players participate and breed "cats", the secondary market quickly becomes oversaturated. The scene is novel and players are excited, but the dilemma is very familiar: how to maintain the price of circulating tokens? If there are not enough active players, demand cannot keep up with the growing supply, and this depreciation problem will be further exacerbated.
As a result, individuals who invest significant time and resources into reproduction may find that the output of their efforts is diminishing. As the game advances collectively, initial scarcity may lead to loss of interest and reduced engagement as abundance emerges.
The application of entropy theory combined with token economics provides a professional and in-depth perspective on the dynamics of token flows and value fluctuations in blockchain projects. Entropy theory is based on the second law of thermodynamics, which states that in a closed system, entropy (a measure of disorder) tends to increase over time. This concept can be applied by analogy to economic systems, especially token economics, to enhance our understanding of token distribution, usage, and market fluctuations. In token economics, the initial distribution of tokens is usually orderly. In this stage, tokens are relatively concentrated, prices remain stable, and players' expectations are high [9]. Over time, more tokens are generated through game mechanics and enter the market. The increase in player transactions and token flows subsequently increases the entropy (disorder) of the market. In this intermediate stage, the disorder within the system surges, resulting in high volatility in token prices.
Challenges that token economics may face include inflation due to an oversupply of tokens in the market, and price instability due to a large influx of speculators. Without effective market regulation and incentives, the system may reach a state of high entropy (chaos), when the value of tokens generally decreases and player participation decreases. In order to maintain the long-term health of the system, it is crucial to have a way to link new incentive mechanisms and regulatory measures. These actions can slow the increase in entropy, thereby maintaining relative order and stability in the market and maintaining player participation.
We often think of token economics as isolated events, like a single point of failure with a specific cause and effect. But from this perspective, the story is less about any one company than about the global entropy of token circulation. Certain factors are always destructive, and certain gameplay always fails. Take Axie Infinity as an example. Its token economics design has several shortcomings from the player's perspective: First, Axie Infinity's token economy is highly dependent on the continuous generation of new tokens (such as Smooth Love Potion, SLP). As more players participate and breed Axies, the number of newly generated tokens in the market increases, causing the market token supply to expand rapidly. This supply and demand imbalance causes the value of tokens to decline over time, and the tokens held by players to depreciate. Second, during the token generation event (TGE), many players and investors flood the market to try to make a quick profit by buying and selling tokens.
This speculative behavior may lead to large price fluctuations and affect market stability. In the long run, the profit exit of early speculators may cause the token price to plummet, which will have an adverse impact on ordinary players. Third, Axie Infinity's economic model lacks a continuous incentive mechanism to maintain player participation after the TGE. As the initial novelty fades, player enthusiasm may weaken due to the limited economic incentives. Addressing any flaws in the game will help attract new users and potentially increase token demand. Participating in Axie Infinity requires players to purchase Axies, which involves a high initial investment cost. This high cost poses a barrier to new players and limits the accessibility and widespread adoption of the game. In addition, the market price of rare Axies may be ridiculously high, making it unaffordable for ordinary players.
Based on the above discussion, we propose two suggestions to improve the GameFi token economic model:
ServerFi: Privatization through asset synthesis
In line with the spirit of Web3, players can be allowed to combine their in-game assets to ultimately gain sovereignty over future servers. This concept, called "ServerFi," involves players accumulating and merging various NFTs and other digital assets in the game to gain control over the game server. This form of privatization not only incentivizes players to invest more deeply in the game, but also fits in with the decentralized and community-driven spirit of Web3. By granting players ownership and control over game servers, we can foster a more engaged and loyal player base because they have a substantial stake in the game ecosystem. For example, we can design a game where players receive a chance to draw a lottery every day based on the value of their contribution to the game server. Players can use these lottery opportunities to draw fragments. When players have collected all the necessary fragments, they can synthesize an NFT. By staking this NFT, players can share the value of other users' contributions to the game server.
Continuous Rewards for High-Retention Players
Another approach is for project teams to continually identify and nurture high-retention players to keep the token alive and ensure the health of the game ecosystem. By implementing sophisticated algorithms and data analytics, projects can monitor player behavior and engagement, providing targeted rewards and incentives to those players who demonstrate strong commitment and high activity. This approach ensures that the most loyal players stay engaged, driving continued engagement and interaction, which supports the overall stability and growth of the game token economy. For example, we could design a game that airdrops a portion of the game server revenue every day to top users based on the value of their contribution to the system. This approach would create a "play and earn" dynamic that rewards players for their participation and contribution.
experiment
To evaluate the effectiveness of our proposed token economic models, we conducted group behavior simulation experiments for each model. These experiments aim to compare and analyze the differences in value capture capabilities of blockchain games built on two different token economic frameworks. In order to model more accurately, we first formalize the definitions of these token economic mechanisms as follows.
