When Game Meets Blockchain — On Blockchain Game Economics

The rendezvous of game and blockchain is an opportunity for both parties to achieve mutual success. As the two industries have thus far been relatively isolated from each other, I believe it’s become necessary for them to communicate. In this I will try to cover five fundamental considerations involved in the integration of these two industries from a blockchain perspective. 

1. Blockchain-based games have the potential to shift the game paradigm from closed monopolistic economies to truly open economies.
2. The tokenization of blockchain game assets brings changes in asset ownership that allow blockchain games a thermal start via financial effects versus the cold bootstrapping of their Web2 counterparts.
3. Three design principles and six player incentives to support a successful blockchain game economy.
4. Why the best technology stack for blockchain-based games is an EVM compatible application chain.
5. Blockchain-based games need both good infrastructure and ecosystem support.

Blockchain Games Create a Paradigm Shift in the Gaming Industry 

The gaming experience is a service-consumption model enriched by the participation of other players. While the interplay between players enhances the gaming experience, transactions between game players are generally not supported due to the potential loss of monopolistic benefits for the service provider.

One important change in the Web3 era of gaming is that the in-game asset issuance policy, which is part of a Web2 game's numerical system, is stripped out and placed on the public blockchain. Once the game asset distribution protocol is placed on the public blockchain, developers aren’t able to easily change the protocol. 

These in-game assets, whether they are fungible assets, like gold coins, or non-fungible assets, like in-game items or land, become standard-format tokens on-chain that can be traded using any protocol on the chain. That means all game assets become part of an open, huge, unified crypto asset marketplace.

Games don't necessarily need to provide their own trading protocols. Typically speaking, a game which creates its own marketplace for trading assets simply can’t compete with the liquidity of a large marketplace. A game’s primary business is to create the gaming experience. 

At the same time, the gaming experience relies on the identity and assets on-chain. Players interact with the game to consume the gaming experience on the one hand, and gain assets by playing the game on the other. The player's private key directly controls the game assets on the blockchain. This framework provides blockchain games with two of the most important conditions for an open market economy.

The first is a property rights system. It’s very clear who owns the assets. Players can dispose of their assets at any time and in any way they wish — Assets can be transferred, sold, and traded without anyone else’s interference.

The second is that the various separate game economies can be connected by the blockchain — linked together into a huge, global, unified marketplace with very low transaction friction — much like the transformation of the fragmented regional economies of feudal society into a global capitalist market economy.

Tokenization of In-game Assets:  Financial Utility & Applied Utility

The salient feature of blockchain-based games is asset tokenization. Turning game assets into tokens have both short and long-term implications. 

The long-term implication is a change in ownership. Generally speaking, there will be an asset in the game called a governance token or ownership token, which represents the ownership of the game economy. The incentive system of blockchain-based games should therefore be designed around how to allocate ownership.

The short-term implication of tokenization is what we call “token magic.” Token magic is effective for all Web3 economies in helping platform-based economies complete the process of bootstrapping from a cold start. Whether they are online games, blockchain-based games, or any other platform-based economies, the core feature is the network effect. 

In the era of Web 3.0, there is a new method and new tool — the token.

The principle of a network effect is that the more users a platform has, the more valuable the platform service is to each user. Network effects are magical things. We can see their hand at play in all major innovations in the IT field over the past few decades. The subsequent rise of the Internet giants is directly related to network effects. 

However, a network effect is difficult to start at the onset because the number of users and the application value of the platform to those users are both quite low. As the number of users increases, the application value increases.

The platform-based economies of Web2 face the difficulty of a cold start which leads to the chicken-and-egg dilemma. The solution is to raise funds through venture capital, and then spend money on the market to subsidize users to activate the network utility.

Generally, when you look at the white paper of a Web3 project, the three most important questions are:

1. What kind of decentralized platform economy is being built?
2. What is the token distribution plan upon platform launch?
3. How will the tokens capture platform economic value?

If the answers to these three questions are convincing, investors will recognize the potential future value of this token. In the financial markets, assets that are expected to be valuable in the future are valuable now and can be converted by risk-return rate. 

So, the token has a financial effect from the beginning. Although the application utility of the platform may be relatively low, platform participants can earn tokens by using it. With more and more users, the application effect of the platform increases.

As game economies grow larger, new users take on less risk, thus their marginal contributions to network utility projects have relatively less impact. So, although the financial benefits to new users may decrease, they still get better application utility. In this way, the Web3 economy can be leveraged faster. The explosion of Axie Infinity, which I will touch on in more detail below, is a classic example.

How to Design a Blockchain Game Economy

Before we launch into a discussion about the tokenomics design of blockchain-based games, we will make three basic assumptions:

1. A blockchain game is a virtual economy with network effects player to player.
2. The game assets comply with the blockchain’s token standard. 
3. The blockchain’s economy is part of an open crypto asset market.

Three Design Principles of a Blockchain Game Economy

The Governance Token

The core of the blockchain game economy is the governance or ownership token which grants both benefits and rights. The goal is to translate the growth of the economy into the intrinsic value of the token through a design mechanism known as value capture. There are multiple approaches to value capture, which cannot be described in detail here.

The governance token is distributed to a variety of participants, including developers, investors, players, etc., who contribute to the growth of the economy’s network effects. The token should grant governance rights that permit its holders to participate in determining the future direction of the game contract — primarily the in-game asset issuance contract. The protocols/agreement/contract can then all be refined and evolve through on-chain governance.

In the vast majority of game economies, game developers will still be at the heart of the game. In a complex and continuously evolving game economy, the developer's share of the distribution cannot be too low. It would be very irresponsible to give 100% of the tokens to the community instead of having a fair launch right out of the gate. 

However, if it's just a fork of an existing protocol, then, relatively speaking, more contributions may actually come from the community than the developers, in which case it's only fair and reasonable to give more tokens to the community. The goal of the governance token is to provide a long-term incentive so that everyone is encouraged to do what is good for the economy in the long term. 

Players’ Rewards
The core contribution of players to the blockchain game economy is enhancing the gaming experience of other players. If someone buys an in-game item NFT and then sells it, that user is an investor, not a player. Players have to participate in the game to improve the game experience of other players, and only then are their contributions made. 

The key lies in deciding how to reward players. First, players’ contributions need to be verified and quantified by the on-chain protocol and then incentivized with the corresponding token reward, which is the core of the design of the blockchain game economic system.

Six Incentive Bases for Rewarding Player Contributions

1. Identity and in-game items. A player’s identity will also include a player’s attributes which reflect the history of a player’s investment in the economy.
2. Time invested. All rewards must be time investment-related — otherwise the game will fast-forward. 
3. Randomness. Luck is part of the fun of the game.
4. *Strategy. Strategies can be individual or collective. Collective strategies require cooperation. Societies are created by rewarding cooperation. Complex systems are formed, self-organize, and evolve. 
5. Content creation. Players who create content for the game, such as avatar skins or in-game items, necessarily contribute to the quality of the game. 
6. Expanding the game experience. Beyond content creation, advanced games need to support players who expand the game experience in other ways, which may not be easy to assess initially.

*There should never be an absolute or optimal policy/strategy or players will eventually lose their free will and become a slave of the algorithm — The meaning of the game would disappear.

Value Capture and Unlocking Mechanisms
The third design principle is to set up a value capture mechanism and additional token issuance unlocking mechanisms so that the long-term growth rate of the total value of the ownership token is slightly higher than the speed of the additional issuance of the token. 

The implication is that the intrinsic value of the unit ownership token should grow in the long run. In the crypto asset market, if the token loses its utility as a store of value, few are willing to hold it and a token economy can’t be established. Setting a low issuance rate increases the benefits of early participants and the cost for participants who come in later.

The Ceiling of the Blockchain Economy

The biggest ceiling of the blockchain game economy is probably the capacity of the blockchain. We call it an anti-network effect, that is, the more users there are, the less value to a single user because it is overcrowded.

The daily trading volume of Binance Smart Chain in 2021 was on the order of several million per day. When it is high, it can exceed 10 million, which is probably the number of transactions that this industry-recognized fast public blockchain can support. It was particularly congested in Q4, mainly because of GameFi and blockchain-based games. When the transaction volume reaches more than 10 million per day, the congestion becomes more serious.

The Solution to Blockchain Gaming Congestion on Public Chains

The only way to run large-scale GameFi or blockchain games is to use an application chain — one chain for one game. On Axie, for example, there can be 1 million active users with the daily transaction volume in millions or even tens of millions.

In November 2021, Axie’s Ronin sidechain processed over 560% of the total number of transactions processed on Ethereum. Transactions over the network are completed within seconds. A game of this magnitude could exhaust the capacity of the entire BSC public chain. For this reason, it’s unsustainable to run blockchain games on a public chain.

In addition, the gas fee of the blockchain doesn’t increase linearly. When Ethereum processes 700,000-800,000 transactions per day, and the capacity is close to saturation, the gas fee doesn’t just increase several times, it increases dozens of times. It’s just like a traffic jam. After a certain critical point, the average driving speed drops sharply and no one is able to move.

Why EVM compatible chains are the most suitable technology stack for Blockchain-based games

Why EVM? Though there are many kinds of blockchain development technologies, EVM is the absolute mainstream. Blockchain games require smart contract developers — and there are more Solidity programmers than there are developers who understand other technology stacks. Moreover, after seven years of development, EVM has had time to shake out bugs and is therefore the most mature and reliable.

Although an Appchain with EVM is developed with smart contracts, it still enjoys the benefits of being an application-specific blockchain. The first benefit is the exclusive use of the chain’s processing capabilities. Due to the small number of nodes, the application chain has better performance than ordinary public chains. It can process tens of millions of transactions per day and support blockchain games that reach millions of daily users.