ServerFi: Privatization through asset synthesis
Let vi denote the contribution of player i to the system in each iteration.
The function f(v) = λv represents the number of draws a player can get with his contribution value v, where λ is a scaling constant greater than 1.
Suppose there are k prizes in the lottery, and the probability of drawing each card is 1/k.
Assuming the number of new players on the first day is n, and considering the growth dynamics of the game, we define the number of new players in the i-th iteration as n/α(i−1).
We assume that all players in the game are rational. Therefore, if a player calculates that the cost of synthesizing an NFT exceeds the current staking reward, they will choose to exit the game. Specifically, for a new player, the expected cost of collecting all fragments is λΣ(1/k). When this cost exceeds the staking reward of a single NFT, no new players will join the game.
The total value of the system in the i-th iteration (day) is Ti = Σvi, where n is the number of players in the i-th iteration.
Continue to reward high retention players
Let vi denote the contribution of player i to the system in each iteration.
We stipulate that the system will reward the top 20% of players with 80% of the total revenue based on their cumulative contributions over the past five days.
We assume that all players in the game are rational. Each player has a randomly initialized tolerance threshold, and if they fail to get rewards too many times in a row, they will choose to quit the game.
The total value of the system at iteration i is Ti = Σvi, where n is the number of players at iteration i.
Given the inherent randomness in real-world scenarios, our actual simulation experiments introduced random noise from various angles, including individual behavior and population growth. For example, we introduced mutation operators in individual modeling to capture the random fluctuations in the productivity of players in the game. To ensure a fair comparison between the two strategies, the experiment designed the same parameters in the two experimental groups, such as the maximum number of iterations and the initial population size. The population of each economic model went through 500 iterations, and each experiment was repeated 100 times. The experimental results are shown in Figure 1. The horizontal axis represents the number of iterations, and the vertical axis represents the total value contributed by the players at each iteration. The light-colored band represents the range between the maximum and minimum values, and the dark line represents the average value.
In the asset synthesis privatization model (left), we observe that as the number of iterations increases, the total player contribution value shows a continuous upward trend, indicating that this model can effectively maintain player participation and drive long-term value growth. In contrast, in the model that consistently rewards high-retained players (right), player contributions initially rise significantly but then decline significantly. While the model showed high player contributions in the early stages, declines in subsequent iterations indicate challenges in sustaining player engagement over the long term.
Based on the modeling results, we believe that while strategies that consistently reward high-retention players may drive significant engagement in the early stages, this approach inherently exacerbates player stratification in the long term. Specifically, this approach may marginalize tail players due to a lack of sufficient positive feedback, ultimately causing them to quit the game. This stratification also tends to set a high barrier to entry for new players. As a result, the reduction of new players, coupled with the departure of tail players, reduces the rewards for existing top players, thus leading to the formation of a vicious cycle.
In contrast, the ServerFi mechanism is based on fragment synthesis, which introduces a degree of randomness through the fragment lottery process, thereby enhancing social mobility within the player community. For existing NFT holders, the continuous synthesis of new NFTs ensures that even top players cannot "sit back and enjoy the fruits of their labor"; they must continuously contribute value to maintain their status. For new players or players who contribute less, there are still plenty of opportunities to synthesize NFTs and share server rewards, promoting upward liquidity. Therefore, the ServerFi model more effectively promotes social mobility between players, activates the entire system and cultivates a more sustainable ecosystem.
in conclusion
In this article, we take a deep dive into the token economics challenges that currently exist in blockchain-based games. Analysis shows that traditional economic models often lead to market instability, reduced player participation and unsustainable token values. To address these pressing issues, we propose and analyze two promising token economic models, with a special emphasis on the ServerFi model based on synthetic privatization of assets. Through extensive experiments in simulating group behavior, ServerFi has shown significant potential in keeping players engaged and ensuring the long-term sustainability of the gaming ecosystem. Unlike traditional models, ServerFi effectively promotes social mobility among players by introducing a dynamic and competitive environment in which continued value contribution is necessary to maintain status. This model not only fosters a more vibrant and inclusive community, but also provides a scalable and resilient framework for future blockchain games. As the industry evolves, the ServerFi approach may represent an important shift in the structure of token economics, providing a more sustainable path for the integration of decentralized technologies in games.