On an Appchain, you don't have to worry about competing with other apps. But on a large public chain, even though you may have just done a fantastic marketing campaign, if another application starts launching airdrops, you may find that your intended users simply can’t get in.

In addition, compared with DeFi, blockchain-based games have greater interaction density and increased microtransactions. Therefore, once the public chain is congested, the first users to be injured are gamers because most blockchain game users are price sensitive.

The second advantage of game building on an application specific chain is that the game is designed to serve the application—It can be fully customized to achieve the best user experience.

We believe that the most suitable technology stack for Blockchain Games is an EVM-compatible application specific blockchain—Appchain.

After the launch of its dedicated sidechain Ronin in February 2021, Axie’s transaction costs were basically reduced to zero, causing a huge explosion in March and April. The word “Ronin” (浪人) means a samurai without a master. Axie named this sidechain Ronin with the intention of mastering its own infrastructure without any external influence. The entire chain serves an application — and you can upgrade it — whereas it’s impossible for an application to force a public chain upgrade.

Octopus Network and the NEAR Ecosystem — One-stop Infrastructure and Community Support

The Octopus Network belongs to the NEAR ecosystem. The NEAR core team is a very strong technical team resulting in a great public chain. NEAR-led sharding is the most complex blockchain technology with the greatest scalability potential. NEAR’s 2021 low was the best performing crypto project. Its ranking rushed into the top 20 from below 40, and its market value has reached 11 billion US dollars. 

The NEAR ecosystem also has an iron triangle for development. In addition to NEAR's native smart contract development, NEAR supports Aurora's EVM development enabling the DeFi protocol of Ethereum to be easily ported. 

The third corner of the triad is Octopus Network — a multi-chain network built around NEAR. Each application-specific blockchain, aka Appchain, is an independent chain with dozens of nodes and enjoys seamless cross-chain interoperability with NEAR mainchain as well as two-way asset cross-chain interoperability with Ethereum.

The Crucial Role of Community Building

It’s critical for all Web3 applications, including blockchain games, to develop their own communities. When you’re building a blockchain game protocol, you need to join a healthy ecosystem to receive support and get the attention of the community, otherwise no one will know you exist. The NEAR Ecosystem is a massive, supportive mega-community committed to both the growth and success of its ecosystem partners, as is reflected in the NEAR Foundation’s various ecosystem funding programs.

In addition to providing leased security, interoperability, and infrastructure to Appchains, the Octopus Network also acts as a meta-community to hatch Web3 application communities. Appchain candidates in the Octopus Network are able to display the merit of their projects to attract a variety of supporters — such as investors, Validators, Delegators, and market participants. The Octopus Network acts as a community-base for Appchains to support them in their own journey of building active and engaged communities around them.

Octopus Network as a Decentralized Game Accelerator

After an Appchain game candidate has done a good job of development, is registered on the Octopus Network, and audited by members of the Octopus Network Developer Task Force, it moves into an open voting queue where Appchain candidates work to win the support within the Octopus Network community. The Octopus Network also assists in promoting its Appchain candidates. As reflected by community votes, the Appchain with the most support moves on to launch its mainnet.

All Octopus Network Appchains are connected with the NEAR blockchain by Octopus Network Bridges to support both trustless fungible token or NFT transfers. As NEAR is the DeFi center for Octopus Network, native Appchain tokens cross to NEAR for IDOs. Octopus Network provides 200,000 OCT airdrops for the IDO of each Appchain on Skyward Finance, helping the Appchain to increase their fundraising by roughly 1 million US dollars. 

Following its IDO, the Appchain token can trade and create pools and farms on Ref.finance — Because it’s an NEP 141 Standard token, it can integrate with all NEAR's DeFi protocols. Additionally, Appchains use an out-of-box IBC pallet to connect with any IBC enabled blockchains directly. So, any asset issued on Ethereum, NEAR, or IBC enabled blockchains can be trustlessly transferred in and out of Octopus Network Appchains.

At present, the Octopus Network has launched two Appchains with an ever increasing number of Appchain candidates at varying stages of development in the Appchain Candidate Pipeline. The Octopus Network Accelerator Program offers up to 200,000 USD in quarterly grants following its course and Demo Day for next-gen Web3 projects within the Substrate ecosystem working to launch their own application-specific blockchains. 

While the relationship between game and blockchain may only be in its nascent stage, we believe we are poised to witness a massive Web3 gaming momentum resulting in an imminent gaming revolution. As a Web3 accelerator, Octopus Network offers game developers the interoperability, security, infrastructure, and community to realize the network effect that only a migration to Web3 can offer.

The founder of Octopus Network, Louis Liu, was invited to give a speech at the "GameFi Special" of the 9th Golden Tea Awards. The annual Golden Tea awards is a grand event in the Chinese gaming industry designed to honor exceptional projects and entrepreneurs. This article was adapted from that speech.

Adapted and Edited by Suzanne Leigh

Translation support by Kelson Toh 

Disclaimer: This article is for informational purposes only and should not be used as legal, tax, investment, financial or any other advice.